As filed with the Securities and Exchange Commission on February 27, 2004

Registration No. 333-            

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

REGISTRATION STATEMENT

Under

THE SECURITIES ACT OF 1933

PARTNERS TRUST FINANCIAL GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware	6036	79-2993918
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)	(I.R.S. Employer Identification No.)

233 Genesee Street

Utica, New York 13501

(315) 768-3000

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive office)

Steven A. Covert

Chief Financial Officer

Partners Trust Financial Group, Inc.

233 Genesee Street

Utica, New York 13501

(315) 768-3000

(Name, address including zip code, and telephone number, including area code, of agent for service)

Copies to:

Stuart G. Stein, Esq. R. Daniel Keating, Esq. Hogan & Hartson L.L.P. 555 Thirteenth Street, N.W. Washington, D.C. 20004-1109 (202) 637-8575 Paul M. Aguggia, Esq. Muldoon Murphy Faucette & Aguggia LLP 5101 Wisconsin Avenue, N.W. Washington, D.C. 20016 (202) 362-0840

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ¨

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. ¨

CALCULATION OF REGISTRATION FEE

Title of each class of securities to be registered	Amount to be registered	Proposed maximum offering price per share		Proposed maximum aggregate offering price(1)		Amount of registration fee
Common Stock, $0.0001 par value per share	23,143,750 Shares	$	10.00	$	231,437,500	$	29,323.13
Plan Interests	(2)		—		—		(3)

(1) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.

(2) In addition, pursuant to Rule 416(c) under the Securities Act, this registration statement also covers an indeterminate amount of interests to be offered or sold pursuant to the employee benefit plan described herein.

(3) The securities to be purchased by the Partners Trust Financial Group Employee Stock Ownership Plan are included in the amount shown for Common Stock. However, pursuant to Rule 457(h) of the Securities Act, no separate fee is required for the plan interests. Pursuant to such rule, the amount being registered has been calculated on the basis of the number of shares of Common Stock that may be purchased with the current assets of such Plan.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

PROSPECTUS

PARTNERS TRUST FINANCIAL GROUP, INC.

(Proposed Holding Company for SBU Bank, to become Partners Trust Bank)

Partners Trust Financial Group, Inc., a Delaware corporation (referred to in this document as new Partners Trust Financial Group), is offering shares of common stock for sale in connection with the conversion of Partners Trust, MHC from the mutual to the stock form of organization. The shares of common stock we are offering represent the ownership interest in Partners Trust Financial Group, Inc., a federal corporation (referred to in this document as Partners Trust Financial Group) now owned by Partners Trust, MHC. The existing shares of Partners Trust Financial Group common stock held by the public will be exchanged for shares of common stock of new Partners Trust Financial Group. New Partners Trust Financial Group will become the holding company for SBU Bank, which plans to change its name to Partners Trust Bank. The number of shares to be exchanged for shares of Partners Trust Financial Group will be based on an exchange ratio and will depend upon the number of new shares we sell in our offering. All shares of common stock are being offered for sale at a price of $10 per share. For a period of 20 trading days after the offering, our shares of common stock will trade on the Nasdaq National Market under the symbol “PRTRD.” Thereafter, our trading symbol will revert to “PRTR.”

If you are or were a depositor of SBU Bank as of the eligibility dates:

• You may have priority rights to order shares of common stock.

If you are currently a stockholder of Partners Trust Financial Group:

• You may order additional shares of common stock in the offering after priority orders are filled.

• Each of your shares of common stock will be exchanged at the conclusion of the offering for between 1.9502 and 3.0343 shares of common stock of new Partners Trust Financial Group.

• Your percentage ownership will remain essentially equivalent to your current percentage ownership interest in Partners Trust Financial Group, subject to the issuance of shares in connection with a pending acquisition described in this document.

If you are a participant in the SBU Bank 401(k) Plan:

• You may direct that all or part of your current account balances in this plan be used to order shares of common stock.

• You will receive a supplement to this prospectus that describes your rights under the plan.

If you fit none of the categories above, but are interested in purchasing shares of our common stock:

• You may order shares of common stock after priority orders are filled.

(continued on following page)

OFFERING SUMMARY

Price: $10.00 per Share

	Minimum		Maximum		Adjusted Maximum
Number of shares:		14,875,000		20,125,000		23,143,750
Gross offering proceeds:	$	148,750,000	$	201,250,000	$	231,437,500
Estimated offering expenses:	$	3,432,100	$	3,915,100	$	4,192,825
Estimated net proceeds:	$	145,317,900	$	197,334,900	$	227,244,675
Estimated net proceeds per share:	$	9.77	$	9.81	$	9.82

These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Neither the Securities and Exchange Commission, the Office of Thrift Supervision, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

For assistance, please contact the conversion center at [(            ) - ].

Sandler O’Neill & Partners, L.P.

The date of this prospectus is             , 2004.

(continued from cover)

We are offering up to 20,125,000 shares of common stock for sale. We may sell up to 23,143,750 shares of common stock, as a result of regulatory considerations, demand for the shares or changes in market conditions, without resoliciting subscribers. We must sell a minimum of 14,875,000 shares in order to complete the offering and the exchange of existing shares.

The minimum number of shares you can order is 25 shares. The offering is expected to expire at             :00 a.m., New York Time, on             , 2004. We may extend this expiration date without notice to you until             , 2004, unless the Office of Thrift Supervision approves a later date, which may not be beyond             ,             . Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond             , 2004 or the number of shares of common stock to be sold is increased to more than 23,143,750 shares or decreased to less than 14,875,000 shares. If the offering is extended beyond             , 2004, subscribers will have the right to modify or rescind their purchase orders. Funds received during the offering will be held in a segregated account at SBU Bank and will earn interest at our passbook savings rate. In the event the offering is terminated, funds will be promptly returned with interest.

Sandler O’Neill & Partners, L.P. will use its best efforts to assist us in selling our shares of common stock, but is not required to purchase any of the common stock that is being offered for sale. Purchasers will not pay a commission to purchase shares of common stock in the offering.

This investment involves risk, including the possible loss of principal. Please read “Risk Factors” beginning on page              for more information.

We expect the directors and officers of new Partners Trust Financial Group, together with their associates, to subscribe for 104,000 shares, or 0.6% of the shares offered at the midpoint of the offering range. Following the conversion and offering, our directors and executive officers, together with their associates, are expected to own 2,397,179 shares of common stock (including exercisable options), or 4.6% of our outstanding common stock if shares are sold at the midpoint of the offering range.

Immediately after the completion of the conversion stock offering, we expect to acquire BSB Bancorp, Inc., the holding company for BSB Bank & Trust Company, for approximately $347 million in a combination of stock and cash. We expect to pay approximately $133.1 million in cash and issue approximately 19,972,470 shares of common stock, at a ratio of 3.6 shares of new Partners Trust Financial Group for each share of BSB Bancorp, to BSB Bancorp’s stockholders in exchange for their shares of BSB Bancorp common stock. This will represent 38.0% of the outstanding common stock of new Partners Trust Financial Group at the midpoint of the offering range.

Although the completion of the conversion is not contingent on the acquisition of BSB Bancorp, the timing and manner of the conversion would be subject to significant modification in the event the acquisition is terminated. In that event, subscribers would have the right to modify or rescind their purchase orders.

TABLE OF CONTENTS

	Page
PROSPECTUS SUMMARY	3
FORWARD-LOOKING STATEMENTS	16
RISK FACTORS	17
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF PARTNERS TRUST FINANCIAL GROUP AND SUBSIDIARIES	23
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF BSB BANCORP AND SUBSIDIARIES	26
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING	29
OUR DIVIDEND POLICY	30
MARKET FOR THE COMMON STOCK	31
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE	32
CAPITALIZATION	33
THE ACQUISITION OF BSB BANCORP	36
PRO FORMA DATA	40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PARTNERS TRUST FINANCIAL GROUP	55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF BSB BANCORP	66
BUSINESS OF PARTNERS TRUST FINANCIAL GROUP AND SBU BANK	83
BUSINESS OF BSB BANCORP AND BSB BANK & TRUST COMPANY	101
REGULATION	115
TAXATION	123
MANAGEMENT OF NEW PARTNERS TRUST FINANCIAL GROUP	125
BENEFICIAL OWNERSHIP OF COMMON STOCK	138
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS	139
THE CONVERSION	140
RESTRICTIONS ON ACQUISITION OF NEW PARTNERS TRUST FINANCIAL GROUP	164
DESCRIPTION OF CAPITAL STOCK OF NEW PARTNERS TRUST FINANCIAL GROUP FOLLOWING THE OFFERING	168
TRANSFER AGENT	170
EXPERTS	170
LEGAL MATTERS	170
WHERE YOU CAN FIND ADDITIONAL INFORMATION	170
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS	F-1

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PROSPECTUS SUMMARY

The following summary explains the significant aspects of the conversion, the offering and the exchange of existing shares of Partners Trust Financial Group common stock for shares of new Partners Trust Financial Group common stock. It may not contain all the information that is important to you. For additional information, you should read this entire document carefully, including the consolidated financial statements and the notes to the consolidated financial statements for both Partners Trust Financial Group and BSB Bancorp.

Unless we specify otherwise, the words “we”, “our” and “us” refer to the new Delaware-chartered Partners Trust Financial Group, the current federally chartered Partners Trust Financial Group, Partners Trust, MHC and SBU Bank, collectively.

The Companies

Partners Trust, MHC

Partners Trust, MHC is the federally chartered mutual holding company of Partners Trust Financial Group. Partners Trust, MHC’s principal business activity is the ownership of 7,627,353 shares of common stock of Partners Trust Financial Group, or 53.7% of the issued and outstanding shares as of December 31, 2003. After the completion of the mutual-to-stock conversion, Partners Trust, MHC will no longer exist.

Partners Trust, MHC’s executive offices are located at 233 Genesee Street, Utica, New York 13501. Its telephone number at this address is (315) 768-3000.

Partners Trust Financial Group

Partners Trust Financial Group is a federally chartered corporation that owns all of the outstanding common stock of SBU Bank. Partners Trust Financial Group was formed in April 2002 to be the holding company of SBU Bank. At the same time, Partners Trust Financial Group conducted an initial public offering of its common stock.

At December 31, 2003, Partners Trust Financial Group had consolidated assets of $1.3 billion, deposits of $796.1 million and stockholders’ equity of $175.3 million. After the completion of the mutual-to-stock conversion, the federally chartered Partners Trust Financial Group will cease to exist, and will be succeeded by new Partners Trust Financial Group. As of December 31, 2003, Partners Trust Financial Group had 14,193,806 shares of common stock issued and outstanding. As of that date, Partners Trust, MHC owned 7,627,353 shares, representing 53.7% of the issued and outstanding shares of common stock. The remaining 46.3% of the shares were held by the public.

Partners Trust Financial Group’s executive offices are located at 233 Genesee Street, Utica, New York 13501. Its telephone number at this address is (315) 768-3000.

New Partners Trust Financial Group

New Partners Trust Financial Group is a newly-formed Delaware corporation that will own all of the outstanding common stock of SBU Bank upon completion of the mutual-to-stock conversion and the offering. Concurrently with the completion of the conversion and offering, new Partners Trust Financial Group will be the successor to Partners Trust Financial Group.

New Partners Trust Financial Group’s executive offices are located at 233 Genesee Street, Utica, New York 13501. Its telephone number at this address is (315) 768-3000.

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SBU Bank

SBU Bank is a federally chartered stock savings bank headquartered in Utica, New York. SBU Bank was established in 1839 as a New York chartered mutual savings bank and, in April 2002, reorganized under a mutual holding company form of ownership as a federally chartered, wholly owned subsidiary of Partners Trust Financial Group. Upon completion of the acquisition of BSB Bancorp, SBU Bank will change its name to Partners Trust Bank.

SBU Bank offers a wide variety of business and retail banking products as well as a full range of trust, investment, and municipal banking services through its sixteen central New York locations in Oneida, Onondaga and Herkimer counties. Customers’ banking needs are serviced 24 hours a day through a network of ATMs, automated telephone banking, and the convenience of internet banking. SBU Bank emphasizes personal service and customer convenience in serving the financial needs of the individuals, families, businesses, and municipalities in its markets.

SBU Bank’s executive offices are located at 233 Genesee Street, Utica, New York 13501. Its telephone number at this address is (315) 768-3000.

Business Strategy

New Partners Trust Financial Group will be the holding company for SBU Bank after the conversion. Upon the completion of the acquisition of BSB Bancorp, the resulting Partners Trust Bank will be a larger, more diversified community bank with a strong capital base and a management and operating structure that will draw from both the business strategies currently being used at SBU Bank and at BSB Bank & Trust Company. We believe that the proposed merger offers unique operating and strategic benefits.

Highlights of our business strategy are:

• to increase the number of households served by our core business lines through active cross-selling initiatives and effective marketing promotions;

• to expand our commercial business in all markets currently served by SBU Bank and BSB Bank & Trust Company by leveraging our investment in high quality relationship managers who will provide local decision-making and responsive service;

• to further develop our trust and municipal banking capabilities and actively promote those products throughout our market area;

• to continue the growth of our fee-based products with particular emphasis on the sale of investment services to consumers through our branch network; and

• to provide increased service to customers of both banks by linking the cities of Binghamton, Syracuse and Utica, with Syracuse serving as a focal point for growth of the combined organization.

Our Organizational Structure

In April 2002, SBU Bank’s mutual predecessor reorganized into the mutual holding company form of organization. As a part of the mutual holding company reorganization, Partners Trust Financial Group sold 46.3% of its shares of common stock to depositors in a subscription offering. The remaining 53.7% of the shares were issued to Partners Trust, MHC. Partners Trust, MHC is a mutual holding company that has no stockholders. Partners Trust Financial Group owns 100% of the outstanding shares of SBU Bank.

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The following chart shows our current organizational structure, which is commonly referred to as the “two-tier” mutual holding company structure:

Pursuant to the terms of the plan of conversion and reorganization, Partners Trust, MHC will convert from the mutual holding company form to the fully public form of corporate structure. As part of the conversion, we are offering for sale stock representing the majority ownership interest of Partners Trust Financial Group that is currently held by Partners Trust, MHC. Upon the completion of the conversion and offering, Partners Trust, MHC will cease to exist, and we will complete the transition from partial to full public stock ownership. At the completion of the conversion, existing public stockholders of Partners Trust Financial Group will receive shares of common stock of new Partners Trust Financial Group in exchange for their existing shares of Partners Trust Financial Group.

After the conversion and offering are completed, we will be organized as a fully public holding company, as follows:

BSB Bancorp Acquisition

At the time we adopted our plan of conversion and reorganization, we also entered into an agreement to acquire BSB Bancorp, Inc. As of December 31, 2003, BSB Bancorp had consolidated assets of $2.2 billion, deposits of $1.6 billion, and stockholders’ equity of $146.3 million. BSB Bancorp is the Delaware chartered bank holding company for BSB Bank & Trust Company. The primary market areas of BSB Bank & Trust Company are the southern tier of New York, centered around the city of Binghamton, and central New York, centered around Syracuse. These metropolitan areas have a combined population of nearly one million people. BSB Bank & Trust Company is a diversified financial services organization providing a full range of deposit and loan products, trust, investment and insurance services. BSB Bank & Trust Company provides banking services to consumers and the business community, as well as school districts and cooperative education centers, cities, towns, villages and numerous municipal agencies.

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Immediately following the acquisition of BSB Bancorp, BSB Bank & Trust Company will be merged into SBU Bank. The resulting bank will operate 36 branch offices. The BSB Bancorp acquisition will expand our presence in Onondaga county, New York and will provide us entry into Broome, Chenango and Tioga counties, New York.

As a result of the merger of BSB Bancorp into us, BSB Bancorp stockholders will have the right, with respect to each of their shares of BSB Bancorp common stock, to elect to receive either $36.00 in cash, without

interest, or 3.6 shares of common stock of new Partners Trust Financial Group. Under the terms of the merger agreement, 60% of the outstanding shares of BSB Bancorp will be exchanged for shares of Partners Trust Financial Group, and the remainder of the shares of BSB Bancorp will be exchanged for cash. We expect to pay approximately $133.1 million in cash (and incur after-tax acquisition expenses of approximately $19.2 million) and issue approximately 19,972,470 shares of common stock to BSB Bancorp’s stockholders in exchange for their shares of BSB Bancorp common stock. This will represent 38.0% of the outstanding common stock of new Partners Trust Financial Group at the midpoint of the offering range.

To the extent we raise less than $152.4 million in the offering, we will require a cash dividend from SBU Bank to new Partners Trust Financial Group in order to finance the acquisition.

The acquisition of BSB Bancorp is contingent on completion of the conversion. The merger is subject to approval by the stockholders of Partners Trust Financial Group and BSB Bancorp and by the Office of Thrift Supervision. We anticipate simultaneously completing the conversion, the stock offering and the merger in mid-2004, although no assurance can be given that we will be able to complete these transactions by that date.

Although the completion of the conversion is not contingent on the acquisition of BSB Bancorp, the timing and manner of the conversion would be subject to significant modification in the event the acquisition is terminated. In that event, subscribers would have the right to modify or rescind their purchase orders.

How We Intend to Use the Proceeds From the Offering

We intend to use the net proceeds from the offering as follows:

Use of Net Proceeds	Amount, at the Minimum		Amount, at the Midpoint		Amount, at the Maximum		Amount, at the Adjusted Maximum
Net proceeds	$	145,317,900	$	171,326,400	$	197,334,900	$	227,244,675
Loan to employee stock ownership plan	$	11,900,000	$	14,000,000	$	16,100,000	$	18,515,000
Cash used in acquisition of BSB Bancorp(1)	$	133,417,900	$	152,352,962	$	152,352,962	$	152,352,962
General corporate purposes	$	—	$	4,973,438	$	28,881,938	$	56,376,713

(1) Includes estimated after-tax acquisition expenses of $19.2 million.

We may use the funds retained for general corporate purposes to pay cash dividends and repurchase shares of common stock. Initially, the portion of the net proceeds remaining after the loan to the ESOP and the acquisition of BSB Bancorp will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities.

Terms of the Conversion and Offering

Pursuant to the plan of conversion and reorganization, our organization will convert from a partially public to a fully public form of holding company structure. In connection with the conversion, we are selling shares representing the ownership interest in Partners Trust Financial Group currently held by Partners Trust, MHC.

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We are offering between 14,875,000 and 20,125,000 shares of common stock to eligible depositors of SBU Bank, our employee benefit plans and, to the extent shares remain available, to our existing public stockholders, depositors of BSB Bank & Trust Company, our community and the general public. The number of shares of common stock to be sold may be increased up to 23,143,750 as a result of regulatory conditions, demand for the shares or changes in the market for financial institution stocks. Unless the number of shares of common stock to be offered is increased to more than 23,143,750 or decreased to less than 14,875,000, or the offering is extended beyond [            ] 2004, you will not have the opportunity to change or cancel your stock order.

The purchase price of each share of common stock to be issued in the offering is $10. All investors will pay the same purchase price per share. Investors will not be charged a commission to purchase shares of common stock. Sandler O’Neill & Partners, L.P., our marketing advisor in the offering, will use its best efforts to assist us in selling shares of our common stock. Sandler O’Neill & Partners, L.P. is not obligated to purchase any shares of common stock in the offering.

Reasons for the Conversion

The primary reasons for converting and raising additional capital are:

• to provide us with the capital to execute our business strategy;

• to provide us with the capital to acquire BSB Bancorp;

• to facilitate growth through other acquisitions and de novo branching as opportunities arise;

• to support internal growth through lending in communities we serve;

• to enhance existing products and services and support the development of new products and services;

• to improve our overall competitive position; and

• to enhance stockholder returns through higher earnings and more flexible capital management strategies.

As a fully converted stock holding company, we will have greater flexibility in structuring further mergers and acquisitions, including the form of consideration that we can use to pay for an acquisition. Our current mutual holding company structure limits our ability to offer shares of our common stock as consideration in a merger or acquisition since Partners Trust, MHC is required to own a majority of our outstanding shares of common stock. Potential sellers often want stock for at least part of the purchase price. Our new stock holding company structure will enable us to offer stock or cash consideration, or a combination thereof and will, therefore, enhance our ability to compete with other bidders when acquisition opportunities arise.

The conversion will afford our officers and employees the opportunity to increase their stock ownership, which we believe to be an effective performance incentive and an effective means of attracting and retaining qualified personnel. The conversion also will provide our customers and local community members with an opportunity to acquire our stock.

Conditions to Completion of the Conversion

We cannot complete the conversion and related offering unless:

• the plan of conversion and reorganization is approved by at least a majority of the total number of outstanding votes entitled to be cast by members of Partners Trust, MHC (depositors of SBU Bank);

• the plan of conversion and reorganization is approved by at least two-thirds of the outstanding common stock of Partners Trust Financial Group;

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• the plan of conversion and reorganization is approved by at least a majority of the outstanding shares of Partners Trust Financial Group common stock, excluding those shares held by Partners Trust, MHC;

• Partners Trust, MHC, Partners Trust Financial Group and SBU Bank receive opinions of counsel or tax advisers as set forth in the plan of conversion and reorganization;

• we sell at least the minimum number of shares of common stock offered; and

• the conversion and offering are completed within the time frame set forth in the plan of conversion and reorganization.

Partners Trust, MHC intends to vote its ownership interest in favor of the plan of conversion and reorganization. At December 31, 2003, Partners Trust, MHC owned 53.7% of the outstanding shares of common stock of Partners Trust Financial Group. The directors and executive officers of Partners Trust Financial Group and their affiliates owned approximately 477,270 shares of Partners Trust Financial Group, or 3.4% of the outstanding shares of common stock, excluding shares that can be acquired upon the exercise of stock options. They intend to vote those shares in favor of the plan of conversion and reorganization.

Differences in Stockholders’ Rights For Existing Stockholders of Partners Trust Financial Group

As a result of the conversion and reorganization, existing stockholders of Partners Trust Financial Group will become stockholders of new Partners Trust Financial Group. Some rights of stockholders of the new Delaware corporation will be different from the rights Partners Trust Financial Group stockholders currently have. The differences in stockholder rights result from differences in the Delaware certificate of incorporation and bylaws of new Partners Trust Financial Group compared to the federal stock charter and bylaws of Partners Trust Financial Group, and from distinctions between Delaware corporate law and federal regulations for mutual holding companies. Most of the differences in stockholder rights under the Delaware certificate of incorporation and bylaws are not mandated by Delaware law but have been chosen by management as being in the best interests of the corporation and all of its stockholders. The differences in stockholder rights include the following areas:

• filling of board vacancies for the remaining term;

• removal of directors;

• calling special meetings of stockholders;

• lead time required for stockholders to submit proposals for new business or nominate directors;

• limitation on voting rights of greater-than-10% stockholders;

• board criteria for evaluation of offers; and

• supermajority voting requirements with respect to certain acquisitions of stock, business combinations and amendments to the certificate of incorporation and bylaws.

Because it owns 53.7% of the outstanding shares of Partners Trust Financial Group, Partners Trust, MHC currently controls the election of directors of Partners Trust Financial Group and determines the outcome of any matters put to a vote of stockholders. Notwithstanding the differences in stockholder rights described above, stockholders of new Partners Trust Financial Group will have greater ability to take action opposed by our board of directors because new Partners Trust Financial Group will be a fully public company with no majority stockholder.

Benefits to Management and Potential Dilution to Stockholders Resulting From the Conversion

Our tax-qualified employee stock ownership plan expects to purchase up to 8.0% of the shares of common stock we sell in the offering, or 1,610,000 shares of common stock, assuming we sell the maximum of the shares proposed to be sold. If we receive orders for more shares of common stock than the maximum of the offering range, the employee stock ownership plan will have first priority to purchase shares over this maximum. We

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reserve the right to purchase shares of common stock in the open market following the offering in order to fund the employee stock ownership plan. This plan is a tax-qualified retirement plan for the benefit of all our employees. Assuming the employee stock ownership plan purchases 1,610,000 shares in the offering, we will recognize additional compensation expense of $1.6 million per year over a 10-year period, assuming the shares of common stock have a fair market value of $10 per share for the full 10-year period. If, in the future, the shares of common stock have a fair market value greater or less than $10, the compensation expense will increase or decrease accordingly.

We intend to implement a stock-based recognition and retention plan no earlier than six months after the conversion. Stockholder approval of this plan will be required. Under this plan, we may award stock options and shares of restricted stock to key employees and directors. The number of stock options available under this plan will be equal to 10% of the number of shares sold in the conversion. The number of shares available for restricted stock awards will equal 4% of the number of shares sold in the conversion. Shares of restricted stock will be awarded at no cost to the recipient. We will incur additional compensation expense as a result of this plan. See “Pro Forma Data” for an illustration of the effects of this plan.

The following table summarizes the number of shares of common stock and aggregate dollar value of grants that are expected under the employee stock ownership plan and the recognition and retention plan as a result of the conversion.

	Number of Shares to be Granted or Purchased				Dilution Resulting From Issuance of Shares for Stock Benefit Plans(2)		Value of Grants(1)
	At Minimum of Offering Range	At Maximum of Offering Range	As a Percentage of Common Stock to be Issued in the Offering				At Minimum of Offering Range		At Maximum of Offering Range
							(dollars in thousands)
Employee stock ownership plan	1,190,000	1,610,000	8.0	%	—	%	$	11,900	$	16,100
Stock options	1,487,500	2,012,500	10.0		3.5			—		—
Restricted stock awards	595,000	805,000	4.0		1.4			5,950		8,050
Total	3,272,500	4,427,500	22.0	%	4.9	%	$	17,850	$	24,150

(1) The actual value of restricted stock grants will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $10 per share. No value is given for options because their exercise price will be equal to the fair market value of the common stock on the day the options are granted.

(2) Calculated at maximum of offering range, and considering 19,972,470 shares of common stock issued to BSB Bancorp stockholders.

How We Determined the Offering Range and the $10 Per Share Stock Price

The amount of common stock we are offering is based on an independent appraisal of the estimated market value of new Partners Trust Financial Group, assuming the conversion, offering and acquisition of BSB Bancorp are completed. RP Financial, LC, our independent appraiser, has estimated that, as of February 13, 2004, this market value ranged from $476.6 million to $574.3 million, with a midpoint of $525.5 million. Based on this valuation, the ownership interest of Partners Trust, MHC being sold in the offering and the $10 per share price, the number of shares of common stock being offered for sale by new Partners Trust Financial Group will range from 14,875,000 shares to 20,125,000 shares. The $10 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions. The appraisal is based in part

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on Partners Trust Financial Group’s and BSB Bancorp’s financial condition and results of operations, the effect of the additional capital raised by the sale of shares of common stock in the offering, and an analysis of a peer group of ten publicly traded savings bank and thrift holding companies that RP Financial considered comparable to Partners Trust Financial Group.

The following table presents a summary of selected pricing ratios for the peer group companies and Partners Trust Financial Group. Compared to the average pricing of the peer group, Partners Trust Financial Group’s pro forma pricing ratios at the maximum of the offering range indicated a premium of 3.8% on a price-to-earnings basis, a discount of 50.5% on a price-to-book basis and a discount of 12.9% on a price-to-tangible book basis. The estimated appraised value and the resulting premium/discount took into consideration the potential financial impact of the conversion and offering and the acquisition of BSB Bancorp.

	Pro Forma Price To Earnings Multiple(1)		Pro Forma Price To Book Value Ratio		Pro Forma Price To Tangible Book Value Ratio
Partners Trust Financial Group (Based on financial data as of December 31, 2003)
Maximum	20.06	x	101.63	%	199.20	%
Minimum	16.52		91.74		196.46

	Pro Forma Price To Earnings Multiple(1)		Pro Forma Price To Book Value Ratio		Pro Forma Price To Tangible Book Value Ratio
Valuation of peer group companies as of February 13, 2004
Averages	19.33	x	205.23	%	228.83	%
Medians	19.02		204.46		214.21

(1) Based on trailing 12-month earnings.

The independent appraisal does not indicate market value. Do not assume or expect that the valuation of Partners Trust Financial Group as indicated above means that, after the conversion and offering, the shares of common stock will trade at or above the $10 purchase price.

The independent appraisal will be updated prior to the completion of the conversion. Any changes in the appraisal are subject to Office of Thrift Supervision approval. If the appraised value changes to either below $476.6 million or above $630.5 million, we will resolicit persons who had submitted stock orders, providing them an opportunity to modify or cancel their stock orders.

The Exchange of Shares of Partners Trust Financial Group Common Stock

If you are currently a stockholder of Partners Trust Financial Group, your shares will be canceled and exchanged for shares of common stock of new Partners Trust Financial Group at the conclusion of the conversion. The number of shares of common stock you receive will be based on an exchange ratio determined as of the closing of the conversion, which will depend upon the number of shares sold in the offering and the number of outstanding shares of Partners Trust Financial Group at the time we consummate the conversion. The following table shows how the exchange ratio will adjust, based on the number of shares of common stock sold in the offering. The table also shows how many shares a hypothetical owner of Partners Trust Financial Group common stock would receive in the exchange for their shares of common stock owned at the consummation of the conversion, depending on the number of shares of common stock sold in the offering. At January 31, 2004, the public stockholders of Partners Trust Financial Group held an aggregate of 6,570,253 shares of Partners Trust

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Financial Group common stock, or 46.3% of the total number of outstanding shares. If options to purchase shares of Partners Trust Financial Group common stock are exercised before consummation of the conversion, there will be an increase in the percentage of shares of Partners Trust Financial Group held by public stockholders, an increase in the number of shares of common stock issued to public stockholders in the share exchange and a decrease in the exchange ratio and the offering range.

	New Shares to be Sold in This Offering			New Shares to be Exchanged for Existing Shares of Partners Trust Financial Group			Total Shares of Common Stock to be Issued in Acquisition			Total Shares of Common Stock to be Issued in Conversion, Offering and Acquisition	Exchange Ratio	New Shares to be Received for 100 Existing Shares
	Amount	Percent		Amount	Percent		Amount	Percent
Minimum	14,875,000	31.2	%	12,813,425	26.9	%	19,972,470	41.9	%	47,660,895	1.9502	195
Midpoint	17,500,000	33.2		15,074,617	28.7		19,972,470	38.0		52,547,087	2.2944	229
Maximum	20,125,000	35.0		17,335,810	30.2		19,972,470	34.8		57,433,280	2.6385	263
Adjusted Maximum	23,143,750	36.7		19,936,181	31.6		19,972,470	31.7		63,052,401	3.0343	303

If you own shares of Partners Trust Financial Group common stock in a brokerage account in “street name,” you do not need to take any action to exchange your shares of common stock. If you own shares in the form of Partners Trust Financial Group stock certificates, you will receive a transmittal form with instructions to surrender your stock certificates after consummation of the conversion. New certificates of new Partners Trust Financial Group common stock will be mailed to you within five business days after the exchange agent receives properly executed transmittal forms and certificates.

No fractional shares of new Partners Trust Financial Group common stock will be issued to any public stockholder of Partners Trust Financial Group. For each fractional share that would otherwise be issued, new Partners Trust Financial Group will pay in cash an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be entitled by the $10 per share subscription price. Current stockholders of Partners Trust Financial Group do not have dissenters’ or appraisal rights in connection with the conversion or the merger.

Persons Who May Order Shares of Common Stock in the Offering

We are offering the shares of common stock of new Partners Trust Financial Group in a subscription offering in the following descending order of priority:

(1) First, to depositors with accounts at SBU Bank, SBU Municipal Bank or The Herkimer County Trust Company with aggregate balances of at least $50 on December 15, 2002.

(2) Second, to our employee stock ownership plan.

(3) Third, to depositors with accounts at SBU Bank with aggregate balances of at least $50 on March 31, 2004.

(4) Fourth, to depositors of SBU Bank as of [                    ], 2004.

If we receive orders for more shares of common stock than the maximum of the offering range, the employee stock ownership plan will have first priority to purchase shares over this maximum, up to a total of 10% of shares of common stock sold in the offering.

Shares of common stock not purchased in the subscription offering will be offered for sale in a community offering, with a preference given first to Partners Trust Financial Group public stockholders as of January 30, 2004, then to depositors with accounts at BSB Bank & Trust Company on November 30, 2003 and who reside in Oneida, Herkimer, Onondaga, Broome, Chenango, or Tioga County, New York, and then to other members of

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the local community and the general public. The community offering will begin concurrently with the subscription offering. We also may offer for sale shares of common stock not purchased in the subscription offering or community offering through a syndicated community offering or an underwritten public offering managed by Sandler O’Neill & Partners, L.P. We have the right to accept or reject, in our sole discretion, orders received in the community offering, syndicated community offering or underwritten public offering.

At the discretion of the board of directors, up to 20% of the shares of Partners Trust Financial Group to be sold in the community offering may be offered on a first-priority basis in the community offering to “qualified institutional buyers,” which include certain large insurance companies, investment companies, pension and employee benefit plans, trusts, investment advisers, dealers and banks, and to institutional “accredited investors.” We believe that increasing institutional ownership in new Partners Trust Financial Group will be beneficial in terms of stabilizing our overall stockholder base.

Limits on How Much Common Stock You May Purchase

The minimum number of shares of common stock that may be purchased is 25.

If you are not currently a Partners Trust Financial Group stockholder—

No individual may purchase more than 100,000 shares of common stock. If any of the following persons purchase shares of common stock, their purchases when combined with your purchases cannot exceed 200,000 shares:

• your spouse or relatives of you or your spouse living in your house;

• companies, trusts or other entities in which you have a 10% or greater financial interest or hold a senior officer or director position; or

• other persons who may be acting in concert with you.

If you are currently a Partners Trust Financial Group stockholder—

In addition to the above purchase limitations, there is an ownership limitation. Shares of common stock that you purchase in the offering individually and together with persons described above, plus any new shares you and they receive in the exchange for existing Partners Trust Financial Group common stock, may not exceed 5% of the total shares of common stock to be issued and outstanding after the completion of the conversion. Subject to Office of Thrift Supervision approval, we may increase or decrease the purchase and ownership limitations at any time.

How You May Purchase Shares of Common Stock

In the subscription offering and community offering, you may pay for your shares only by:

• personal check, bank check or money order; or

• authorizing us to withdraw funds from the types of SBU Bank deposit accounts designated on the stock order form.

SBU Bank is not permitted to lend funds to anyone for the purpose of purchasing shares of common stock in the offering. Additionally, you may not use a SBU Bank line of credit to pay for shares of common stock.

You may subscribe for shares of common stock in the offering by delivering a signed and completed original stock order form, together with full payment payable to Partners Trust Financial Group or authorization

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to withdraw from one or more of your SBU Bank deposit accounts, provided that we receive the stock order form and full payment before              a.m., New York Time, on             , 2004, which is the end of the offering period. We will pay interest at SBU Bank’s passbook savings rate from the date funds are received until completion or termination of the conversion. Withdrawals from certificates of deposit to purchase shares of common stock in the offering may be made without incurring an early withdrawal penalty. All funds authorized for withdrawal from deposit accounts with SBU Bank must be in the accounts at the time the stock order is received. However, funds will not be withdrawn from the accounts until the completion of the offering and will earn interest at the applicable deposit account rate until that time. A hold will be placed on those funds when your stock order is received, making the designated funds unavailable to you. After we receive an order, the order cannot be withdrawn or changed.

You may subscribe for shares of common stock using funds in your individual retirement account, or IRA, at SBU Bank or elsewhere. However, common stock must be held in a self-directed retirement account, such as those offered by a brokerage firm or SBU Bank’s Investment Management and Trust Departments. By regulation, SBU Bank’s individual retirement accounts that were not established through our Investment Management or Trust Departments are not self-directed, so they cannot be invested in our common stock. If you wish to use some or all of the funds in your SBU Bank individual retirement account, the applicable funds must be transferred to a self-directed account maintained by an independent trustee, such as a brokerage firm or our Investment Management or Trust Departments. If you do not have such an account, you will need to establish one before placing your stock order. An annual administrative fee may be payable to the independent trustee. Because individual circumstances differ and processing of retirement fund orders takes additional time, we recommend that you contact our conversion center promptly, preferably at least two weeks before the end of the offering period, for assistance with purchases using your individual retirement account or other retirement account that you may have. Whether you may use such funds for the purchase of shares in the stock offering may depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.

Delivery of Stock Certificates

Certificates representing shares of common stock sold in the offering will be mailed to the persons entitled thereto at the certificate registration address noted on the order form as soon as practicable following consummation of the offering and receipt of all necessary regulatory approvals. It is possible that, until certificates for the common stock are delivered to purchasers, purchasers might not be able to sell the shares of common stock which they ordered, even though the common stock will have begun trading.

Deadline for Orders of Common Stock

If you wish to purchase shares of common stock, a properly completed original stock order form, together with payment for the shares of common stock, must be received by the conversion center no later than             :00 a.m., New York Time, on             , 2004, unless we extend this deadline. You may submit your order form by mail using the return envelope provided or by overnight courier to the indicated address on the order form. Stock order forms also may be delivered to our branch offices. Once submitted, your order is irrevocable unless the offering is terminated or extended beyond             , 2004 or the number of shares of common stock to be sold is increased to more than 23,143,750 shares or decreased to less than 14,875,000 shares. If the subscription offering or community offering extend beyond             , 2004, we will be required to resolicit subscriptions before proceeding with the offering.

You May Not Sell or Transfer Your Subscription Rights

Office of Thrift Supervision regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to state that you are purchasing the

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common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action, including reporting persons to federal or state regulatory agencies, against anyone who we believe has sold or given away his or her subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred your subscription rights. You cannot add any names of other persons who are not beneficial owners on your qualifying account to your stock registration.

Steps We May Take if We Do Not Receive Orders for the Minimum Number of Shares by the Expiration Date

If we do not receive orders for at least 14,875,000 shares of common stock by             :00 a.m., New York time on             , 2004, we may take several steps in order to issue the minimum number of shares of common stock in the offering range. Specifically, we may:

• extend the community offering for a period of up to 45 days after the expiration of the subscription offering;

• increase the purchase and ownership limitations;

• undertake a syndicated community offering; and

• seek regulatory approval to extend the offering beyond the             , 2004 expiration date, provided that any such extension will require us to resolicit subscriptions received in the offering.

Purchases by Officers and Directors

We expect our current directors and executive officers, along with the new directors and officers of new Partners Trust Financial Group, together with their associates, to subscribe for 104,000 shares of common stock in the offering. The purchase price paid by them will be the same $10 per share price paid by all other persons who purchase shares of common stock in the offering. Following the conversion and offering, such individuals are expected to own 2,397,179 shares of common stock, or 4.6% of our total outstanding shares of common stock at the midpoint of the offering range.

Market for Common Stock

Existing publicly held shares of our common stock trade on the Nasdaq National Market under the symbol “PRTR.” Upon completion of the conversion, the shares of common stock of new Partners Trust Financial Group will replace existing shares of Partners Trust Financial Group and will be traded on the Nasdaq National Market. For a period of 20 trading days following completion of the conversion, our trading symbol will be “PRTRD.” Thereafter it will revert to “PRTR.” Sandler O’Neill & Partners, L.P. currently intends to remain a market maker in the common stock and, if needed, will assist us in obtaining additional market makers, but it is under no obligation to do so. We cannot assure you that other market makers will be obtained or that an active and liquid trading market for the shares of common stock will develop or, if developed, will be maintained.

Our Dividend Policy

Partners Trust Financial Group currently pays a quarterly cash dividend of $0.12 per share. After the conversion, we intend to continue to pay cash dividends on a quarterly basis. We expect the annualized dividends to equal $0.25, $0.21, $0.18 and $0.16 per share at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, which represents an annual dividend yield of 2.5%, 2.1%, 1.8% and 1.6%, at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, based upon a price of $10 per share. The amount of dividends that we intend to pay after the conversion will preserve the dividend

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amount that Partners Trust Financial Group stockholders currently receive, adjusted to reflect the exchange ratio. The dividend rate and the continued payment of dividends will depend on a number of factors, including our capital requirements, our financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurance can be given that we will continue to pay dividends or that they will not be reduced in the future.

See “Selected Consolidated Financial and Other Data of Partners Trust Financial Group and Subsidiaries,” “Our Dividend Policy” and “Market for the Common Stock” for information regarding our historical dividend payments.

Tax Consequences

As a general matter, the conversion will not be a taxable transaction for purposes of federal or New York state income taxes to Partners Trust, MHC, Partners Trust Financial Group, SBU Bank, persons eligible to subscribe in the subscription offering, or existing stockholders of Partners Trust Financial Group. Existing stockholders of Partners Trust Financial Group who receive cash in lieu of fractional share interests in new shares of Partners Trust Financial Group will recognize a gain or loss equal to the difference between the cash received and the tax basis of the fractional share.

Restrictions on Acquisition of New Partners Trust Financial Group

Office of Thrift Supervision regulations prohibit any person from making an offer, announcing an intent to make an offer or participating in any other arrangement to purchase stock or acquiring stock or subscription rights in a converting institution or its holding company from another person prior to completion of its conversion. Further, without the prior written approval of the Office of Thrift Supervision, no person may make such an offer or announcement of an offer to purchase shares or actually acquire shares in the converting institution or its holding company for a period of three years from the date of the completion of the conversion if, upon the completion of such offer, announcement or acquisition, that person would become the beneficial owner of more than 10% of the outstanding stock of the institution or its holding company.

In addition, provisions of new Partners Trust Financial Group’s certificate of incorporation and bylaws, federal and state regulations and various other factors may make it more difficult for companies or persons to acquire control of Partners Trust Financial Group without the consent of the board of directors. These provisions will also make the removal of the current board of directors or management, or the appointment of new directors, more difficult. These provisions include: limitations on voting rights of beneficial owners of more than 10% of Partners Trust Financial Group’s common stock; approval by at least 80% of the outstanding shares required to approve business combinations involving an interested stockholder; the election of directors to staggered terms of three years; and the absence of cumulative voting by stockholders in the election of directors. For further information about these provisions, see “Restrictions on Acquisition of New Partners Trust Financial Group.”

How You Can Obtain Additional Information

Our branch office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or stock offering, please call our conversion center, toll free, at (            )                         , Monday through Friday between 10:00 a.m. and 4:00 p.m., New York Time. The conversion center will be closed weekends and bank holidays.

TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE EXPIRATION DATE OF             , 2004 IN ACCORDANCE WITH FEDERAL LAW, NO PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS PRIOR TO             , 2004 OR HAND-DELIVERED ANY LATER THAN TWO DAYS PRIOR TO             , 2004.

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FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements, which can be identified by the use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect and similar expressions. These forward-looking statements include:

• statements of our goals, intentions and expectations;

• statements regarding our business plans and prospects and growth and operating strategies;

• statements regarding the benefits of the acquisition and our intentions with respect to the combined company;

• statements regarding the asset quality of our loan and investment portfolios; and

• estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:

• failure to complete the conversion;

• failure to successfully integrate our business with that of BSB Bancorp, or to integrate them in a timely manner;

• failure to achieve anticipated cost savings, or to achieve savings in a timely manner;

• costs, customer loss and business disruption in connection with the acquisition or the integration of our companies that may be greater than expected;

• failure to obtain governmental approvals without adverse regulatory conditions;

• failure to obtain required stockholder and member approvals;

• significantly increased competition among depository and other financial institutions;

• changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

• general economic conditions, either nationally or in our market areas, that are worse than expected;

• adverse changes in the securities markets;

• legislative or regulatory changes that adversely affect our business;

• our ability to enter new markets successfully and capitalize on growth opportunities;

• changes in consumer spending, borrowing and savings habits;

• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board and the Public Company Accounting Oversight Board; and

• changes in our organization, compensation and benefit plans.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. We discuss these uncertainties and others in “Risk Factors” beginning on page [    ], “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Partners Trust Financial Group” beginning on page [    ] and “Management’s Discussion and Analysis of Financial Condition and Results of Operations of BSB Bancorp” beginning on page [    ].

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RISK FACTORS

You should carefully consider the risks described below, together with all of the other information in this prospectus, before deciding to invest in our common shares. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not currently known to us or that we believe are immaterial may also impair our business operations. If any of these risks actually occurs, our business, financial condition or results of operations may suffer. As a result, the trading price of our common shares could decline and you could lose part or all of your investment in our common shares.

Risks Related to the BSB Bancorp Merger

We Will Face Technical, Operational and Strategic Challenges That May Prevent Us From Successfully Integrating BSB Bancorp

For the merger with BSB Bancorp to be successful, we will have to succeed in combining the personnel and operations of Partners Trust Financial Group and BSB Bancorp and in achieving expense savings by eliminating selected redundant operations. Our integration of BSB Bancorp will be a complex, time consuming and expensive process, which may disrupt our business if not completed in a timely and efficient manner. We cannot assure you that our plan to integrate and operate the combined operations will be timely or efficient, or that we will successfully retain existing customer relationships of BSB Bank & Trust Company.

We May Incur Additional Charge-Offs In Connection with Certain Assets of BSB Bancorp

In recent years, BSB Bancorp has had significant loan charge-offs and made significant provisions for loan losses, both of which adversely affected net income. Over the last five years, BSB Bancorp’s net loan charge-offs were $25.9 million, $41.8 million, $18.7 million, $23.6 million and $15.0 million and its provisions for loan losses were $10.1 million, $46.2 million, $18.2 million, $53.7 million and $19.1 million for 2003, 2002, 2001, 2000 and 1999, respectively. If we experience significant loan losses in connection with the BSB loan portfolio, this could have a material adverse effect on our operating results. Additional defaults in BSB Bancorp’s loan portfolio following the acquisition could require us to incur additional charge-offs which would have the effect of reducing our net income and would generally have an adverse effect on our future financial condition and results of operations. We also may be required to increase our allowance for loan losses, which could materially decrease our net income.

Risks Related to Our Business

Our Commercial Real Estate, Commercial and Consumer Loans Expose Us To Increased Lending Risks

At December 31, 2003, the composition of our loan portfolio was as follows:

• residential real estate loans of $481.9 million, or 59.9% of total loans,

• commercial real estate loans of $139.6 million, or 17.3% of total loans,

• commercial loans of $58.9 million, or 7.3% of total loans, and

• consumer loans of $124.8 million, or 15.5% of total loans.

Commercial real estate, commercial and consumer loans expose a lender to a greater risk of loss than one- to four-family residential loans. Commercial real estate and commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential loans. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to one residential mortgage loan. See “Business of Partners Trust Financial Group and SBU Bank—Lending Activities.”

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Our Local Economy has Limited Growth Potential and This May Hurt Our Ability to Generate Profits and Grow our Business

The success of our business depends on our ability to generate profits and grow our franchise. Our primary lending activity is the origination of loans secured by real estate. Nearly all of these loans are made to borrowers who live and work in our primary market area. Our primary market area in central New York has experienced a decline in population, reflecting a decrease in the manufacturing sector, and the loss of major employers during the past decade. Moreover, economic and population growth in central New York is expected to be limited for the foreseeable future. The relatively weak economy will make it more difficult for us to grow our earnings and to generate internal asset growth following the stock offering.

Changes in Interest Rates Could Adversely Affect Our Results of Operations and Financial Condition

Our results of operations and financial condition are significantly affected by changes in interest rates. Our results of operations are substantially dependent on our net interest income, which is the difference between the interest income earned on our interest-earning assets and the interest expense paid on our interest-bearing liabilities. Because as a general matter our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would result in a decrease in our average interest rate spread and net interest income.

Changes in interest rates also affect the value of our interest-earning assets, and in particular our securities portfolio. Generally, the value of securities fluctuates inversely with changes in interest rates. At December 31, 2003, the value of our available-for-sale securities portfolio totaled $343.7 million, with net unrealized gains of $4.0 million. Changes in the unrealized gains and losses on our securities available-for-sale could have an adverse effect on stockholders’ equity.

We are also subject to reinvestment risk relating to interest rate movements. Changes in interest rates can affect the average life of loans and mortgage related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage related securities, as borrowers refinance to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest such prepayments at rates that are comparable to the rates on existing loans or securities.

If Our Allowance For Loan Losses Is Not Sufficient to Cover Actual Loan Losses, Our Earnings Could Decrease

Our loan customers, including customers of BSB Bancorp, may not repay their loans according to their terms, and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. We may experience significant loan losses, which could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectibility of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. At December 31, 2003, our allowance for loan losses to non-performing loans was 202.9%, and our allowance for loan losses to total loans was 1.1%. In determining the amount of the allowance for loan losses, we rely on an allowance valuation model that considers a review of loans, our experience and our evaluation of economic conditions. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Material additions to our allowance would materially decrease our net income.

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities could have a material adverse effect on our results of operations and financial condition.

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If Economic Conditions Deteriorate, Our Results of Operations and Financial Condition Could Be Adversely Impacted As Borrowers’ Ability to Repay Loans Declines and the Value of the Collateral Securing Our Loans Decreases

Our financial results may be adversely affected by changes in prevailing economic conditions, including decreases in real estate values, adverse employment conditions, the monetary and fiscal policies of the federal government and other significant external events. Because we have a significant amount of real estate loans, decreases in real estate values could adversely affect the value of property used as collateral. Adverse changes in the economy may also have a negative effect on the ability of our borrowers to make timely repayments of their loans, which would have an adverse impact on our earnings.

In addition, substantially all of our loans are to individuals and businesses in Oneida, Herkimer and Onondaga Counties, New York. Consequently, any decline in the economy of these market areas could have an adverse impact on our earnings.

Strong Competition Within Our Market Area May Limit Our Growth and Profitability

Competition in the banking and financial services industry is intense. The central New York area has a high concentration of financial institutions including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as private banking. Many of these competitors have substantially greater resources and lending limits than we do and may offer certain services that we do not or cannot provide. This competition has made it more difficult for us to make new loans and at times has forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to successfully compete in our market area. For more information about the competition we face, see “Business of Partners Trust Financial Group—Competition.”

We May Have Difficulty Managing Our Growth, Which May Divert Resources and Limit Our Ability to Successfully Expand Our Operations

We have grown substantially from $973.4 million of total assets and $636.3 million of total deposits at December 31, 1999 to $1.3 billion of total assets and $796.1 million of total deposits at December 31, 2003. The BSB Bancorp acquisition will increase our assets, deposits, number of customers and scale of operations significantly. At December 31, 2003, the combined entities would have had $3.7 billion of total assets and $2.4 billion of total deposits.

Since 1999, we have expanded our branch network principally by acquiring financial institutions. At December 31, 1999, we had 12 branch offices, compared with 16 at December 31, 2003, and after our acquisition of BSB Bancorp, we will operate 36 branches.

We have incurred substantial expenses to build our management team and personnel, develop our delivery systems and establish our infrastructure to support future growth. Our future success will depend on the ability of our officers and key employees to continue to implement and improve our operational, financial and management controls, reporting systems and procedures, and to manage a growing number of client relationships. We may not be able to successfully implement improvements to our management information and control systems in an efficient or timely manner, and we may discover deficiencies in our existing systems and controls. Thus, we cannot assure you that our growth strategy will not place a strain on our administrative and operational infrastructure or require us to incur additional expenditures beyond current projections to support our recent and future growth.

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Our Stock Benefit Plans Will Increase Our Costs, Which Will Reduce Our Profitability and Stockholders’ Equity

We anticipate that our employee stock ownership plan will purchase 8% of the common stock sold in the offering, with funds borrowed from new Partners Trust Financial Group. The cost of acquiring the employee stock ownership plan shares will be between $11.9 million at the minimum of the offering range and $18.5 million at the adjusted maximum of the offering range. We will record annual employee stock ownership plan expenses in an amount equal to the fair value of shares committed to be released to employees. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.

We also intend to implement a stock recognition and retention plan after the conversion. Under this plan, our officers and directors could be awarded, at no cost to them, shares of common stock in an aggregate amount equal to 4% of the shares of common stock sold in the offering. The recognition and retention plan cannot be implemented until at least six months after the conversion, and if it is adopted within twelve months after the conversion, it is subject to Office of Thrift Supervision regulations. Assuming the shares of common stock to be awarded under the plan are repurchased in the open market and cost the same as the purchase price in the offering, the reduction to stockholders’ equity from the plan would be between $6.0 million at the minimum of the offering range and $9.3 million at the adjusted maximum of the offering range. In the event that a portion of the shares used to fund the plan are obtained from authorized but unissued shares, the issuance of additional shares will decrease our net income per share and stockholders’ equity per share.

A Breach Of Information Security Could Negatively Affect Our Earnings

Increasingly, we depend upon data processing, communication and information exchange on a variety of computing platforms and networks, and over the internet. We cannot be certain all our systems are entirely free from vulnerability to attack, despite safeguards we have instituted. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. If information security is breached, information can be lost or misappropriated, resulting in financial loss or costs to us or damages to others. These costs or losses could materially exceed the amount of insurance coverage, if any, which would adversely affect our earnings.

Various Factors May Make Takeover Attempts More Difficult To Achieve

Our board of directors has no current intention to sell control of new Partners Trust Financial Group. Provisions of our certificate of incorporation and bylaws, federal regulations, Delaware law and various other factors may make it more difficult for companies or persons to acquire control of new Partners Trust Financial Group without the consent of our board of directors. You may want a takeover attempt to succeed because, for example, a potential acquiror could offer a premium over the then prevailing price of our common stock. The factors that may discourage takeover attempts or make them more difficult include:

• Office of Thrift Supervision Regulations. Office of Thrift Supervision regulations prohibit, for three years following the completion of a mutual-to-stock conversion, the acquisition of more than 10% of any class of equity security of a converted savings institution without the prior approval of the Office of Thrift Supervision.

• Certificate of Incorporation and Statutory Provisions. Provisions of the certificate of incorporation and bylaws of new Partners Trust Financial Group and Delaware law may make it more difficult and expensive to pursue a takeover attempt that management opposes. These provisions also would make it more difficult to remove our current board of directors or management, or to elect new directors. These provisions include:

^¡ limitations on voting rights of beneficial owners of more than 10% of our common stock;

^¡ supermajority voting requirements for certain acquisitions of stock, business combinations and amendments to our certificate of incorporation and bylaws;

20

^¡ provisions requiring the election of directors to staggered terms of three years;

^¡ provisions fixing the board size within a range;

^¡ limitations on the removal of directors;

^¡ provisions requiring the calling of special meetings of stockholders only by a majority of the board or a supermajority of stockholders; and

^¡ provisions requiring the filling of board vacancies for the remaining term.

Our bylaws also contain provisions regarding the timing and content of stockholder proposals and nominations for service on the board of directors.

• Required Change in Control Payments and Issuance of Stock Options. We have entered into employment agreements with certain executive officers, which will require payments to be made to them in the event their employment is terminated following a change in control of new Partners Trust Financial Group. We have also issued stock options to key employees and directors that will require payments to them in connection with a change in control of Partners Trust Financial Group. These payments may have the effect of increasing the costs of acquiring new Partners Trust Financial Group, thereby discouraging future attempts.

We Operate in a Highly Regulated Environment and We May Be Adversely Affected by Changes in Laws and Regulations

We are subject to extensive regulation, supervision and examination by the Office of Thrift Supervision, our chartering authority, and by the Federal Deposit Insurance Corporation, as insurer of deposits. Such regulation and supervision govern the activities in which an institution and its holding company may engage and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, including changes in the regulations governing holding companies, could have a material impact on the combined banks, new Partners Trust Financial Group, and our operations.

Risks Related to the Offering

Purchasers of Our Common Stock Will Experience Substantial Dilution in the Net Tangible Book Value Per Share of Their Investment

Our pro forma tangible book value per share at the midpoint of the offering range is $5.05. If you purchase shares of common stock in this offering, you will experience immediate and substantial dilution of $4.95 per share at the midpoint of the offering range, based on the initial offering price of $10 per share. This dilution is attributable primarily to the goodwill associated with the BSB Bancorp acquisition. You may incur additional dilution if holders of options to purchase common stock, whether currently outstanding or subsequently granted, exercise their options following this offering.

The Future Price Of The Common Stock May Be Less Than The Purchase Price In The Offering

We cannot assure you that if you purchase common stock in the offering you will later be able to sell it at or above the purchase price in the offering. The final aggregate purchase price of the common stock in the conversion will be based on an independent appraisal. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. The valuation is based on estimates and projections of a number of matters, all of which are subject to change from time to time.

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There is No Guarantee That an Active Trading Market for Your Stock Will Develop, Which May Hinder Your Ability to Sell Your Common Stock

Because new Partners Trust Financial Group has never issued stock, there is no current trading market for the common stock. In addition, our common stock currently trades in relatively light volumes on the Nasdaq National Market. Consequently, we cannot assure or guarantee that an active trading market for the common stock will develop or that, if developed, will continue. An active and orderly trading market will depend on the existence and individual decisions of willing buyers and sellers at any given time over which neither we nor any market maker will have any control. If an active trading market does not develop or is sporadic, this may hurt the market value of the common stock and make it difficult to buy or sell shares on short notice.

Our Failure to Effectively Utilize the Proceeds of the Offering Could Reduce Our Profitability

We intend to use substantially all of the net proceeds of the offering to acquire BSB Bancorp and to fund a loan to the employee stock ownership plan to enable it to purchase shares in the offering. We may use the remaining net proceeds, if any, to finance the acquisition of other financial institutions or other businesses that are related to banking, pay dividends to stockholders, repurchase common stock, purchase investment securities or for other general corporate purposes. We have not allocated specific amounts of proceeds for any of these purposes, and we will have significant flexibility in determining how much of the net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively could reduce our profitability.

Once Submitted, Your Purchase Order May Not Be Revoked Unless the Stock Offering Is Terminated or Extended Beyond [            ]

Funds submitted in connection with a purchase of common stock in the offering will be held by Partners Trust Financial Group until the termination or completion of the reorganization, including any extension of the expiration date. Because completion of the reorganization will be subject to an update of the independent appraisal prepared by RP Financial, among other factors, there may be one or more delays in the completion of the reorganization. Orders submitted in the offering are irrevocable, and subscribers will have no access to subscription funds or shares of common stock unless the stock offering is terminated, or extended beyond [            ].

22

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

OF PARTNERS TRUST FINANCIAL GROUP AND SUBSIDIARIES

The information for the years ended and as of December 31, 2003, 2002, 2001, 2000 and 1999 is derived from Partners Trust Financial Group’s audited consolidated financial statements. The following is only a summary and you should read it in conjunction with the financial statements and notes beginning on page F-2.

	At December 31,
	2003		2002			2001		2000		1999
	(In thousands)
Financial Condition Data:
Total assets	$	1,285,115	$	1,333,503		$	983,405	$	1,017,344	$	973,362
Total loans(1)		806,194		809,610			604,205		611,774		578,215
Allowance for loan losses		8,608		10,989			7,934		7,564		9,328
Securities		344,954		345,700			297,685		336,481		313,769
Goodwill		34,523		34,523			—		—		—
Other intangible assets		3,288		4,461			178		290		413
Deposits		796,078		855,211			604,969		640,966		636,300
Borrowings(2)		296,625		297,595			262,193		271,899		240,354
Stockholders’ equity		175,335		165,437			100,148		89,911		81,624
Non-performing loans		4,242		10,983			9,135		8,917		10,279
Other real estate owned		121		3,092			173		180		150
	Year Ended December 31,
	2003		2002			2001		2000		1999
	(In thousands, except share and per share data)
Operating Data:
Interest income		$69,189		$62,890			$68,529		$71,261		$66,883
Interest expense		22,582		27,626			38,862		42,972		35,022
Net interest income		46,607		35,264			29,667		28,289		31,861
Provision for loan losses		1,100		1,150			1,672		1,097		—
Net interest income after provision for loan losses		45,507		34,114			27,995		27,192		31,861
Net (loss) gain on sale of securities available-for-sale		—		(19	)		266		—		—
Other non-interest income		11,138		6,866			6,867		6,822		5,613
Merger expenses		—		1,716			—		—		—
Other non-interest expense(3)		35,331		27,015			26,158		26,056		27,747
Income before income tax expense		21,314		12,230			8,970		7,958		9,727
Income tax expense		7,268		3,818			2,329		2,547		3,601
Net income		$14,046		$  8,412			$  6,641		$  5,411		$  6,126
Basic earnings per share(4)		$1.04		$0.45			N/A		N/A		N/A
Diluted earnings per share(4)		$1.02		$0.45			N/A		N/A		N/A
Basic weighted average shares outstanding(4)		13,531,672		13,677,898			N/A		N/A		N/A
Diluted weighted average shares outstanding(4)		13,749,174		13,701,600			N/A		N/A		N/A
Dividends paid per share		$0.34		$0.10			N/A		N/A		N/A

(1) Loans are shown net of net deferred fees and costs and unearned discounts. Includes loans held for sale.

(2) Includes mortgagors’ escrow funds.

(3) Includes a one-time $2.1 million charitable contribution to the SBU Bank Charitable Foundation in 2002.

(4) Earnings per share, weighted average shares outstanding and dividends paid per share are not applicable prior to the conversion of SBU Bank to a stock bank on April 3, 2002.

23

	At or for Year Ended December 31,
	2003			2002			2001		2000		1999
Performance Ratios:
Return on average assets		1.08	%		0.82	%	0.67	%	0.54	%	0.65	%
Return on average equity		8.18			5.67		6.85		6.34		6.94
Interest rate information:
Yield on assets		5.91			6.60		7.39		7.62		7.58
Cost of funds		2.24			3.38		4.59		4.97		4.38
Net interest rate spread(1)		3.67			3.22		2.80		2.65		3.20
Net interest margin(2)		3.98			3.70		3.20		3.03		3.61
Net charge-offs to average loans		0.43			0.37		0.21		0.48		0.14
Efficiency ratio(3)		61.90			68.96		72.12		74.56		74.11
Asset Quality Ratios:
Non-performing loans to total loans(4)		0.53	%		1.36	%	1.51	%	1.46	%	1.78	%
Non-performing assets to total assets(5)		0.34			1.06		0.95		0.89		1.07
Allowance for loan losses to non-performing loans		202.92			100.05		86.85		84.83		90.75
Allowance for loan losses to total loans(6)		1.07			1.37		1.32		1.24		1.61
Other Per Share Data:(7)
Book value per share	$	12.72		$	12.04		N/A		N/A		N/A
Book value per share, including unallocated ESOP shares		12.35			11.65		N/A		N/A		N/A
Tangible book value per share		9.98			9.20		N/A		N/A		N/A
Tangible book value per share, including unallocated ESOP shares		9.69			8.90		N/A		N/A		N/A

(1) Net interest rate spread represents the difference between the weighted average yield on average earning assets and the weighted average cost of average interest-bearing liabilities.

(2) Net interest margin represents net interest income divided by average earning assets.

(3) The efficiency ratio represents the ratio of non-interest expenses to the sum of net interest income and non-interest income, excluding gains or losses on the sale of securities and loans. The efficiency ratio is not a financial measurement required by generally accepted accounting principles in the United States of America. However, Partners Trust Financial Group believes such information is useful to investors in evaluating Partners Trust Financial Group’s operations.

(4) Non-performing loans include loans for which SBU Bank does not accrue interest (nonaccrual loans), loans 90 days past due and still accruing interest, and renegotiated loans due to a weakening in the financial condition of the borrower.

(5) Non-performing assets consist of non-performing loans and repossessed assets.

(6) Total loans excludes loans held for sale.

(7) Per share information is not applicable prior to the conversion of SBU Bank to a stock bank on April 3, 2002.

24

	2003												2002
	Fourth			Third			Second			First			Fourth			Third			Second			First
	(In thousands, except share and per share data)
Quarterly Financial Data:
Interest income	$	16,240		$	16,994		$	17,445		$	18,510		$	15,517		$	15,843		$	15,821		$	15,709
Interest expense		5,017			5,367			5,826			6,372			6,299			6,715			7,139			7,473
Net interest income		11,223			11,627			11,619			12,138			9,218			9,128			8,682			8,236
Provision for loan losses		—			391			283			425			300			200			350			300
Net interest income after provision for loan losses		11,223			11,236			11,336			11,713			8,918			8,928			8,332			7,936
Net (loss) gain on sale of securities available-for-sale		—			—			—			—			—			—			(19	)		—
Other non-interest income		2,737			3,241			2,748			2,411			1,732			1,998			1,582			1,554
Merger expenses		—			—			—			—			1,712			4			—			—
Contribution expenses		21			18			83			30			33			53			2,121			61
Other non-interest expense		8,847			8,982			8,609			8,740			6,239			6,279			6,166			6,063
Income before income tax expense		5,092			5,477			5,392			5,354			2,666			4,590			1,608			3,366
Income tax expense		1,845			1,862			1,782			1,780			730			1,479			551			1,058
Net income	$	3,247		$	3,615		$	3,610		$	3,574		$	1,936		$	3,111		$	1,057		$	2,308
Basic earnings per share(1)	$	0.24		$	0.27		$	0.27		$	0.26		$	0.14		$	0.23		$	0.08			N/A
Diluted earnings per share(1)	$	0.23		$	0.26		$	0.26		$	0.26		$	0.14		$	0.23		$	0.08			N/A
Basic weighted average shares outstanding(1)		13,567,189			13,532,398			13,519,624			13,506,805			13,589,711			13,730,775			13,713,597			N/A
Diluted weighted average shares outstanding(1)		13,853,994			13,789,794			13,718,119			13,636,850			13,660,561			13,730,775			13,713,597			N/A
Performance Ratios:
Net interest margin(2)		3.85	%		3.95	%		3.93	%		4.19	%		3.82	%		3.76	%		3.59	%		3.62	%
Return on average assets		1.01			1.11			1.11			1.11			0.75			1.20			0.41			0.95
Return on average equity		7.35			8.22			8.48			8.70			4.57			7.47			2.68			9.11
Efficiency ratio(3)		63.90			61.95			61.02			60.80			74.24			57.70			81.22			62.98

(1) Earnings per share and weighted average shares outstanding are not applicable prior to the conversion to a stock bank on April 3, 2002.

(2) Net interest income divided by average earning assets.

(3) Represents the ratio of non-interest expense divided by the sum of net interest income and non-interest income, excluding gains or losses on the sale of securities and loans.

25

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

OF BSB BANCORP AND SUBSIDIARIES

The information for the years ended and as of December 31, 2003, 2002, 2001, 2000 and 1999 is derived from BSB Bancorp’s audited consolidated financial statements. The following is only a summary and you should read it in conjunction with the financial statements and notes beginning on page F-35.

	At December 31,
	2003		2002			2001		2000		1999
	(In thousands)
Financial Condition Data:
Total assets	$	2,212,111	$	2,034,667		$	2,062,937	$	2,315,376	$	2,242,285
Total loans(1)		1,449,244		1,347,431			1,484,707		1,838,745		1,739,585
Allowance for loan losses		47,421		63,250			58,829		59,291		29,134
Securities(2)		643,373		613,852			516,530		401,676		401,723
Deposits(3)		1,589,086		1,442,756			1,496,937		1,881,226		1,901,204
Borrowings		410,768		378,118			360,251		225,468		142,045
Stockholders’ equity		146,303		148,926			155,825		155,785		154,493
Non-performing loans		13,209		50,615			60,675		32,138		11,607
Other real estate owned and repossessed assets		1,231		3,109			2,034		1,805		2,442
	Year Ended December 31,
	2003		2002			2001		2000		1999
	(In thousands, except share and per share data)
Operating Data:
Interest income	$	114,801	$	129,488		$	163,494	$	192,346	$	176,117
Interest expense		42,965		51,219			82,167		102,189		89,576
Net interest income		71,836		78,269			81,327		90,157		86,541
Provision for loan losses		10,088		46,170			18,224		53,721		19,137
Net interest income after provision for loan losses		61,748		32,099			63,103		36,436		67,404
Net (loss) gain on sale of securities available-for-sale		1,339		292			379		9		(231	)
Other non-interest income		12,201		17,471			13,153		14,739		13,206
Merger expenses		325		—			—		2,013		5,408
Other non-interest expense		49,221		48,333			43,603		45,584		45,416
Income before income tax expense		25,742		1,529			33,032		3,587		29,555
Income tax expense (benefit)		8,725		(254	)		12,572		1,316		11,330
Net income	$	17,017	$	1,783		$	20,460	$	2,271	$	18,225
Basic earnings per share	$	1.85	$	0.19		$	2.05	$	0.22	$	1.80
Diluted earnings per share	$	1.81	$	0.18		$	2.02	$	0.22	$	1.77
Basic weighted average shares outstanding		9,209,058		9,589,361			9,958,952		10,279,667		10,137,625
Diluted weighted average shares outstanding		9,380,036		9,740,263			10,114,197		10,357,644		10,312,113
Dividends paid per share	$	1.00	$	1.00		$	1.00	$	1.00	$	0.95

(1) Loans do not include net deferred fees and costs or loans held for sale.

(2) Includes Federal Home Loan Bank stock.

(3) Includes mortgagors’ escrow funds.

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	At or for Year Ended December 31,
	2003			2002			2001			2000			1999
Performance Ratios:
Return on average assets		0.81	%		0.09	%		0.95	%		0.10	%		0.82	%
Return on average equity		11.74			1.15			12.87			1.41			11.69
Interest rate information:
Yield on assets		5.60			6.49			7.77			8.71			8.16
Cost of funds		2.39			2.97			4.49			5.26			4.64
Net interest rate spread(1)		3.21			3.52			3.28			3.95			3.52
Net interest margin(2)		3.51			3.92			3.87			4.08			4.01
Net charge-offs to average loans		1.84			3.07			1.13			1.31			0.88
Efficiency ratio(3)		58.03			52.59			46.11			45.37			51.07
Asset Quality Ratios:
Non-performing loans to total loans(4)		0.91	%		3.76	%		4.09	%		1.75	%		0.67	%
Non-performing assets to total assets(5)		0.65			2.64			3.04			1.47			0.63
Allowance for loan losses to non-performing loans		359.01			124.96			96.96			184.49			251.00
Allowance for loan losses to total loans		3.27			4.69			3.96			3.22			1.67
Other Per Share Data:
Book value per share	$	15.82		$	15.78		$	16.19		$	15.08		$	15.11
Tangible book value per share		15.82			15.78			16.10			14.97			14.95

(1) Net interest rate spread represents the difference between the weighted average yield on average earning assets and the weighted average cost of average interest-bearing liabilities.

(2) Net interest margin represents net interest income divided by average earning assets.

(3) The efficiency ratio represents the ratio of non-interest expenses to the sum of net interest income and non-interest income. The efficiency ratio is not a financial measurement required by generally accepted accounting principles in the United States of America. However, BSB Bancorp believes such information is useful to investors in evaluating BSB Bancorp’s operations.

(4) Non-performing loans include loans for which BSB Bank & Trust does not accrue interest (nonaccrual loans), loans 90 days past due and still accruing interest, and renegotiated loans due to a weakening in the financial condition of the borrower that are still in accruing status.

(5) Non-performing assets consist of non-performing loans, other real estate owned and repossessed assets.

27

	2003												2002
	Fourth			Third			Second			First			Fourth			Third			Second			First
	(In thousands, except share and per share data)
Quarterly Financial Data:
Total interest income	$	28,284		$	28,153		$	28,990		$	29,376			31,085		$	31,511		$	33,193		$	33,699
Total interest expense		10,425			10,543			11,101			10,896			11,779			12,679			13,307			13,454
Net interest income		17,859			17,610			17,889			18,480			19,306			18,832			19,886			20,245
Provision for loan losses		260			2,880			2,980			3,968			9,750			4,500			26,720			5,200
Net interest income (loss) after provision for loan losses		17,599			14,730			14,909			14,512			9,556			14,332			(6,834	)		15,045
Non-interest income		3,173			3,610			3,398			3,358			6,618			3,124			3,172			4,849
Operating expense		13,128			12,029			12,327			12,063			11,723			11,212			13,553			11,845
Income (loss) before income taxes		7,644			6,311			5,980			5,807			4,451			6,244			(17,215	)		8,049
Income tax expense (benefit)		2,702			2,066			2,028			1,930			480			2,318			(6,058	)		3,006
Net income (loss)	$	4,942		$	4,245		$	3,952		$	3,877		$	3,971		$	3,926		$	(11,157	)	$	5,043
Basic earnings (loss) per share	$	0.54		$	0.46		$	0.43		$	0.42		$	0.42		$	0.41		($	1.16	)	$	0.52
Diluted earnings (loss) per share	$	0.52		$	0.45		$	0.42		$	0.41		$	0.41		$	0.41		$	(1.16	)	$	0.51
Basic weighted average shares outstanding		9,480,423			9,342,609			9,308,249			9,412,381			9,611,592			9,692,658			9,608,067			9,882,533
Diluted weighted average shares outstanding		9,197,428			9,171,132			9,158,671			9,309,002			9,514,115			9,584,896			9,608,067			9,650,367
Performance Ratios:
Net interest margin(1)		3.40	%		3.36	%		3.50	%		3.79	%		3.86	%		3.80	%		3.95	%		4.09	%
Return on average assets		0.91			0.79			0.75			0.77			0.77			0.77			(2.16	)		1.00
Return on average equity		13.67			11.90			10.88			10.53			10.52			10.50			(28.05	)		12.74
Efficiency ratio(2)		62.42			56.69			57.91			55.24			45.22			51.07			58.78			47.20

(1) Net interest income divided by average earnings assets.

(2) Represents the ratio of non-interest expense divided by the sum of net interest income and non-interest income.

28

HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING

The net proceeds will depend on the total number of shares of common stock sold in the offering, which in turn will depend on RP Financial’s appraisal as well as regulatory and market considerations, and the expenses incurred in connection with the offering. We will not be able to determine the actual net proceeds from the sale of the common stock until we complete the offering. Approximately $152.4 million of the net proceeds will be used to finance the cash merger consideration portion of the acquisition of BSB Bancorp, of which $19.2 million relates to after-tax acquisition expenses.

We intend to distribute the net proceeds from the offering as follows:

	Minimum		Midpoint		Maximum		Adjusted Maximum
	(In millions)
Offering proceeds	$	148.8	$	175.0	$	201.3	$	231.4
Less offering expenses		3.4		3.7		3.9		4.2
Net offering proceeds	$	145.4	$	171.3	$	197.4	$	227.2
Less loan to ESOP		11.9		14.0		16.1		18.5
Less proceeds to finance acquisition	$	133.4	$	152.4	$	152.4	$	152.4
Proceeds retained by new Partners Trust Financial Group	$	—	$	4.9	$	28.9	$	56.3

The loan to the Partners Trust Financial Group Employee Stock Ownership Plan (“ESOP”) is anticipated to be an amount sufficient to permit it to buy up to 8.0% of the shares sold in the offering. The Partners Trust Financial Group ESOP will allocate the shares it purchases to employees as the loan is repaid. Purchases by the Partners Trust Financial Group ESOP would amount to 1,610,000 shares at the maximum of the range or $16.1 million based on a per share price of $10.00. See “Management of Partners Trust Financial Group—Benefit Plans—Employee Stock Ownership Plan and Trust.”

The net proceeds may vary because total expenses relating to the reorganization may be more or less than our estimates. For example, our expenses would increase if a syndicated community offering is used to sell shares not purchased in the subscription offering and community offering. The net proceeds also will vary if the number of shares to be sold in the offering are adjusted to reflect a change in the estimated pro forma market value of Partners Trust Financial Group and SBU Bank or if our ESOP purchases shares in the open market at an average cost that is higher or lower than $10 per share. Payments for shares made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of SBU Bank’s deposits.

New Partners Trust Financial Group may use the proceeds it retains from the offering after financing the acquisition of BSB Bancorp, if any:

• to finance the expansion of its operations through the acquisition of financial institutions or their assets, or through diversification into related financial services businesses, such as insurance agency, financial planning and investment management companies, although no transactions are specifically being considered at this time;

• to pay dividends to stockholders;

• to invest in securities; and

• for general corporate purposes, including making contributions to our subsidiaries.

Following the reorganization, we may also implement stock repurchase programs. However, under current Office of Thrift Supervision regulations, we may not repurchase shares of common stock during the first year following the reorganization, except when extraordinary circumstances exist and with prior regulatory approval.

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OUR DIVIDEND POLICY

Partners Trust Financial Group currently pays a quarterly cash dividend to its stockholders of $0.12 per share. No dividends have been paid on shares held by Partners Trust, MHC, which has waived receipt of its dividends on its common stock. After the offering, we intend to continue to pay cash dividends, initially at the equivalent of a $0.12 quarterly per share dividend, adjusted to reflect the conversion ratio. On that basis, we would expect our annual dividends to approximate $0.25, $0.21, $0.18 and $0.16 per share, at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively; these amounts represent an annual dividend yield of 2.5%, 2.1%, 1.8% and 1.6% at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, based upon a stock price of $10.00 per share. However, we cannot guarantee that we will pay any dividends or that, if paid, dividends will be at these amounts or that we will not reduce or eliminate them in the future. We also cannot assure that we will continue past practices or patterns with respect to changes in dividend rates.

Our payment of dividends will be subject to the determination of our board of directors, which will take into account, among other factors, our financial condition, results of operations, tax considerations, industry standards, economic conditions, and tax and regulatory restrictions that affect the payment of dividends by Partners Trust Bank to new Partners Trust Financial Group. We must also comply with our regulatory capital requirements, as well as with Delaware law which generally provides that corporations may not make distributions if they would render the corporation unable to pay its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus any amounts necessary to satisfy the preferential rights of any outstanding preferred shares.

Upon completion of the acquisition of BSB Bancorp by Partners Trust Financial Group, SBU Bank will change its name to Partners Trust Bank. As our principal asset and source of income, Partners Trust Bank will provide the principal sources of funds for the payment of dividends by new Partners Trust Financial Group. Federal law provides that dividends may be paid by Partners Trust Bank, as a federal institution, only out of net income and unrestricted capital surplus. See “Regulation.” However, Partners Trust Bank will not be permitted to pay dividends on its capital stock if, among other things, its capital would be reduced below the amount required for its liquidation account. See “The Conversion—Liquidation Rights.”

If all of the offering proceeds are used to finance the BSB acquisition, dividends from new Partners Trust Financial Group will depend upon receipt of dividends from Partners Trust Bank. We cannot assure that you that Partners Trust Bank will have sufficient net income and unrestricted capital surplus in order to provide dividends to Partners Trust Financial Group.

Any payment of dividends by Partners Trust Bank which would be deemed to be drawn out of bad debt reserve would require a payment of taxes at the then-current tax rate by Partners Trust Bank on the amount of earnings deemed to be removed from bad debt reserves for such distribution. Partners Trust Bank does not intend to make any distribution to new Partners Trust Financial Group that would create this type of a tax liability.

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MARKET FOR THE COMMON STOCK

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

Year Ending December 31, 2004	High			Low			Dividend per Share
First quarter	$	[	]	$	[	]	$	[	]
Second quarter (through [            ])	$	[	]	$	[	]	$	[	]
Year Ending December 31, 2003	High			Low			Dividend per Share
Fourth quarter		$34.76			$21.95			$0.10
Third quarter		24.52			19.00			0.10
Second quarter		22.00			16.87			0.07
First quarter		17.56			15.81			0.07
Year Ending December 31, 2002	High			Low			Dividend per Share
Fourth quarter		$16.74			$12.99			$0.05
Third quarter		16.05			12.95			0.05
Second quarter (beginning April 4, 2002)		16.41			13.50			—

On December 23, 2003, the last business day immediately preceding the public announcement of the offering, the closing price of Partners Trust Financial Group common stock, as reported on the Nasdaq National Market, was $25.47 per share. On [            ], 2004, that price was $[            ] per share.

At January 31, 2004, Partners Trust Financial Group had approximately 6,570,253 publicly held shares of common stock issued and outstanding, with approximately 1,400 stockholders of record.

For a period of 20 days following the completion of our offering, our symbol will be “PRTRD”, after which it will be “PRTR.”

Restrictions on Partners Trust Financial Group’s ability to pay dividends are discussed under “Our Dividend Policy.”

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HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE

At December 31, 2003, SBU Bank exceeded all applicable regulatory capital requirements. The table below sets forth the historical equity capital and regulatory capital of SBU Bank and BSB Bank & Trust Company at December 31, 2003 and the pro forma regulatory capital of SBU Bank after giving effect to the acquisition of BSB Bancorp and the merger of BSB Bank & Trust Company with and into SBU Bank. For a discussion of the applicable capital requirements, see “Regulation—Federal Banking Regulation—Capital Requirements.”

	SBU Bank Historical at December 31, 2003				BSB Bank & Trust Company Historical at December 31, 2003
	Amount		Percent of Assets(2)		Amount		Percent of Assets(2)
	(In thousands)
GAAP capital	$	154,803	12.04	%	$	174,777	7.91	%
Tier 1 leverage capital(3)	$	114,807	9.22	%	$	171,239	7.93	%
Tier 1 requirement(3)		49,820	4.00			60,245	4.00
Excess capital(3)	$	64,987	5.22	%	$	110,994	3.93	%
Tier 1 risk-based capital		114,807	15.68			171,239	11.37
Tier 1 risk-based requirement		29,284	4.00			60,245	4.00
Excess capital	$	85,523	11.68	%	$	110,994	7.37	%
Total risk-based capital		123,415	16.86			190,419	12.64
Total risk-based requirement		58,569	8.00			120,490	8.00
Excess capital	$	64,846	8.86	%	$	69,929	4.64	%

	Pro Forma at December 31, 2003, Based Upon the Acquisition and Sale in Conversion of(1)
	14,875,000 Shares				17,500,000 Shares				20,125,000 Shares				23,143,750 Shares
	Amount		Percent of Assets(2)		Amount		Percent of Assets(2)		Amount		Percent of Assets(2)		Amount		Percent of Assets(2)
	(In thousands)
GAAP capital	$	526,635	15.25	%	$	526,635	15.25	%	$	526,635	15.25	%	$	526,635	15.25	%
Tier 1 leverage capital(3)	$	241,971	7.09	%	$	241,971	7.09	%	$	241,971	7.09	%	$	241,971	7.09	%
Tier 1 leverage requirement(3)		136,512	4.00			136,512	4.00			136,512	4.00			136,512	4.00
Excess capital(3)	$	105,459	3.09	%	$	105,459	3.09	%	$	105,459	3.09	%	$	105,459	3.09	%
Tier 1 risk-based capital		241,971	10.78			241,971	10.78			241,971	10.78			241,971	10.78
Tier 1 risk-based requirement		89,820	4.00			89,820	4.00			89,820	4.00			89,820	4.00
Excess capital	$	152,151	6.78	%	$	152,151	6.78	%	$	152,151	6.78	%	$	152,151	6.78	%
Total risk-based capital		269,759	12.01			269,759	12.01			269,759	12.01			269,759	12.01
Total risk-based requirement		179,639	8.00			179,639	8.00			179,639	8.00			179,639	8.00
Excess capital	$	90,120	4.01	%	$	90,120	4.01	%	$	90,120	4.01	%	$	90,120	4.01	%

(1) Pro forma capital compliance figures shown for SBU Bank, on a pro forma basis merged with BSB Bancorp. Assuming that new Partners Trust Financial Group retains all of the net proceeds of the offering, less net cash required to fund the acquisition, the pro forma regulatory capital of SBU Bank will remain constant across the offering range.

(2) Adjusted total or adjusted risk-weighted assets, as appropriate. Pro forma adjusted risk-weighted assets assume that funds infused into SBU Bank are held in assets that carry a 20% risk-weighting.

(3) Historical and pro forma Tier 1 leverage capital ratios for SBU Bank are calculated based on adjusted total assets pursuant to OTS regulations. Historical Tier 1 leverage capital ratios for BSB Bank & Trust Company are calculated based on average total assets for leverage purposes pursuant to FDIC regulations.

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CAPITALIZATION

The following table presents the historical consolidated capitalization of Partners Trust Financial Group and BSB Bancorp at December 31, 2003 and the pro forma consolidated capitalization of Partners Trust Financial Group after giving effect to the conversion and acquisition of BSB Bancorp based upon the assumptions set forth in the “Pro Forma Data” section.

	Partners Trust Financial Group Historical at December 31, 2003			BSB Bancorp Historical at December 31, 2003
	(In thousands, except share data)
Deposits(3)	$	796,078		$	1,581,482	(8)
Borrowings(4)		290,569			410,768
Junior subordinated obligations issued to unconsolidated subsidiary trusts		—			48,202
Total deposits, borrowed funds and junior subordinated obligations issued to unconsolidated subsidiary trusts	$	1,086,647		$	2,040,452
Stockholders’ equity:
Common stock, $0.0001 par value, 190,000,000 shares authorized (post-conversion); shares to be issued as reflected		1,422			118
Additional paid-in capital		63,410			44,243
Retained earnings(5)		115,561			142,743
Less: treasury stock		(450	)		(43,850	)
Accumulated other comprehensive income		1,902			3,049
Less:
Common stock acquired by 2002 RRP		(2,416	)		—
Common stock acquired by ESOP(6)		(4,094	)		—
Common stock acquired by 2004 RRP(7)		—			—
Total stockholders’ equity	$	175,335		$	146,303
Total stockholders’ equity as a percentage of total assets		13.6	%		6.6	%
Tangible stockholders’ equity as a percentage of total assets		11.0	%		6.6	%

(footnotes on following page)

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	Pro Forma Combined at December 31, 2003, Based Upon the Acquisition(1)			Pro Forma at December 31, 2003, Based Upon the Acquisition and Sale or Issuance in Conversion of
				Minimum 14,875,000 Shares			Midpoint 17,500,000 Shares			Maximum 20,125,000 Shares			Adjusted Maximum(2) 23,143,750 Shares
	(In thousands, except share data)
Deposits(3)	$	2,383,520		$	2,383,520		$	2,383,520		$	2,383,520		$	2,383,520
Borrowings(4)		714,154			714,154			714,154			714,154			714,154
Junior subordinated obligations issued to unconsolidated subsidiary trusts		48,202			48,202			48,202			48,202			48,202
Total deposits, borrowed funds and junior subordinated obligations issued to unconsolidated subsidiary trusts	$	3,145,876		$	3,145,876		$	3,145,876		$	3,145,876		$	3,145,876
Stockholders’ equity:
Common stock, $0.0001 par value, 190,000,000 shares authorized (post-conversion); shares to be issued as reflected		3,419			5			5			6			6
Additional paid-in capital		280,892			429,624			455,632			481,640			511,550
Retained earnings(5)		115,561			115,561			115,561			115,561			115,561
Less: treasury stock		(450	)		(450	)		(450	)		(450	)		(450	)
Accumulated other comprehensive income		1,902			1,902			1,902			1,902			1,902
Less:
Common stock acquired by 2002 RRP		(2,416	)		(2,416	)		(2,416	)		(2,416	)		(2,416	)
Common stock acquired by ESOP(6)		(4,094	)		(15,994	)		(18,094	)		(20,194	)		(22,609	)
Common stock acquired by 2004 RRP(7)		—			(5,950	)		(7,000	)		(8,050	)		(9,258	)
Total stockholders’ equity	$	394,814		$	522,282		$	545,140		$	567,999		$	594,286
Total stockholders’ equity as a percentage of total assets		10.99	%		14.04	%		14.56	%		15.08	%		15.67	%
Tangible stockholders’ equity as a percentage of total assets		3.20	%		6.52	%		7.09	%		7.65	%		8.29	%

(1) Reflects pro forma impact of the cash and stock acquisition of BSB Bancorp, including the payment of $199.7 million of newly issued common stock and $133.1 million of cash.

(2) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the offering range up to approximately 15% to reflect changes in market and financial conditions before the conversion is completed.

(3) Does not reflect withdrawals from deposit accounts for the purchase of common stock in the conversion. Such withdrawals would reduce pro forma deposits by the amount of such withdrawals.

(4) Pro forma borrowings reflect the ESOP loan funded internally and eliminated in consolidation.

(5) The retained earnings of Partners Trust Financial Group will be substantially restricted after the conversion. See “The Conversion—Liquidation Rights.”

(6) Assumes that 8% of the common stock sold in the conversion offering will be acquired by the ESOP. The common stock acquired by the ESOP is reflected as a reduction in stockholders’ equity. Assumes the funds used to acquire ESOP shares will be borrowed from new Partners Trust Financial Group. See “Pro Forma Data.”

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(7) Gives effect to the 2004 RRP that new Partners Trust Financial Group expects to adopt after the conversion and acquisition and present to stockholders for approval at a meeting of stockholders to be held at least six months after the conversion and the acquisition are completed. No shares will be purchased by the 2004 RRP in the conversion, and such plan cannot purchase any shares until stockholder approval has been obtained. If the 2004 RRP is approved by the new Partners Trust Financial Group stockholders, the plan intends to acquire an amount of common stock equal to 4% of the shares of common stock sold in the conversion offering or 595,000, 700,000, 805,000 and 925,750 shares at the minimum, midpoint, maximum and maximum, as adjusted of the offering range, respectively. The table assumes that stockholder approval has been obtained and that such shares are purchased in the open market at $10.00 per share. The common stock so acquired by the 2004 RRP is reflected as a reduction of stockholders’ equity. If the shares are purchased at prices higher or lower than the initial purchase price of $10.00 per share, such purchases would have a greater or lesser impact, respectively on stockholders’ equity. If the 2004 RRP purchases authorized but unissued shares from new Partners Trust Financial Group, such issuance would dilute the voting interests of existing stockholders by approximately 1.3% if 17,500,000 shares were sold in the conversion. See “Pro Forma Data.”

(8) Does not include escrow deposits.

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THE ACQUISITION OF BSB BANCORP

General

On December 23, 2003, we entered into an agreement to acquire BSB Bancorp, which is the holding company for BSB Bank & Trust Company, a state-chartered commercial bank headquartered in Binghamton, New York. BSB Bank & Trust Company is a diversified financial services organization providing a full range of deposit and loan products to area businesses and consumers, trust, investment and insurance services. As of December 31, 2003, BSB Bancorp had consolidated assets of $2.2 billion, deposits of $1.6 billion and stockholders’ equity of $146.3 million.

Post-Acquisition Strategy

Upon the planned acquisition of BSB Bancorp, the resulting Partners Trust Bank will be a larger, more diversified, well capitalized community bank with a management and operating structure that will draw from both the business strategies currently being used at SBU Bank and BSB Bank & Trust Company. We believe that the proposed merger offers unique operating and strategic benefits.

On a pro forma basis at the maximum of the offering range, after giving effect to the acquisition of BSB Bancorp and as of December 31, 2003, the combined entity would have had total assets of $3.7 billion and total deposits of $2.4 billion.

The planned acquisition will significantly expand our branch network and market reach. The primary market areas of BSB Bank & Trust Company are the southern tier of New York, centered around the city of Binghamton, and central New York, centered around Syracuse. These metropolitan areas have a combined population of nearly one million people. The BSB Bancorp acquisition will expand our presence in Onondaga County, New York and will provide us entry into Broome, Chenango and Tioga counties, New York. The combined bank will operate 36 branch offices.

We believe that we will be well positioned to pursue our key business strategies following the acquisition of BSB Bancorp. Highlights of our business strategy are:

• to increase the number of households served by our core business lines through active cross-selling initiatives and effective marketing promotions;

• to expand our commercial business in all markets currently served by SBU Bank and BSB Bank & Trust Company by leveraging our investment in high quality relationship managers who will provide local decision-making and responsive service;

• to further develop our trust and municipal banking capabilities and actively promote those products throughout our market area;

• to continue the growth of our fee-based products with particular emphasis on the sale of investment services to consumers through our branch network; and

• to provide increased service to customers of both banks by linking the cities of Binghamton, Syracuse and Utica, with Syracuse serving as a focal point for growth of the combined organization.

See “Business of Partners Trust Financial Group and SBU Bank” and “Business of BSB Bancorp and BSB Bank & Trust Company” for a further discussion of our business strategy.

Management of the Combined Company

Following the acquisition of BSB Bancorp, the board of directors of new Partners Trust Financial Group will consist of the current directors of Partners Trust Financial Group plus Robert Allen, William Craine and David Niermeyer, each of whom is currently a director of BSB Bancorp.

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Following the acquisition of BSB Bancorp, the executive officers of new Partners Trust Financial Group will consist of the current executive officers of Partners Trust Financial Group plus Howard W. Sharp, who will serve as Executive Vice President until June 30, 2006 and William M. Le Beau, who will serve as Senior Vice President, Risk Management Officer and Corporate Secretary.

For information about our existing and prospective directors and executive officers, see “Management of Partners Trust Financial Group.”

Acquisition Details

BSB Bancorp will be merged with and into us. As a result of the merger, BSB Bancorp stockholders will have the right, with respect to each of their shares of BSB Bancorp common stock, to elect to receive, subject to proration as described below, either (a) $36.00 in cash, without interest, or (b) 3.6 shares of common stock of new Partners Trust Financial Group, or if the conversion price per share in the conversion is not $10.00, then such other number of shares as is equal to 36 divided by the conversion price per share (we refer to this number, whether 3.6 or such other number based on a conversion price per share of other than $10.00, as the Exchange Ratio).

Each holder of record of shares of BSB Bancorp common stock (other than holders that have exercised appraisal rights under the Delaware law) will have the right to submit an election specifying:

• the number of shares of BSB Bancorp common stock owned by such holder with respect to which the holder desires to make an election for stock consideration (in which case the holder will be deemed to have made a stock election with respect to such shares and an election for cash consideration with respect to the balance, if any); or

• the number of shares of BSB Bancorp common stock owned by such holder with respect to which the holder desires to make an election for cash consideration (in which case the holder will be deemed to have made a cash election with respect to such shares and an election for stock consideration with respect to the balance, if any).

Non-Electing Shares. BSB Bancorp stockholders who make no election to receive cash or new Partners Trust Financial Group common stock in the merger or who make an invalid election, will be deemed not to have made an election. Stockholders not making an election may be paid in cash, new Partners Trust Financial Group common stock or a mix of cash and shares of new Partners Trust Financial Group common stock depending on, and after giving effect to, the number of valid cash elections and stock elections that have been made by other BSB Bancorp stockholders using the proration adjustment described below.

Election Limitations. The number of shares of BSB Bancorp common stock that will be converted into new Partners Trust Financial Group common stock in the merger is fixed at 60% of the total BSB Bancorp common shares outstanding immediately before completion of the merger. The remainder, or 40%, of the BSB Bancorp common shares will be converted into the cash consideration. Therefore, the cash and stock elections are subject to proration to preserve this requirement regarding the number of shares of new Partners Trust Financial Group common stock to be issued and the cash to be paid in the merger. Further, in the event counsel for Partners Trust Financial Group reasonably determines that the merger may not satisfy the continuity of interest requirements applicable to reorganizations under Section 368(a) of the Internal Revenue Code, new Partners Trust Financial Group will reduce the number of shares of BSB Bancorp common stock entitled to receive the cash consideration and correspondingly increase the number of shares of BSB Bancorp common stock entitled to receive the stock consideration by the minimum amount necessary to enable the merger to satisfy such continuity of interest requirements. As a result, BSB Bancorp stockholders may receive a mix of cash and stock.

Proration if Too Much Stock is Elected. If BSB Bancorp stockholders elect to receive more new Partners Trust Financial Group common stock than new Partners Trust Financial Group has agreed to issue in the merger,

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then BSB Bancorp stockholders who elect to receive cash or who have made no election will receive cash for each share of BSB Bancorp common stock. All BSB Bancorp stockholders who elected to receive new Partners Trust Financial Group common stock will receive a pro rata portion of the available new Partners Trust Financial Group shares plus cash for those shares not converted into new Partners Trust Financial Group common stock.

Proration if Too Much Cash is Elected. If BSB Bancorp stockholders elect to receive fewer shares of new Partners Trust Financial Group common stock than new Partners Trust Financial Group has agreed to issue in the merger, then all BSB Bancorp stockholders who elected to receive new Partners Trust Financial Group common stock will receive new Partners Trust Financial Group common stock and those stockholders who have elected cash or have made no election will be treated in the following manner:

• If the number of shares held by BSB Bancorp stockholders who have made no election is sufficient to make up the shortfall in the number of new Partners Trust Financial Group shares that new Partners Trust Financial Group is required to issue, then all BSB Bancorp stockholders who elected cash will receive cash, and those stockholders who made no election will receive a combination of cash and new Partners Trust Financial Group common stock in whatever proportion is necessary to make up the shortfall.

• If the number of shares held by BSB Bancorp stockholders who have made no election is insufficient to make up the shortfall, then all of those shares will be converted into new Partners Trust Financial Group common stock and those BSB Bancorp stockholders who elected to receive cash will receive a combination of cash and new Partners Trust Financial Group common stock in whatever proportion is necessary to make up the shortfall.

Treasury Shares and Shares Held by Partners Trust Financial Group or BSB Bancorp or Any of Their Subsidiaries. Any shares of BSB Bancorp common stock owned immediately before the merger by BSB Bancorp or Partners Trust Financial Group (other than shares held by either in a fiduciary or agency capacity or in satisfaction of prior debts) will be canceled and retired and will cease to exist, and no consideration will be delivered in exchange for those shares. All shares of BSB Bancorp common stock owned by subsidiaries of Partners Trust Financial Group and BSB Bancorp will be converted in the merger into new Partners Trust Financial Group common stock.

Adjustments to the Merger Consideration. If before the merger, the outstanding shares of new Partners Trust Financial Group common stock are changed into a different number of shares by reason of any reclassification, recapitalization or combination, stock split, reverse stock split, stock dividend or rights issued in respect of such stock, merger or consolidation, or any similar event occurs, the merger consideration will be proportionately adjusted to provide BSB Bancorp stockholders the same economic effect as contemplated by the merger before the event causing the change in number of shares.

BSB Bancorp Stock Options. Upon completion of the merger, each BSB Bancorp stock option which is outstanding immediately before the merger, whether or not exercisable or vested, will be canceled and converted into an option to purchase shares of new Partners Trust Financial Group common stock in an amount and at an exercise price determined on the following basis:

• the number of shares of new Partners Trust Financial Group Common Stock to be subject to the option immediately after the effective time of the merger will be equal to the product of the number of shares of BSB Bancorp common stock subject to the option immediately before the merger, multiplied by the Exchange Ratio. Any fractional shares of new Partners Trust Financial Group common stock resulting from this multiplication will be rounded to the nearest share; and

• the exercise price per share of new Partners Trust Financial Group common stock under the converted option immediately after the merger will be equal to the exercise price per share of BSB Bancorp common stock under the option immediately before the merger divided by the Exchange Ratio, provided that the exercise price will be rounded to the nearest cent.

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Conditions to Completion. Completion of the merger depends upon a number of conditions being satisfied or waived, including the following:

• our conversion from mutual to stock form must be completed;

• Partners Trust Financial Group and BSB Bancorp stockholders must approve the merger agreement;

• Partners Trust Financial Group and BSB Bancorp must have received required regulatory approvals and all statutory waiting periods must have expired;

• there must not be any legal prohibitions preventing the completion of the merger;

• the registration statement relating to the new Partners Trust Financial Group common stock to be issued in the merger must have become effective and no stop order or related proceedings will be in effect or pending by the SEC;

• the shares of new Partners Trust Financial Group common stock to be issued in the merger to BSB Bancorp stockholders must be approved for listing on the Nasdaq National Market;

• since December 23, 2003, BSB Bancorp must not have suffered a material adverse effect; and

• both Partners Trust Financial Group and BSB Bancorp must have received a legal opinion that the merger will qualify as a tax-free reorganization under United States federal income tax laws.

Any shares of new Partners Trust Financial Group common stock to be issued in connection with the merger will be issued immediately following completion of the mutual-to-stock conversion of Partners Trust, MHC and related stock offering of new Partners Trust Financial Group. The merger is contingent on completion of the conversion and subject to regulatory and stockholder approval.

We anticipate simultaneously completing the conversion, offering and merger in mid-2004, although no assurance can be given that we will be able to complete these transactions by that time.

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PRO FORMA DATA

Unaudited Pro Forma Condensed Consolidated Financial Information

The following unaudited pro forma condensed balance sheets at December 31, 2003 and unaudited pro forma condensed consolidated statements of income for the year ended December 31, 2003 give effect to the proposed conversion and merger based on the assumptions set forth below. The unaudited pro forma consolidated financial information is based on the audited consolidated financial statements of Partners Trust Financial Group for the year ended December 31, 2003 and the audited consolidated financial statements of BSB Bancorp for the year ended December 31, 2003. The unaudited pro forma consolidated financial information gives effect to the BSB Bancorp merger using the purchase method of accounting under accounting principles generally accepted in the United States of America. However, integration costs and expected cost savings related to integration are not included.

The unaudited pro forma information is provided for informational purposes only. The pro forma financial information presented is not necessarily indicative of the actual results that would have been achieved had the merger been consummated on the date or at the beginning of the period presented, and is not necessarily indicative of future results. The unaudited pro forma financial information should be read in conjunction with the audited consolidated financial statements and the notes thereto of Partners Trust Financial Group and BSB Bancorp contained elsewhere in this document.

The unaudited pro forma net income derived from the above assumptions is qualified by the statements set forth above and should not be considered indicative of the market value of Partners Trust Financial Group common stock or the actual or future results of operations of Partners Trust Financial Group for any period. The pro forma data may be materially affected by the actual gross and net proceeds from the sale of shares in the stock offering and other factors.

40

Unaudited Pro Forma Condensed Balance Sheet

The following table presents pro forma balance sheet information at December 31, 2003 assuming the sale of 14,875,000 shares in the offering at the minimum of the offering range.

	At December 31, 2003(1)
	Partners Trust Financial Group			Pro Forma Conversion Adjustments(2)			Partners Trust As Converted			BSB Bancorp			Proforma Adjustments			Proforma Combined
	(In thousands)
Assets
Cash and cash equivalents	$	40,507		$	127,468		$	167,975		$	61,670		$	(152,353	)(3)	$	77,292
Securities available-for-sale		343,714						343,714			623,832						967,546
Securities held-to-maturity		1,240						1,240			—						1,240
Loans receivable(5)		806,194						806,194			1,453,341			10,458	(4)		2,269,993
Allowance for loan losses		(8,608	)					(8,608	)		(47,421	)					(56,029	)
Premises and equipment, net		13,623						13,623			15,223			(3,200	)(4)		25,646
Land and buildings held for sale		3,182						3,182			—						3,182
Goodwill		34,523						34,523			—			219,130	(6)		253,653
Identifiable intangible assets		3,288						3,288			825			22,000	(4)		26,113
Other assets		47,452						47,452			104,641						152,093
Total Assets	$	1,285,115		$	127,468		$	1,412,583		$	2,212,111		$	96,035		$	3,720,729
Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	796,078					$	796,078		$	1,581,482	(8)	$	5,960	(4)	$	2,383,520
Borrowings		290,569						290,569			410,768			12,817	(4)		714,154
Other liabilities		23,133						23,133			25,356			4,082	(4)		52,571
Junior subordinated obligations issued to unconsolidated subsidiary trusts		—						—			48,202			—	(4)		48,202
Total liabilities		1,109,780			—			1,109,780			2,065,808			22,859			3,198,447
Stockholders’ equity:
Common stock		1,422			(1,419	)		3			118			(116	)(7)		5
Additional paid-in capital		63,410			146,737			210,147			44,243			175,234	(7)		429,624
Retained earnings		115,561						115,561			142,743			(142,743	)(7)		115,561
Accumulated other comprehensive Income		1,902						1,902			3,049			(3,049	)(7)		1,902
Less: Common stock held by employee stock ownership plan		(4,094	)		(11,900	)		(15,994	)		—			—			(15,994	)
Less: Common stock acquired by recognition and retention plan		(2,416	)		(5,950	)		(8,366	)		—			—			(8,366	)
Treasury stock		(450	)					(450	)		(43,850	)		43,850	(7)		(450	)
Total stockholders’ equity		175,335			127,468			302,803			146,303			73,176			522,282
Total Liabilities and Stockholders’ Equity	$	1,285,115		$	127,468		$	1,412,583		$	2,212,111		$	96,035		$	3,720,729

(footnotes on following pages)

41

(1) Assumes that the conversion and acquisition of BSB Bancorp, Inc. was completed at December 31, 2003.

(2) Reflects:

	(In thousands)
Sale of Partners Trust common stock in the conversion:
Gross proceeds	$	148,750
Costs of offering		(3,432	)
		145,318
Purchase of common stock by Partners Trust Employee Stock Ownership Plan with a loan by Partners Trust		(11,900	)
Purchase of common stock by Partners Trust stock recognition and retention plan, funded internally by Partners Trust		(5,950	)
	$	127,468

Also reflects a change in par value per share as follows (in thousands):

	Common Stock			APIC		Total
Converted to $0.0001 par value per share from $0.10 par value per share	$	(1,420	)	$	1,420	$	—
Sale of $0.0001 par value stock in conversion, net of offering expenses		1			145,317		145,318
Pro forma adjustment	$	(1,419	)	$	146,737	$	145,318

(3) Assumes a purchase price of $331.4 million to be paid in 60% common stock (19,972,470 shares at $10 per share) and cash ($133.1 million), along with after-tax acquisition expenses of $19.2 million as summarized as follows (in thousands):

Merger related compensation and severance	$	12,475
Professional services		6,105
System and facilities conversion and other expenses		623
	$	19,203

The total cash outlay is $152.4 million.

(4) Purchase accounting adjustments are estimated as follows (in thousands):

BSB Bancorp net assets historical at December 31, 2003							$	146,303
Fair value adjustments(A):
Loans receivable(B)	$	10,458
Premises and equipment, net(C)		(3,200	)
Deposits(D)		(5,960	)
Borrowings(D)		(12,817	)
Junior subordinated obligations issued to unconsolidated subsidiary trusts		—
Total market value adjustments				$	(11,519	)
Identifiable intangible assets:
Core deposit premium(E)		21,100
Trust relationships(E)		900
Total identifiable assets					22,000
Total market value adjustments and identifiable assets					10,481
Tax effect of fair value adjustments at 38.95%					(4,082	)
Total net adjustments to net assets acquired								6,399
Adjusted net assets acquired							$	152,702

42

(A) Fair value adjustments in accordance with purchase accounting under generally accepted accounting principles. The values of the financial instruments are based on fair values disclosed in the notes to the audited financial statements of BSB Bancorp.

(B) The net premium on loans is being amortized to interest income on a straight line basis over 2.4 years. The actual net premium will be amortized into interest income using a method that will approximate the level yield method. Assumes that BSB Bancorp’s allowance for loan losses is carried over and SOP No. 03-3 does not apply. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Partners Trust Financial Group – Impact of New Accounting Standards.”

(C) The fair value adjustment for premises and equipment was on buildings and improvements with estimated lives between five and 30 years, and will reduce depreciation on a straight line basis.

(D) The premium on deposits and borrowings is being amortized into interest expense on a straight line basis over their estimated lives of 1.6 years and 2.7 years, respectively.

(E) The core deposit premium and trust relationship intangible are being amortized over their estimated lives of 10 years, using the sum of the years digits method.

(5) Includes loans held for sale.

(6) The excess of cost over fair value of net assets acquired is set forth below (in thousands except share data):

Total cost:
Stock portion			$	199,725
Cash				152,353
				352,078
BSB Bancorp options exchanged for Partners Trust options:
BSB Bancorp options outstanding		1,367,991
Estimated value using Black-Scholes model	$	14.44
Value of options exchanged				19,754
Subtotal				371,832
Net assets acquired				152,702
Goodwill			$	219,130

(7) Pro forma adjustments to eliminate BSB Bancorp equity accounts. Also includes adjustment to reflect issuance of 19,972,470 shares of stock as follows (in thousands):

	Common Stock			Additional Paid-in Capital
Shares issued to BSB Bancorp shareholders (19,972,470 shares with $0.0001 par value per share)	$	2		$	199,723
Value of options exchanged		—			19,754
Eliminate BSB Bancorp equity		(118	)		(44,243	)
Pro forma adjustment	$	(116	)	$	175,234

(8) Does not include escrow deposits.

43

Unaudited Pro Forma Condensed Balance Sheet

The following table presents pro forma balance sheet information at December 31, 2003 assuming the sale of 20,125,000 shares in the offering at the maximum of the offering range.

	At December 31, 2003 (1)
	Partners Trust Financial Group			Pro Forma Conversion Adjustments(2)			Partners Trust As Converted			BSB Bancorp			Proforma Adjustments			Proforma Combined
	(In thousands)
Assets
Cash and cash equivalents	$	40,507		$	173,185		$	213,692		$	61,670		$	(152,353	)(3)	$	123,009
Securities available-for-sale		343,714						343,714			623,832						967,546
Securities held-to-maturity		1,240						1,240			—						1,240
Loans receivable(5)		806,194						806,194			1,453,341			10,458	(4)		2,269,993
Allowance for loan losses		(8,608	)					(8,608	)		(47,421	)					(56,029	)
Premises and equipment, net		13,623						13,623			15,223			(3,200	)(4)		25,646
Land and buildings held for sale		3,182						3,182			—						3,182
Goodwill		34,523						34,523			—			219,130	(6)		253,653
Identifiable intangible assets		3,288						3,288			825			22,000	(4)		26,113
Other assets		47,452						47,452			104,641						152,093
Total Assets	$	1,285,115		$	173,185		$	1,458,300		$	2,212,111		$	96,035		$	3,766,446
Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	796,078					$	796,078		$	1,581,482	(8)	$	5,960	(4)	$	2,383,520
Borrowings		290,569						290,569			410,768			12,817	(4)		714,154
Other liabilities		23,133						23,133			25,356			4,082	(4)		52,571
Junior subordinated obligations issued to unconsolidated subsidiary trusts		—						—			48,202			—	(4)		48,202
		1,109,780			—			1,109,780			2,065,808			22,859			3,198,447
Stockholders’ equity:
Common stock		1,422			(1,418	)		4			118			(116	)(7)		6
Additional paid-in capital		63,410			198,753			262,163			44,243			175,234	(7)		481,640
Retained earnings		115,561						115,561			142,743			(142,743	)(7)		115,561
Accumulated other comprehensive income		1,902						1,902			3,049			(3,049	)(7)		1,902
Less: Common stock held by employee stock ownership plan		(4,094	)		(16,100	)		(20,194	)		—			—			(20,194	)
Less: Common stock acquired by recognition and retention plan		(2,416	)		(8,050	)		(10,466	)		—			—			(10,466	)
Treasury stock		(450	)					(450	)		(43,850	)		43,850	(7)		(450	)
Total stockholders’ equity		175,335			173,185			348,520			146,303			73,176			567,999
Total Liabilities and Stockholders’ Equity	$	1,285,115			173,185		$	1,458,300		$	2,212,111		$	96,035		$	3,766,446

(footnotes on following pages)

44

(1) Assumes that the conversion and acquisition of BSB Bancorp, Inc. was completed at December 31, 2003.

(2) Reflects:

	(In thousands)
Sale of Partners Trust common stock in the conversion:
Gross proceeds	$	201,250
Costs of offering		(3,915	)
		197,335
Purchase of common stock by Partners Trust Employee Stock Ownership Plan with a loan by Partners Trust		(16,100	)
Purchase of common stock by Partners Trust stock recognition and retention plan, funded internally by Partners Trust		(8,050	)
	$	173,185

Also reflects a change in par value per share as follows (in thousands):

	Common Stock			APIC		Total
Converted to $0.0001 par value per share from $0.10 par value per share	$	(1,420	)	$	1,420	$	—
Sale of $0.0001 par value stock in conversion, net of offering expenses		2			197,333		197,335
Pro forma adjustment	$	(1,418	)	$	198,753	$	197,335

(3) Assumes a purchase price of $331.4 million to be paid in 60% common stock (19,972,470 shares at $10 per share) and cash ($133.1 million) along with after-tax acquisition expenses of $19.2 million as summarized as follows (in thousands):

Merger related compensation and severance	$	12,475
Professional services		6,105
System and facilities conversion and other expenses		623
	$	19,203

The total cash outlay is $152.4 million.

(4) Purchase accounting adjustments are estimated as follows (in thousands):

BSB Bancorp net assets historical at December 31, 2003							$	146,303
Fair value adjustments (A):
Loans receivable (B)	$	10,458
Premises and equipment, net (C)		(3,200	)
Deposits (D)		(5,960	)
Borrowings (D)		(12,817	)
Junior subordinated obligations issued to unconsolidated subsidiary trusts		—
Total market value adjustments				$	(11,519	)
Identifiable intangible assets:
Core deposit premium (E)		21,100
Trust relationships (E)		900
Total identifiable assets					22,000
Total market value adjustments and identifiable assets					10,481
Tax effect of fair value adjustments at 38.95%					(4,082	)
Total net adjustments to net assets acquired								6,399
Adjusted net assets acquired							$	152,702

45

(A) Fair value adjustments in accordance with purchase accounting under generally accepted accounting principles. The values of the financial instruments are based on fair values disclosed in the notes to the audited financial statements of BSB Bancorp.

(B) The net premium on loans is being amortized to interest income on a straight line basis over 2.4 years. The actual net premium will be amortized into interest income using a method that will approximate the level yield method. Assumes that BSB Bancorp’s allowance for loan losses is carried over and SOP No. 03-3 does not apply. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Partners Trust Financial Group – Impact of New Accounting Standards.”

(C) The fair value adjustment for premises and equipment was on buildings and improvements with estimated lives between five and 30 years, and will reduce depreciation on a straight line basis.

(D) The premium on deposits and borrowings is being amortized into interest expense on a straight line basis over their estimated lives of 1.6 years and 2.7 years, respectively.

(E) The core deposit premium and trust relationship intangible are being amortized over their estimated lives of 10 years, using the sum of the years digits method.

(5) Includes loans held for sale.

(6) The excess of cost over fair value of net assets acquired is set forth below (in thousands except share data):

Total cost:
Stock portion			$	199,725
Cash				152,353
				352,078
BSB Bancorp options exchanged for Partners Trust options:
BSB Bancorp options outstanding		1,367,991
Estimated value using Black-Scholes model	$	14.44
Value of options exchanged				19,754
Subtotal				371,832
Net assets acquired				152,702
Goodwill			$	219,130

(7) Pro forma adjustments to eliminate BSB Bancorp equity accounting. Also includes adjustment to reflect issuance of 19,972,470 shares of stock as follows (in thousands):

	Common Stock			Additional Paid-in Capital
Shares issued to BSB Bancorp shareholders (19,972,470 shares with $0.0001 par value per share)	$	2		$	199,723
Value of options exchanged		—			19,754
Eliminate BSB Bancorp equity		(118	)		(44,243	)
Pro forma adjustment	$	(116	)	$	175,234

(8) Does not include escrow deposits.

46

Unaudited Pro Forma Condensed Consolidated Statements of Income

The following table presents pro forma income statement information assuming the sale of 14,875,000 shares in the conversion offering at the minimum of the offering range.

	For the Year Ended December 31, 2003(1)
	Partners Trust Financial Group Historical		BSB Bancorp Historical		Pro Forma Adjustments (4)(6)			Combined Pro Forma
	(In thousands, except share data)
Interest income	$	69,188	$	114,801	$	(5,500	)(5)	$	178,489
Interest expense		22,582		42,965		(8,500	)(5)		57,047
Net interest income		46,606		71,836		3,000			121,442
Provision for loan losses		1,100		10,088					11,188
Net interest income after provision for loan losses		45,506		61,748		3,000			110,254
Non-interest income		11,138		13,540					24,678
Non-interest expense		35,330		49,546		3,994	(5)		88,870
Income before income tax expense		21,314		25,742		(994	)		46,062
Income tax expense (benefit)		7,268		8,725		(387	)(5)		15,606
Net income	$	14,046	$	17,017	$	(607	)	$	30,456
Earnings Per Share:
Basic	$	1.04	$	1.85				$	0.66
Diluted	$	1.02	$	1.81				$	0.65
Shares Used For Calculating:
Basic		13,531,672		9,209,058		(9,209,058	)(2)		46,278,326	(3)
Diluted		13,749,174		9,380,036		(9,380,036	)(2)		47,071,768	(3)

(1) Assumes that the acquisition of BSB Bancorp, Inc. was completed on January 1, 2003.

(2) BSB Bancorp historical weighted average number of shares outstanding as adjusted for the 3.6:1 merger exchange ratio used in calculation of earnings per share are as follows:

	Weighted Average Shares Outstanding
	Historical BSB Bancorp	Less: 40% Exchanged for Cash		BSB Bancorp Shares to be Exchanged	Adjusted BSB Bancorp
Basic EPS	9,209,058	(3,683,623	)	5,525,435	19,891,566
Diluted EPS	9,380,036	(3,752,014	)	5,628,022	20,260,879

(3) The weighted average number of shares outstanding used to calculate pro forma consolidated earnings per share are as follows:

	Weighted Average Shares Outstanding
	Historical Partners Trust	Shares Issued in Conversion	Shares Issued in Merger	Pro Forma
Basic EPS	13,531,672	26,386,760	19,891,566	46,278,326
Diluted EPS	13,749,174	26,810,889	20,260,879	47,071,768

(4) Adjustments to record estimated interest income to be earned on the net proceeds of the offering will be recorded as incurred. In accordance with Article 11 of Regulation S-X, such adjustments are not reflected in the Pro Forma Income Statements and related per share calculations. The estimated interest income assuming the net proceeds of $127.5 million from the conversion offering are invested at an average yield of 1.06% would be approximately $825,000 after taxes. The yield utilized approximates the yield of a one-year U.S. Treasury Bill adjusted to a constant maturity (“CMT”) on December 31, 2003.

47

(5) Pro forma adjustments to interest income and interest expense were calculated as follows (a method approximating the interest method will ultimately be used for securities, loans, deposits and borrowings) (in thousands):

Amortization of premium on securities (straight line over 4.6 years)	$	(1,100	)
Amortization of premium on loans (straight line over 2.4 years)		(4,400	)
Total net adjustments — interest income		(5,500	)
Amortization of premium on deposits (straight line over 1.6 years)		(3,700	)
Amortization of premium on borrowings (straight line over 2.7 years)		(4,800	)
Total net adjustments — interest expense		(8,500	)
Amortization of core deposit premium (sum of the years digit over 10 years)		3,836
Amortization of trust relationship intangible (sum of the years digit over 10 years)		171
Reduction in depreciation expense (straight line over between 5 and 30 years)		(13	)
Total net adjustments — non-interest expense		3,994
Total net adjustments before income tax expense (benefit)		(994	)
Income tax expense (benefit) at 38.95%		(387	)
Net income impact of net adjustments	$	(607	)

(6) Non-interest expenses do not include anticipated cost savings or merger related expenses.

48

Unaudited Pro Forma Condensed Consolidated Statements of Income

The following table presents pro forma income statement information assuming the sale of 20,125,000 shares in the conversion offering at the maximum of the offering range.

	For the Year Ended December 31, 2003(1)
	Partners Trust Financial Group Historical		BSB Bancorp Historical		Pro Forma Adjustments (4)(6)			Combined Pro Forma
	(In thousands, except share data)
Interest income	$	69,188	$	114,801	$	(5,500	)(5)	$	178,489
Interest expense		22,582		42,965		(8,500	)(5)		57,047
Net interest income		46,606		71,836		3,000			121,442
Provision for loan losses		1,100		10,088					11,188
Net interest income after provision for loan losses		45,506		61,748		3,000			110,254
Non-interest income		11,138		13,540					24,678
Non-interest expense		35,330		49,546		3,994	(5)		88,870
Income before income tax expense		21,314		25,742		(994	)		46,062
Income tax expense (benefit)		7,268		8,725		(387	)(5)		15,606
Net income	$	14,046	$	17,017	$	(607	)	$	30,456
Earnings Per Share:
Basic	$	1.04	$	1.85				$	0.55
Diluted	$	1.02	$	1.81				$	0.54
Shares Used For Calculating:
Basic		13,531,672		9,209,058		(9,209,058	)(2)		55,601,648	(3)
Diluted		13,749,174		9,380,036		(9,380,036	)(2)		56,544,949	(3)

(1) Assumes that the acquisition of BSB Bancorp, Inc. was completed on January 1, 2003.

(2) BSB Bancorp historical weighted average number of shares outstanding as adjusted for the 3.6:1 merger exchange ratio used in calculation of earnings per share are as follows:

	Weighted Average Shares Outstanding
	Historical BSB Bancorp	Less: 40% Exchanged for Cash		BSB Bancorp Shares to be Exchanged	Adjusted BSB Bancorp
Basic EPS	9,209,058	(3,683,623	)	5,525,435	19,891,566
Diluted EPS	9,380,036	(3,752,014	)	5,628,022	20,260,879

(3) The weighted average number of shares outstanding used to calculate pro forma consolidated earnings per share are as follows:

	Weighted Average Shares Outstanding
	Historical Partners Trust	Shares Issued in Conversion	Shares Issued in Merger	Pro Forma
Basic EPS	13,531,672	35,710,082	19,891,566	55,601,648
Diluted EPS	13,749,174	36,284,070	20,260,879	56,544,949

(4) Adjustments to record estimated interest income to be earned on the net proceeds of the offering will be recorded as incurred. In accordance with Article 11 of Regulation S-X, such adjustments are not reflected in the Pro Forma Income Statements and related per share calculations. The estimated interest income

49

assuming the net proceeds of $173.2 million from the conversion offering are invested at an average yield of 1.06% would be approximately $1.1 million after taxes. The yield utilized approximates the yield of a one-year U.S. Treasury Bill adjusted to a constant maturity (“CMT”) on December 31, 2003.

(5) Pro forma adjustments to interest income and interest expense were calculated as follows (a method approximating the interest method will ultimately be used for securities, loans, deposits and borrowings) (in thousands):

Amortization of premium on securities (straight line over 4.6 years)	$	(1,100	)
Amortization of premium on loans (straight line over 2.4 years)		(4,400	)
Total net adjustments—interest income		(5,500	)
Amortization of premium on deposits (straight line over 1.6 years)		(3,700	)
Amortization of premium on borrowings (straight line over 2.7 years)		(4,800	)
Total net adjustments—interest expense		(8,500	)
Amortization of core deposit premium (sum of the years digit over 10 years)		3,836
Amortization of trust relationship intangible (sum of the years digit over 10 years)		171
Reduction in depreciation expense (straight line over between 5 and 30 years)		(13	)
Total net adjustments—non-interest expense		3,994
Total net adjustments before income tax expense (benefit)		(994	)
Income tax expense (benefit) at 38.95%		(387	)
Net income impact of net adjustments	$	(607	)

(6) Non-interest expenses do not include anticipated cost savings or merger related expenses.

50

Summary Historical Data Giving Effect to Conversion and Merger

The following tables summarize historical data of Partners Trust Financial Group and pro forma data to give effect to the proposed conversion and the merger of Partners Trust Financial Group at or for the year ended December 31, 2003. This information is based on assumptions set forth below and in the table, and should not be used as a basis for projections of market value of the shares of common stock following the conversion, offering and acquisition. Pro forma stockholders’ equity per share does not give effect to the liquidation account to be established in the conversion or, in the event of a liquidation of SBU Bank, to the recoverability of intangibles or the tax effect of the recapture of the bad debt reserve. See “The Conversion—Liquidation Rights.”

The net proceeds in the tables are based upon the following assumptions:

(1) all shares of common stock will be sold in the subscription and community offerings;

(2) 104,000 shares of common stock will be purchased by our executive officers and directors and their associates;

(3) our employee stock ownership plan will purchase 8.0% of the shares of common stock sold in the offering with a loan from Partners Trust Financial Group;

(4) Sandler O’Neill & Partners, L.P. will receive a fee equal to 1.0% of the dollar amount of shares of common stock sold in the offering. No fee will be paid with respect to shares of common stock purchased by our qualified and non-qualified employee stock benefit plans or by our officers, directors and employees and their immediate families; and

(5) total expenses of the offering, including the marketing fees to be paid to Sandler O’Neill & Partners, L.P., will be between $3.4 million at the minimum of the offering range and $4.2 million at the maximum of the offering range, as adjusted.

We calculated pro forma consolidated net earnings for the year ended December 31, 2003 as if the estimated net proceeds we received had been invested at an assumed interest rate of 1.06%, which represents the yield on the one year U.S. Treasury Bill as of December 31, 2003. The effect of withdrawals from deposit accounts for the purchase of shares of common stock has not been reflected. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the indicated number of shares of common stock. No effect has been given in the pro forma stockholders’ equity calculations for the assumed earnings on the net proceeds. The actual net proceeds from the sale of shares of common stock will not be determined until the offering is completed. However, we currently estimate the net proceeds to be between $145.3 million and $197.3 million, or $227.2 million if the offering range is increased by 15%. It is assumed that all shares of common stock will be sold in the subscription and community offerings.

The following pro forma information may not be representative of the financial effects of the foregoing transactions at the dates on which such transactions actually occur, and should not be taken as indicative of future results of operations. Pro forma consolidated stockholders’ equity represents the difference between the stated amounts of our assets and liabilities. The pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock.

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	At or For the Year ended December 31, 2003 Based on the Sale At $10.00 Per Share of
	Minimum 14,875,000 Shares			Midpoint 17,500,000 Shares			Maximum 20,125,000 Shares			Adjusted Maximum 23,143,750 Shares(8)
	(In thousands, except per share amounts)
Gross proceeds	$	148,750		$	175,000		$	201,250		$	231,438
Plus: shares issued in the exchange		128,134			150,746			173,358			199,362
Plus: shares issued to BSB Bancorp		199,725			199,725			199,725			199,725
Pro forma market capitalization	$	476,609		$	525,471		$	574,333		$	630,524
Gross proceeds	$	148,750		$	175,000		$	201,250		$	231,438
Less: conversion expenses		3,432			3,674			3,915			4,193
Estimated net proceeds		145,318			171,326			197,335			227,245
Less: common stock acquired by ESOP and financed internally		(11,900	)		(14,000	)		(16,100	)		(18,515	)
Less: common stock acquired by 2004 RRP		(5,950	)		(7,000	)		(8,050	)		(9,258	)
Estimated net proceeds as adjusted	$	127,468		$	150,326		$	173,185		$	199,472
Estimated acquisition cash costs(9)	$	(152,353	)	$	(152,353	)	$	(152,353	)	$	(152,353	)
For the year ended December 31, 2003
Consolidated net income(1)
Pro forma net income reflecting acquisition(1)	$	30,456		$	30,456		$	30,456		$	30,456
Pro forma income on net proceeds		825			973			1,121			1,291
Pro forma acquisition adjustment		(986	)		(986	)		(986	)		(986	)
Pro forma ESOP adjustment(2)		(726	)		(855	)		(983	)		(1,130	)
Pro forma RRP adjustment(3)		(726	)		(855	)		(983	)		(1,130	)
Pro forma net income(4)	$	28,843		$	28,733		$	28,625		$	28,501
Per share net income(1)
Pro forma net income reflecting acquisition(1)	$	0.66		$	0.60		$	0.55		$	0.50
Pro forma income on net proceeds		0.02			0.02			0.02			0.02
Pro forma acquisition adjustment		(0.02	)		(0.02	)		(0.02	)		(0.02	)
Pro forma ESOP adjustment(2)		(0.02	)		(0.02	)		(0.02	)		(0.02	)
Pro forma RRP adjustment(3)		(0.02	)		(0.02	)		(0.02	)		(0.02	)
Pro forma net income per share(4)	$	0.62		$	0.56		$	0.51		$	0.46
Shares used for calculating pro forma earnings per share		46,508,991			51,206,183			55,903,376			61,305,147
Stock price as a multiple of pro forma earnings per share(7)		16.13x			17.86x			19.61x			21.74x

(footnotes on following page)

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	At or For the Year ended December 31, 2003 Based on the Sale At $10.00 Per Share of
	Minimum 14,875,000 Shares		Midpoint 17,500,000 Shares		Maximum 20,125,000 Shares		Adjusted Maximum 23,143,750 Shares(8)
	(In thousands, except per share amounts)
At December 31, 2003
Stockholders’ equity
Historical consolidated stockholders’ equity	$394,814		$394,814		$394,814		$394,814
Estimated net proceeds	145,318		171,326		197,335		227,245
Less: common stock acquired by ESOP(2)	(11,900	)	(14,000	)	(16,100	)	(18,515	)
Less: common stock acquired by RRP(3)	(5,950	)	(7,000	)	(8,050	)	(9,258	)
Pro forma stockholders’ equity	522,282		545,140		567,999		594,286
Intangible assets	(279,766	)	(279,766	)	(279,766	)	(279,766	)
Pro forma tangible stockholders’ equity(4)	$242,516		$265,374		$288,233		$314,520
Stockholders’ equity per share:(6)
Historical	$      8.28		$      7.51		$      6.87		$      6.27
Estimated net proceeds	3.05		3.26		3.44		3.60
Less: common stock acquired by ESOP(2)	(0.25	)	(0.27	)	(0.28	)	(0.29	)
Less: common stock acquired by RRP(3)	(0.12	)	(0.13	)	(0.14	)	(0.15	)
Pro forma stockholders’ equity per share(4)(5)	10.96		10.37		9.89		9.43
Intangible assets(10)	(5.87	)	(5.32	)	(4.87	)	(4.44	)
Pro forma tangible stockholders’ equity per share(4)(5)	$      5.09		$      5.05		$      5.02		$      4.99
Shares used for pro forma stockholders’ equity per share	47,660,895		52,547,087		57,433,280		63,052,401
Offering price as percentage of equity per share(7)	91.24	%	96.43	%	101.11	%	106.04	%
Offering price as a percentage of tangible equity per share(7)	196.46	%	198.02	%	192.20	%	200.40	%

(1) Consolidated net income is pro forma net income reflecting the acquisition of BSB Bancorp and related purchase accounting adjustments. Per share net income data is based on the indicated shares outstanding at the minimum, midpoint, maximum and adjusted maximum of the estimated offering range, which represents shares sold in the offering, shares issued to existing public stockholders of Partners Trust Financial Group, shares issued in the merger and shares to be allocated or distributed under the ESOP and stock recognition and retention plan for the period presented.

(2) It is assumed that 8% of the aggregate shares sold in the conversion offering will be purchased by Partners Trust Financial Group’s ESOP. The funds used to acquire such shares are assumed to have been borrowed by the ESOP from Partners Trust Financial Group. The amount to be borrowed is reflected as a reduction to stockholders’ equity. Annual contributions are expected to be made to the ESOP in an amount at least equal to the principal and interest requirement of the debt. The pro forma net income assumes: (i) that the contribution to the ESOP is equivalent to the debt service requirement for the twelve months ended December 31, 2003, at an average fair value of $10.00 per share; and (ii) only the ESOP shares committed to be released were considered outstanding for purposes of the net income per share calculations.

(3) Gives effect to the stock recognition and retention plan new Partners Trust Financial Group expects to adopt following completion of the conversion and the merger. This plan is expected to acquire a number of shares of common stock equal to an aggregate of 4% of the shares of common stock sold in the offering, or 595,000, 700,000, 805,000 and 925,750 shares of common stock at the minimum, midpoint, maximum and adjusted maximum of the estimated offering range, respectively, either through open market purchases or directly from new Partners Trust Financial Group. In calculating the pro forma effect of the stock recognition and retention plan, it is assumed that the shares were acquired by the plan at the beginning of the period presented in open market purchases at $10.00 per share and that 20% of the amount contributed was

53

an amortized expense during such period. The issuance of authorized but unissued shares of new Partners Trust Financial Group common stock to the stock recognition and retention plan instead of open market purchases would dilute the voting interests of existing stockholders by approximately 1.3% at the midpoint of the offering range.

(4) No effect has been given to the issuance of additional shares of common stock pursuant to the stock option plan that new Partners Trust Financial Group expects to adopt following the conversion. Under the stock option plan, an amount equal to the aggregate 10% of the common stock sold in the offering, or 1,487,500, 1,750,000, 2,012,500 and 2,314,375 shares at the minimum, midpoint, maximum and adjusted maximum of the estimated offering range, respectively, will be reserved for future issuance upon the exercise of options to be granted under the stock option plan. The issuance of common stock pursuant to the exercise of options under the new Partners Trust Financial Group stock option plan will result in the dilution of existing stockholders’ voting power by approximately 3.3% at the midpoint of the offering range.

(5) The retained earnings of Partners Trust Financial Group will continue to be substantially restricted after the conversion.

(6) Stockholders’ equity per share data is based upon the indicated number of shares outstanding at the minimum, midpoint, maximum and adjusted maximum of the estimated offering range, representing shares sold in the offering, shares issued to existing public stockholders of Partners Trust Financial Group, shares purchased by the Partners Trust Financial Group ESOP and the stock recognition and retention plan, and shares issued in the merger.

(7) Based on pro forma net income and pro forma stockholders’ equity for the twelve months ended December 31, 2003.

(8) As adjusted to give effect to an increase in the number of shares which could occur due to an increase in the estimated offering range of up to 15% as a result of regulatory considerations, demand for the shares, or changes in market or general financial and economic conditions following the commencement of the offering.

(9) Based on cash to close the merger of $133.1 million, transaction costs and expense of $24.6 million, net of tax savings of $5.4 million from tax-deductible transaction costs.

(10) Based on goodwill of $253.7 million and identifiable intangible assets of $26.1 million.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS OF PARTNERS TRUST FINANCIAL GROUP

General

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

Overview

Income. Our results of operations are dependent primarily on net interest income, which is the difference between the income earned on loans and securities and the cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for loan losses, securities and loan sale activities, loan servicing activities, service charges and fees collected on deposit accounts, income collected from trust and investment advisory services and the income earned on bank-owned life insurance.

Expenses. Our expenses primarily consist of salaries and employee benefits, occupancy and equipment expense, marketing expense, technology expense, other expense and income tax expense. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, government policies and the actions of regulatory authorities.

2003 Highlights

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

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

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

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

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

Loans receivable were flat year to year. However, due primarily to the Herkimer transaction, our average outstanding loan balance increased significantly from $603.3 million in 2002 to $793.0 million in 2003, and our loan mix changed. Residential mortgages increased $47.6 million or 11.0% and were 59.9% of total loans receivable, compared to 54.0% at the end of 2002. As interest rates remained at historic lows in 2003, refinancing

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activity of residential mortgages was substantial. This, in conjunction with borrowers’ desire for shorter term loans such as 15-year biweekly mortgages, allowed us to retain more loans for portfolio. Commercial real estate and consumer loans decreased $30.9 million, or 18.1% and $18.6 million, or 13.0% respectively. The decline in commercial real estate loans is primarily attributed to customers refinancing their loans with competitors who offered rates and conditions that SBU Bank was not willing to match, and due to the planned exiting of riskier lending relationships. The decline in consumer loans is primarily attributed to a high level of payoffs on automobile loans as consumers took advantage of extremely low rates of financing offered by automotive manufacturers.

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

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

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

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

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

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

Provision for Loan Losses. We establish provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level management considers necessary to absorb probable credit losses in the current loan portfolio. The amount of the allowance is based on estimates and the ultimate

56

losses may vary from such estimates as more information becomes available or later events occur. Management assesses the allowance for loan losses on a quarterly basis and makes provisions for loan losses in order to increase the allowance.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Income Tax Expense. Income tax expense was $7.3 million on income before taxes of $21.3 million for the year ended December 31, 2003, resulting in an effective tax rate of 34.1% compared to income tax expense of $3.8 million on income before taxes of $12.2 million for 2002, resulting in an effective tax rate of 31.2%. The increase in the effective tax rate is primarily attributed to the higher net income before taxes resulting in a higher marginal tax rate.

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

General. Net income for the year ended December 31, 2002 was $8.4 million, or $0.45 per share (computed on earnings from the date of the reorganization), which was $1.8 million higher than 2001. The 2002 results were substantially affected by SBU Bank’s reorganization and merger expenses. In connection with the reorganization, we contributed 191,928 shares of newly issued stock and $200,000 in cash to the SBU Bank Charitable Foundation, resulting in a one-time charitable contribution expense of $2.1 million, or approximately $1.3 million after income taxes. We also incurred $1.7 million in merger expenses related to Herkimer, or

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approximately $1.0 million after income taxes. The increase in net income from the prior year was primarily due to higher net interest income and a reduction in the provision for loan losses, partially offset by a decrease in non-interest income, an increase in non-interest expense and an increase in income tax expense. Return on average assets for the years ended December 31, 2002 and 2001 was 0.82% and 0.67%, respectively. Return on average equity for the years ended December 31, 2002 and 2001 was 5.67% and 6.85%, respectively.

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

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

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

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

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

Average Balance Sheet

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

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	For the Years Ended December 31,
	2003							2002							2001
	Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate		Average Outstanding Balance			Interest Earned/ Paid		Yield/ Rate
	(In thousands)
Earning assets:
Federal funds sold and interest bearing deposits	$	30,817		$	348	1.13	%	$	33,848		$	534	1.58	%	$	9,478		$	274	2.89	%
Securities(1)		347,877			14,855	4.27			315,357			18,319	5.81			317,699			20,351	6.41
Loans(2)		792,993			53,986	6.81			603,272			44,037	7.30			599,964			47,904	7.98
Total earning assets		1,171,687			69,189	5.91			952,477			62,890	6.60			927,141			68,529	7.39
Non-earning assets		123,974							67,940							65,865
Total assets	$	1,295,661						$	1,020,417						$	993,006
Interest bearing liabilities:
Savings accounts	$	166,457		$	839	0.50	%	$	105,590		$	1,147	1.09	%	$	105,484		$	1,988	1.88	%
Money market accounts		160,358			1,335	0.83			117,400			1,832	1.56			113,615			3,618	3.18
NOW accounts		91,142			199	0.22			57,424			326	0.57			55,772			549	0.98
Time accounts		314,454			9,563	3.04			277,350			12,054	4.35			307,377			17,921	5.83
Borrowings(3)		277,548			10,646	3.84			260,685			12,267	4.71			264,389			14,786	5.59
Total interest bearing liabilities		1,009,959			22,582	2.24			818,449			27,626	3.38			846,637			38,862	4.59
Non-interest bearing deposits		99,617							39,550							35,105
Other non-interest bearing liabilities		14,316							14,095							14,384
Total liabilities		1,123,892							872,094							896,126
Stockholders’ equity		171,769							148,323							96,880
Total liabilities and stockholders’ equity	$	1,295,661						$	1,020,417						$	993,006
Net interest income				$	46,607						$	35,264						$	29,667
Net interest rate spread						3.67	%						3.22	%						2.80	%
Net earning assets	$	161,728						$	134,028						$	80,504
Net interest margin						3.98	%						3.70	%						3.20	%
Ratio of earning assets to interest bearing liabilities		116.01	%						116.38	%						109.51	%

(1) The amounts shown are amortized cost and include FHLB stock.

(2) Net of the allowance for loan losses and net of deferred loan fees and costs. Includes loans held for sale.

(3) Borrowings include mortgagors’ escrow funds.

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Rate/Volume Analysis

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

	Year Ended December 31,
	2003 vs. 2002									2002 vs. 2001
	Rate			Volume			Total			Rate			Volume			Total
	(In thousands)
Earning assets:
Federal funds sold and interest-bearing deposits	$	(141	)	$	(45	)	$	(186	)	$	(172	)	$	432		$	260
Securities		(5,213	)		1,749			(3,464	)		(1,883	)		(149	)		(2,032	)
Loans		(3,132	)		13,081			9,949			(4,130	)		263			(3,867	)
Total earning assets		(8,486	)		14,785			6,299			(6,185	)		546			(5,639	)
Interest bearing liabilities:
Savings accounts		(786	)		478			(308	)		(843	)		2			(841	)
Money market accounts		(1,030	)		533			(497	)		(1,903	)		117			(1,786	)
NOW accounts		(261	)		134			(127	)		(239	)		16			(223	)
Time accounts		(3,954	)		1,463			(2,491	)		(4,240	)		(1,627	)		(5,867	)
Borrowings		(2,377	)		756			(1,621	)		(2,315	)		(204	)		(2,519	)
Total interest bearing liabilities		(8,408	)		3,364			(5,044	)		(9,540	)		(1,696	)		(11,236	)
Net interest income	$	(78	)	$	11,421		$	11,343		$	3,355		$	2,242		$	5,597

See “—Comparison of Operating Results for the Years Ended December 31, 2003 and 2002” and “—Comparison of Operating Results for the Years Ended December 31, 2002 and 2001” above for a discussion of changes in net interest income.

Impact of Inflation and Changing Prices

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

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used by us for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate, and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding.

For the year ended December 31, 2003, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition.

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Liquidity and Capital Resources

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

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

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

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

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

At December 31, 2003, SBU Bank exceeded all the applicable regulatory capital requirements. Although the Office of Thrift Supervision does not impose minimum capital requirements on thrift holding companies, our consolidated regulatory capital amounts and ratios are discussed below. Partners Trust Financial Group’s consolidated and SBU Bank’s leverage (Tier 1) capital at December 31, 2003 was $135.4 million and

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$114.8 million, respectively, or 10.8% and 9.2% of assets, respectively. In order to be classified as “well-capitalized” under federal banking regulations, SBU Bank was required to have leverage (Tier 1) capital of at least $62.3 million, or 5.0% of assets. To be classified as a well-capitalized bank, SBU Bank must also have a ratio of total risk-based capital to risk-weighted assets of at least 10.0%. At December 31, 2003, SBU Bank’s total risk-based capital ratio was 16.9%.

Critical Accounting Policies

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

Impact of New Accounting Standards

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

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

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities.” The objective of this interpretation is to provide guidance on how to identify a variable interest entity (“VIE”) and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company’s consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses or receive a majority of the entity’s expected residual returns, if they occur. FIN No. 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. FIN No. 46 was effective for all VIE’s created after January 31, 2003. For VIE’s created prior to February 1, 2003, FIN No. 46 was to be effective for public companies on July 1, 2003. However, the FASB postponed that effective date to December 31, 2003. In December 2003, the FASB issued a revised FIN No. 46 (FIN No. 46R), which further delayed the effective date for public companies to March 31, 2004 for VIE’s created prior to February 1, 2003, except for interests in special purpose entities, for which a

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company must adopt either FIN No. 46 or FIN No. 46R as of December 31, 2003. Adoption of the requirements of FIN No. 46R is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

In 2003, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 149, “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities”. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contacts and for hedging activities. This statement amends SFAS 133 for decisions made as part of the Derivatives Implementation Group process that effectively required amendments to SFAS 133, in connection with other Board projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative. The adoption of SFAS 149 did not have a significant impact on our consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement requires an issuer to classify three types of freestanding financial instruments as liabilities. The first type is financial instruments issued in the form of shares that are mandatorily redeemable, which embody an unconditional obligation requiring the issuer to redeem them by transferring its assets. The second type is financial instruments that embody an obligation to repurchase the issuer’s equity shares and requires or may require the issuer to settle the obligation by transferring assets. The third type is financial instruments that embody an unconditional obligation that the issuer must or may settle by issuing a variable number of its equity shares if, at inception, the monetary value of the obligation meets certain criteria. SFAS No. 150 also requires disclosures about the terms of the instruments and settlement alternatives. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise shall be effective at the beginning of the first interim period beginning after June 15, 2003. For certain financial instruments, the classification and measurement provisions of SFAS No. 150 have been deferred indefinitely. The provisions of this Statement did not have a material impact on our consolidated financial statements.

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

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) became law in the United States. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. We maintain a postretirement benefit plan that may be impacted by the Act. In accordance with FASB Staff Position FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” we have elected to defer recognition of the effects of the Act in any measures of the benefit obligation or cost associated with its postretirement benefit plan. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require us to change previously reported information. Currently we do not believe we will need to amend our plan to benefit from the Act. The measurement date used to determine postretirement benefit measures for our postretirement benefit plan is September 30.

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Contractual Obligations

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

	Payments Due by Period
	Total		Less than 1 Year		1-3 Years		3-5 Years		More than 5 Years
Federal Home Loan Bank Borrowings	$	263,500	$	33,500	$	160,000	$	70,000	$	—
Operating Leases		1,882		447		787		495		153
Total Obligations	$	265,382	$	33,947	$	160,787	$	70,495	$	153

Quantitative and Qualitative Disclosures about Market Risk

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

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

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

Change in Interest Rates in Basis Points (Rate Shock)	Annual Net Interest Income
	$ Amount	$ Change		% Change
	(Dollars in thousands)
-100	45,899	(560	)	–	1.21	%
Flat	46,459	—			—
+100	46,215	(244	)	–	0.53	%
+200	45,983	(476	)	–	1.02	%
+300	45,790	(669	)	–	1.44	%

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS OF BSB BANCORP

General

The following section presents highlight information from management to assist with understanding the consolidated financial condition and results of operations of BSB Bancorp and its subsidiaries during the year ended December 31, 2003 and the preceding two years. The consolidated financial statements and related notes, included elsewhere in this prospectus, should be read in conjunction with the discussions in this section.

Overview

From an industry and national perspective, BSB Bancorp’s profitability, like most financial institutions, is dependent to a large extent upon net interest income, which is the difference between the interest received on earning assets, such as loans and securities, and the interest paid on interest-bearing liabilities, principally deposits and borrowings. Results of operations are also affected by the provision for loan losses, operating expenses such as salaries and employee benefits, occupancy and other operating expenses, including income taxes, and, to a lesser extent, non-interest income such as trust service fees, checkcard interchange income, loan servicing fees, and service charges on deposit accounts. Economic conditions, competition and the monetary and fiscal policies of the Federal government in general, significantly affect financial institutions, including BSB Bancorp. During 2003, the Federal government’s focus was marked by low interest rates intended to stabilize the current economy and to provide stimulation to future industrial economic growth. Lending activities are also significantly influenced by regional and local economic factors. Some specific factors may include the demand for and supply of housing, competition among lenders, interest rate conditions and prevailing market rates on competing investments, customer preferences and levels of personal income and savings in BSB Bancorp’s primary market area.

In the last three years, management recognized that overall future growth would depend on BSB Bancorp’s success with operating efficiency and the continuing efforts to improve asset quality, especially relative to its commercial loan portfolio. Another key factor relates to BSB Bancorp’s ability to minimize credit risk despite the significant influence of national and regional economic factors.

During recent years, BSB Bancorp initiated strategic changes to its operations intended to enhance BSB Bank & Trust Company’s utilization of resources, and the effectiveness of customer services within its primary market area. In December 2002, BSB Bank & Trust Company completed the sale of two Elmira, New York branches with deposit liabilities of $44.2 million, and recognized a net gain of $3.1 million from the disposition. In May 2001, BSB Bank & Trust Company sold its Oswego supermarket branch office, including $4.3 million of deposit liabilities, and had a net gain of $299,000 on disposition. In March 2002, BSB Bancorp sold its credit card portfolio and realized a net gain of $1.8 million.

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

Total assets were $2.2 billion at December 31, 2003 compared to $2.0 billion at December 31, 2002, an increase of 8.7%. Changes in the composition of its assets relate directly to BSB Bancorp’s strategy to shift and improve the mix of the loan portfolio and to reduce credit risk. The most significant elements relate to the increases of $118.7 million in aggregate net loan portfolio, an increase of $31.6 million in investment securities, and a $21.0 million increase in bank owned life insurance (“BOLI”).

BSB Bancorp’s total loan portfolio increased $101.8 million or 7.6% to $1.4 billion at December 31, 2003 from $1.3 billion at December 31, 2002. The primary changes related to increases in real estate loans offset by decreases in the commercial and industrial loan (“C&I”) portfolio. Real estate loans increased by $280.9 million from December 31, 2002 to $758.2 million at December 31, 2003. The most significant growth has been in

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residential mortgage loans with an increase of $228.4 million, which represents 81.3% of the growth in overall real estate loans.

Total deposits increased to $1.6 billion at December 31, 2003 compared to $1.4 billion at December 31, 2002. Money market deposits increased by $90.2 million during the year, primarily related to the $88.9 million increase in municipal accounts, which tend to fluctuate with the related government activities. Total time deposits increased $51.3 million at December 31, 2003 compared to December 31, 2002. Retail time deposits declined by $39.8 million, while municipal time deposits increased by $9.8 million, moneydesk time deposits increased by $1.4 million and brokered certificates of deposit increased by $79.9 million in 2003. The increase to brokered time deposits occurred principally in the fourth quarter, and reflects BSB Bancorp’s use of such instruments to provide incremental funding to meet cash flow needs.

BSB Bancorp’s borrowings increased to $410.8 million at December 31, 2003 from $378.1 million at December 31, 2002. The primary source of borrowings is Federal Home Loan Bank (“FHLB”) advances which account for $390.8 million and $335.9 million of aggregate borrowings at December 31, 2003 and 2002, respectively. New FHLB advances for 2003 have a weighted average term of 1.76 years at December 31, 2003. The comparative weighted average term for all FHLB advances outstanding at December 31, 2003 was 3.27 years. Other borrowings at December 31, 2003 were primarily comprised of $18.8 million of securities sold under agreements to repurchase. Borrowings, along with deposits, are used to fund BSB Bancorp’s lending and investment activities.

Total stockholders’ equity decreased by $2.6 million in 2003 primarily due to treasury stock purchases of 318,238 shares for $7.1 million. The treasury stock purchases were primarily part of a stock repurchase program authorized by BSB Bancorp’s Board of Directors in October 2002, which expired in March 2003. Shares were repurchased during the year in open market and unsolicited, negotiated transactions that were subject to availability and prices which were acceptable to BSB Bancorp. Currently, no additional stock repurchase program has been authorized. Other decreases in stockholders’ equity were attributed to cash dividends paid of $9.2 million and $5.9 million of net other comprehensive losses, and were partially offset by net income and the exercise of stock options.

Results of Operations

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

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

General. For the year ended December 31, 2003, BSB Bancorp reported net income of $17.0 million compared to $1.8 million for the year ended December 31, 2002. Basic and diluted earnings per share were $1.85 and $1.81, respectively, for the year ended 2003 compared to basic and diluted earnings per share of $0.19 and $0.18 for the year ended December 31, 2002. The weighted average common shares outstanding were 9,209,058 for the year ended December 31, 2003, down 4.0% or 380,303 shares from the previous year. The decrease in the average shares outstanding is primarily attributed to BSB Bancorp’s stock repurchase programs which expired in March 2003. Return on average assets for the year ended December 31, 2003 was 0.81% and 0.09% for 2002. The return on average equity was 11.74% for the year ended December 31, 2003 compared to 1.15% for 2002.

Net Interest Income. BSB Bancorp earned net interest income of $71.8 million and $78.3 million in 2003 and 2002, respectively. The continuing national trend of historically low interest rates produced a decrease in net

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interest income of 8.2% in 2003 from 2002 despite the increase in average balances. The changes in the loan and security portfolios, discussed earlier, generally reflect downward trends in rates associated with lower risk assets in addition to the current market rates. As a result, BSB Bancorp’s interest rate spread decreased to 3.21% in 2003 from 3.52% in 2002 and net interest margin for the year 2003 decreased to 3.51% compared to 3.92% for the year 2002. Average earning asset balances increased 2.71% to $2,048.5 million for 2003 from $1,994.5 million for 2002.

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

	2003								2002								2001
	Increase Balance			(Decrease) Amount			Average     %		Increase Balance			(Decrease) Amount			Average     %		Balance
	(In thousands)
Commercial loans	$	423,243		$	(193,166	)	(31.3	)%	$	616,409		$	(261,985	)	(29.8	)%	$	878,394
Consumer loans:
Personal-direct		69,374			7,594		12.3			61,780			975		1.6			60,805
Personal-indirect		259,780			(1,431	)	(0.5	)		261,211			(35,541	)	(12.0	)		296,752
Other(1)		43,982			2,782		6.8			41,200			(7,508	)	(15.4	)		48,708
Total consumer loans		373,136			8,945		2.5			364,191			(42,074	)	(10.4	)		406,265
Real estate loans:
Residential-fixed		390,062			207,223		113.3			182,839			43,230		31.0			139,609
Commercial-fixed		37,745			17,368		85.2			20,377			8,694		74.4			11,683
Residential-adjustable		62,547			(8,038	)	(11.4	)		70,585			(10,173	)	(12.6	)		80,758
Commercial-adjustable		125,418			18,811		17.6			106,607			(34,670	)	(24.5	)		141,277
Total real estate loans		615,772			235,364		61.9			380,408			7,081		1.9			373,327
Investment securities(2)		622,896			9,135		1.5			613,761			204,817		50.1			408,944
Loans held for sale		6,905			3,346		94.0			3,559			1,530		75.4			2,029
Federal funds sold		6,569			(9,649	)	(59.5	)		16,218			(17,754	)	(52.3	)		33,972
Total interest-earning assets		2,048,526			53,980		2.7			1,994,546			(108,385	)	(5.2	)		2,102,931
Allowance for loan losses		(61,707	)		(4,041	)	7.0			(57,666	)		1,426		(2.4	)		(59,092	)
Non-interest-earning assets		124,256			13,368		12.1			110,888			(1,832	)	(1.6	)		112,720
Total assets	$	2,111,070		$	63,302		3.1	%	$	2,047,768		$	(108,791	)	(5.0	)%	$	2,156,559
Interest-bearing liabilities:
Deposits:
Savings	$	181,847		$	5,642		3.2	%	$	176,205		$	12,985		8.0	%	$	163,220
Money market		385,546			12,737		3.4			372,809			9,183		2.5			363,626
Time deposits		632,725			(43,214	)	(6.4	)		675,939			(207,453	)	(23.5	)		883,392
NOW		122,955			2,042		1.7			120,913			7,124		6.3			113,789
Total deposits		1,323,073			(22,793	)	(1.7	)		1,345,866			(178,161	)	(11.7	)		1,524,027
Borrowings		429,062			83,924		24.3			345,138			71,067		25.9			274,071
Trust preferred securities(3)		47,446			11,660		32.6			35,786			5,786		19.3			30,000
Total interest-bearing liabilities		1,799,581			72,791		4.2			1,726,790			(101,308	)	(5.5	)		1,828,098
Non-interest-bearing liabilities		17,087			1,064		6.6			16,023			(7,018	)	(30.5	)		23,041
Non-interest-bearing demand accounts		149,470			(1,013	)	(0.7	)		150,483			3,991		2.7			146,492
Stockholders’ equity		144,932			(9,540	)	(6.2	)		154,472			(4,456	)	(2.8	)		158,928
Total liabilities and stockholders’ equity	$	2,111,070		$	63,302		3.1	%	$	2,047,768		$	(108,791	)	(5.0	)%	$	2,156,559

(1) Other loans include passbook, overdraft, credit cards, checkcard reserve and student loans.

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

(3) Reflects full year average for trust preferred securities since FASB Interpretation No. 46 R was implemented on December 31, 2003.

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

	Years Ended December 31,
	2003							2002							2001
	Average/Yield							Average/Yield							Average/Yield
	Balance			Interest		Rate		Balance			Interest		Rate		Balance			Interest		Rate
	(In thousands)
Commercial loans	$	423,243		$	26,536	6.27	%	$	616,409		$	40,565	6.58	%	$	878,394		$	70,543	8.03	%
Consumer loans:
Personal-direct		69,374			4,753	6.85			61,780			5,201	8.42			60,805			5,817	9.57
Personal-indirect		259,780			17,294	6.66			261,211			20,780	7.96			296,752			26,551	8.95
Other(1)		43,982			2,035	4.63			41,200			2,558	6.21			48,708			4,786	9.83
Total consumer loans		373,136			24,082	6.45			364,191			28,539	7.84			406,265			37,154	9.15
Real estate loans:
Residential-fixed		390,062			21,926	5.62			182,839			12,536	6.86			139,609			10,298	7.38
Commercial-fixed		37,745			2,588	6.86			20,377			1,587	7.79			11,683			1,037	8.88
Residential-adjustable		62,547			3,227	5.16			70,585			4,536	6.43			80,758			6,409	7.94
Commercial-adjustable		125,418			8,930	7.12			106,607			8,583	8.05			141,277			11,755	8.32
Total real estate loans		615,772			36,671	5.96			380,408			27,242	7.16			373,327			29,499	7.90
Investment securities(2)		622,896			27,032	4.34			613,761			32,622	5.32			408,944			25,008	6.12
Loans held for sale		6,905			400	5.79			3,559			233	6.55			2,029			189	9.31
Federal funds sold		6,569			80	1.22			16,218			287	1.77			33,972			1,101	3.24
Total interest-earning assets		2,048,526		$	114,801	5.60	%		1,994,546		$	129,488	6.49	%		2,102,931		$	163,494	7.77	%
Allowance for loan losses		(61,707	)						(57,666	)						(59,092	)
Non interest-earning assets		124,256							110,888							112,720
Total assets	$	2,111,070						$	2,047,768						$	2,156,559
Interest-bearing liabilities:
Deposits:
Savings	$	181,847		$	1,416	0.78	%	$	176,205		$	2,551	1.45	%	$	163,220		$	4,092	2.51	%
Money market		385,546			4,773	1.24			372,809			5,667	1.52			363,626			11,500	3.16
Time deposits		632,725			18,783	2.97			675,939			26,401	3.91			883,392			48,878	5.53
NOW		122,955			264	0.21			120,913			710	0.59			113,789			1,522	1.34
Total deposits		1,323,073			25,236	1.91			1,345,866			35,329	2.63			1,524,027			65,992	4.33
Borrowings		429,062			14,700	3.43			345,138			13,162	3.81			274,071			13,738	5.01
Trust preferred securities(3)		47,446			3,029	6.38			35,786			2,728	7.62			30,000			2,437	8.12
Total interest-bearing liabilities		1,799,581			42,965	2.39	%		1,726,790			51,219	2.97	%		1,828,098			82,167	4.49	%
Non-interest-bearing liabilities		17,087							16,023							23,041
Non-interest-bearing demand accounts		149,470							150,483							146,492
Stockholders’ equity		144,932							154,472							158,928
Total liabilities and stockholders’ equity	$	2,111,070						$	2,047,768						$	2,156,559
Net interest income	$	71,836						$	78,269						$	81,327
Net earning assets	$	248,945						$	267,756						$	274,833
Net interest rate spread						3.21	%						3.52	%						3.28	%
Net interest rate margin						3.51							3.92							3.87
Ratio of interest-earning assets to interest-bearing liabilities						1.14	x						1.16	x						1.15	x

(1) Other loans include passbook, overdraft, credit cards, checkcard reserve and student loans.

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

(3) Reflects full year average for trust preferred securities since FASB Interpretation No. 46 R was implemented on December 31, 2003.

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Rate/Volume Analysis

The table below 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.

	2003 Compared to 2002 Increase (Decrease)									2002 Compared to 2001 Increase (Decrease)
	Volume			Rate			Net			Volume			Rate			Net
Interest income on interest-earning assets:
Commercial loans	$	(12,190	)	$	(1,839	)	$	(14,029	)	$	(18,673	)	$	(11,305	)	$	(29,978	)
Consumer loans		686			(5,143	)		(4,457	)		(3,616	)		(4,999	)		(8,615	)
Real estate loans		14,624			(5,195	)		9,429			550			(2,807	)		(2,257	)
Investment securities		479			(6,069	)		(5,590	)		11,227			(3,613	)		7,614
Loans held for sale		197			(30	)		167			112			(68	)		44
Federal funds sold		(136	)		(71	)		(207	)		(436	)		(378	)		(814	)
Total		3,660			(18,347	)		(14,687	)		(10,836	)		(23,170	)		(34,006	)
Interest expense on interest-bearing liabilities:
Savings		80			(1,215	)		(1,135	)		304			(1,845	)		(1,541	)
Money market		188			(1,082	)		(894	)		283			(6,116	)		(5,833	)
Time deposits		(1,603	)		(6,015	)		(7,618	)		(10,001	)		(12,476	)		(22,477	)
NOW		12			(458	)		(446	)		90			(902	)		(812	)
Total deposits		(1,323	)		(8,770	)		(10,093	)		(9,324	)		(21,339	)		(30,663	)
Borrowings		2,971			(1,433	)		1,538			3,120			(3,696	)		(576	)
Trust preferred securities		792			(491	)		301			448			(157	)		291
Total		2,440			(10,694	)		(8,254	)		(5,756	)		(25,192	)		(30,948	)
Net interest income	$	1,220		$	(7,653	)	$	(6,433	)	$	(5,080	)	$	2,022		$	(3,058	)

Interest on Commercial Loans. Commercial loans, which represent 22.3% of total loans at December 31, 2003, tend to increase the interest rate sensitivity of the overall loan portfolio, because interest rates on such loans are generally tied to BSB Bancorp’s Prime Rate. In 2003, general interest rates, including the BSB Bancorp’s commercial loan Prime Rate, stabilized at historically lower levels following a steady decrease that commenced during 2001.

Commercial loans have been a primary focus and concern of management over the last three years due to the negative impact of national interest rate trends and regional economic conditions on both their interest rate risk and loan quality. Thus, as BSB Bancorp continues to reallocate its asset balances, the average balance of commercial loans has declined each year since 2001. Lower commercial loan balances were a primary factor in the overall lower levels of interest income. The average balance of commercial loans decreased by $193.2 million to $423.2 million for the year 2003 from 2002. In addition, the average yield on commercial loans decreased to 6.27% for 2003 compared to 6.58% for 2002. Also, non-accrual loans, which are primarily commercial loans, impact the overall yield; however, the improvements in the level of non-accruals lessened their impact on the 2003 yield.

Interest on Consumer Loans. The consumer loan portfolio includes principally fixed-rate loans with short terms. Since consumer loan rates had few changes during 2003 due to the historically low interest rates, the average yield on the aggregate consumer loan portfolio decreased to 6.45% for 2003 compared to 7.84% in 2002. The average balance of all consumer loans increased $8.9 million to $373.1 million for the year 2003 from

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$364.2 million in 2002. Changes in the mix of the consumer loan portfolio also contributed to the decrease in yield from 2002 to 2003. In 2003, BSB Bancorp shifted to lower risk home equity lines of credit during a period of very competitive conditions in the new auto loan market. Since 2002, BSB Bancorp has de-emphasized the origination of mobile home loans, which generally have higher yields than other consumer loan types, but also have increased credit risk.

Interest on Real Estate Loans. Interest income from total real estate loans increased $9.4 million, or 34.6%, to $36.7 million in 2003 from $27.2 million in 2002. The strategic shift to real estate loans, especially in the residential category, provided the most significant positive impact on net interest income for 2003.

The record setting level of residential originations, discussed earlier, is reflected in the growth of average residential mortgage balances. Fixed-rate residential mortgages increased 113.3% to average balances of $390.1 million in 2003 from $182.8 million in 2002. Though the average balance of adjustable-rate residential mortgages decreased in 2003 from 2002, fourth quarter activity was higher than normal as both regional and national market trends showed some reversal in rates, especially for extended term loans. As a result, residential loans provided approximately $8.1 million or 85.7% of the overall increase in income from all real estate loans.

In the commercial real estate category, interest income increased $1.3 million or 13.3% to $11.5 million for 2003 over 2002. The most significant increase in interest income was attributed to the growth in fixed-rate commercial real estate loans, discussed earlier, which provided average balances that represented 48.0% of the $36.2 million increase in volume and 74.3% of the $1.3 million increase in related interest income.

Interest on Investment Securities. Income from investment securities decreased to $27.0 million in 2003 compared to $32.6 million in 2002 and yields declined to 4.34% for 2003 compared to 5.32% for 2002. During 2003, the average balance of investment securities was $622.9 million, a minor increase of $9.1 million over the average balance of $613.8 million for 2002. Such results for 2003 reflect the heavy turnover of investment securities to facilitate BSB Bancorp’s redistribution of assets. As the commercial loan portfolio declined, investment securities were invested, mainly in mortgage-backed securities, to provide readily available liquidity for corporate requirements. The relative yields were also influenced by the amortization of any premiums incurred to acquire such investment securities, especially mortgage-backed securities. As prepayments have increased due to the low rate environment, BSB Bancorp has had to accelerate the premium amortization, thus decreasing yields.

Interest on Deposits. Interest expense on deposits for the year ended December 31, 2003 was $25.2 million, a decrease of $10.1 million or 28.6% from $35.3 million in 2002. The average cost of interest-bearing deposits declined to 1.91% in 2003 from 2.63% in 2002. National and regional trends of the interest rate environment, as well as competition in BSB Bancorp’s primary markets, are the most significant factors that influenced the cost of such funds in 2003. Time deposits represent the most influential category of interest-bearing deposits, in terms of both volume and rate, impacting BSB Bancorp’s annual cost for all interest-bearing deposits. BSB Bancorp continues to monitor the cost and the availability of deposits against the cost and levels of borrowings to determine the best funding sources for BSB Bancorp’s assets.

The average balance outstanding for all time deposits was $632.7 million for 2003, a decrease of $43.2 million or 6.4% from $675.9 million for 2002. The cost of funds for all time deposits decreased to $18.8 million in 2003 with an average rate of 2.97%, compared to $26.4 million in 2002 with an average rate of 3.91%. For the first nine months of 2003, BSB Bancorp maintained sufficient liquidity to reduce its reliance on higher-costing deposits, especially brokered time deposits. In the fourth quarter, the average balance of brokered time deposits increased approximately $40.0 million with more than $22.9 million having terms in excess of three years.

Interest on Borrowings and Trust Preferred Securities. Borrowed funds are used to supplement retail and commercial deposits as needed to fund asset growth, lengthen liabilities and lower the cost of funds, when possible. In general, borrowings remove the volatility that can occur with moneydesk deposits and enhances

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planning for liquidity needs, yet the cost of such funds can approximate the costs of wholesale funds. The average balance of borrowings during 2003 increased to $429.1 million, with 89.3% of such borrowings being FHLB advances. The average interest rate paid on borrowings in 2003 decreased to 3.43% from 3.81% in 2002. The impact of the additional borrowings, though partially offset by the declining rates, resulted in an increase of $1.5 million in interest expense in 2003 on borrowings to $14.7 million compared to $13.2 million in 2002.

Interest expense on trust preferred securities increased $301,000 to $3.0 million in 2003 from $2.7 million in 2002. The changes in the cost of trust preferred securities correlates directly to the issuance of $25.0 million of new trust preferred securities from two subsidiary trusts during 2002. The new issues also had lower interest rates that lowered the average rate paid from 7.62% to 6.38%. BSB Bancorp’s adoption of FASB Interpretation No. 46 R (“FIN 46 R”), effective December 31, 2003, had no impact on the cost of funds for 2003.

Provision for Loan Losses. The provision for loan losses in 2003 was $10.1 million compared to $46.2 million in 2002. The lower provision for loan losses in 2003 as compared to 2002 is primarily due to the significant reduction in net loan charge-offs, the increase in recoveries, as well as both the reduction in non-performing loans and the changing mix of the overall loan portfolio. As discussed under the allowance for loan losses, the provision for loan losses reflects management’s assessment of the estimated losses inherent in the loan portfolio. Loans charged-off can fluctuate from period to period and the current level of charge-offs should not be considered an indicator of future levels. The November 2003 sale of certain large, under-performing commercial loans had no impact on the current provision for loan losses; however, the sale eliminated the exposure to any potential future deterioration in the value of such loans.

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

	2003		2002		$ Change			% Change
	(In thousands)
Service charges on deposit accounts	$	5,190	$	5,176	$	14		0.3	%
Checkcard interchange fees		1,407		1,422		(15	)	(1.1	)
Mortgage servicing fees		607		832		(225	)	(27.0	)
Fees and commissions—brokerage services		855		886		(31	)	(3.5	)
Trust fees		1,210		1,308		(98	)	(7.5	)
Income on bank owned life insurance		1,023		32		991		3,096.9
Gain on sale of securities, net		1,339		292		1,047		358.6
Gain on sale of branch offices, net		—		3,063		(3,063	)	(100.0	)
Gain on sale of credit card portfolio, net		—		1,806		(1,806	)	(100.0	)
Other income		1,909		2,946		(1,037	)	(35.2	)
	$	13,540	$	17,763	$	(4,223	)	(23.8	)%

The most significant changes in the year-to-year comparison relate to BSB Bancorp’s 2002 sale of two branch offices and the sale of its credit card portfolio. The December 2002 sale of two branch offices in the Elmira, New York area resulted in a net gain of $3.1 million. BSB Bancorp sold these branches, located in the Chemung County area, to concentrate on the further development of its retail branch operations in the Greater Binghamton and the Central New York regions. Earlier in 2002, BSB Bancorp sold its credit card portfolio for a net gain of $1.8 million. The increasing costs associated with maintaining the technology to provide a high level of service to BSB Bancorp’s customers and the higher levels of charge-offs associated with credit card debt made this portfolio less profitable for BSB Bancorp.

As the serviced mortgage portfolio reduced to $265.0 million at December 31, 2003 from $366.0 million at December 31, 2002, the fee income generated from these loans serviced for others decreased to $607,000 for 2003 from $832,000 in 2002. Gains on security sales were $1.3 million in 2003 compared to $292,000 in 2002. Other income decreased $1.0 million in 2003 compared to 2002 with approximately $726,000 attributable to gains recognized on the repurchase of trust preferred securities during 2002.

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Bank owned life insurance (“BOLI”) provided income of $1.0 million in 2003 with minimal comparable income in the previous year since the initial BOLI investment was in December 2002. BOLI income is expected to continue at a similar rate of return dependent on the current market for such securities, as well as the impact of the additional $20 million BOLI investment in December 2003.

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

	2003		2002		$ Change			% Change
	(In thousands)
Salaries, pensions and employee benefits	$	27,044	$	24,769	$	2,275		9.2	%
Building occupancy		4,561		4,259		302		7.1
Advertising and promotion		1,260		1,293		(33	)	(2.6	)
Professional fees		2,374		2,890		(516	)	(17.9	)
Data processing costs		4,662		5,534		(872	)	(15.8	)
Services		3,082		2,905		177		6.1
System conversion expenses		—		387		(387	)	(100.0	)
Merger related expenses		325		—		325		100.0
Other real estate owned and repossessed asset expenses, net		555		688		(133	)	(19.3	)
Other expenses		5,683		5,608		75		1.3
	$	49,546	$	48,333	$	1,213		2.5	%

Salaries, pensions and other employee benefits increased $2.3 million or 9.2% in 2003 compared to 2002. Salary costs increased $1.2 million for 2003 compared to 2002 due to additional performance incentive bonuses of $1.1 million as well as salaries related to BSB Bancorp’s new item processing center, discussed below. Benefit costs, principally for health insurance and pension costs, represent the remaining increase in personnel-related costs. Defined benefit plan pension costs increased $609,000 and reflect the expected increase in the net periodic pension costs. The current trend for increased health insurance and pension costs is expected to continue into 2004.

In May 2003, BSB Bancorp opened a new in-house item processing center primarily to facilitate direct control over the technology and operational processing of transactions with the Federal Reserve. Prior to such date, these processing costs were included primarily under the data processing category. Operating expenses for the item processing center totaled $1.3 million in 2003, including $269,000 for salaries and related benefits. In 2002, such operating expenses were included primarily in data processing costs which declined $872,000 in 2003.

Professional fees associated with loan collections, as well as other real estate owned and repossessed asset expenses, decreased in 2003 consistent with the reductions of non-performing assets.

In 2003, BSB Bancorp incurred $325,000 for non-tax deductible expenses associated with the pending merger with Partners Trust Financial Group with no similar cost in 2002. Additional merger related costs will be incurred in 2004.

Since a substantial portion of operating expense relates directly to income generation, an effective measurement of the control of operating expense is the efficiency ratio, which consists of operating expenses divided by revenues (net interest income and non-interest income) on a pre-tax basis. The efficiency ratio for BSB Bancorp was 58.03% and 52.59% for 2003 and 2002, respectively. BSB Bancorp’s ratio of operating expense to average assets was 2.35% in 2003 and 2.34% in 2002. These ratios increased in 2003 due primarily to the increase in operating expense, primarily salaries, pensions and other employee benefits combined with the reduced level of net interest income.

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Income Taxes. The provision for income taxes is $8.7 million with an effective tax rate of 33.9% for the year ended December 31, 2003. By comparison, the provision for income taxes for the year ended December 31, 2002 reflects a tax benefit of $254,000 with an effective income tax rate of (16.6)%. Income tax expense generally fluctuates with the respective level of income before income taxes. BSB Bancorp had a lower ratio of tax-exempt income to income before taxes in 2003, as compared to 2002, which contributed to the increase in the effective tax rate. Another factor impacting BSB Bancorp’s annual effective tax rates relates to various tax credits associated with New York State’s Qualified Empire Zone Enterprise (“QEZE”) program. QEZE credits recognized in 2003 were $227,000 compared to $465,000 in 2002.

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

General. For the year ended December 31, 2002, BSB Bancorp reported net income of $1.8 million compared to $20.5 million for the year ended December 31, 2001. Basic and diluted earnings per share were $0.19 and $0.18, respectively, for the year ended 2002, compared to basic and diluted earnings per share of $2.05 and $2.02 for the year ended December 31, 2001. The weighted average common shares outstanding were 9,589,361 for the year ended December 31, 2002, down 3.7% or 369,591 shares from the previous year. The decrease in the average shares outstanding is primarily attributed to BSB Bancorp’s repurchase programs.

Net Interest Income. BSB Bancorp earned net interest income of $78.3 million and $81.3 million in 2002 and 2001, respectively. BSB Bancorp’s interest rate spread increased to 3.52% in 2002 from 3.28% in 2001. While net interest margin for the year 2002 increased slightly to 3.92% compared to 3.87% for the year 2001, the increase was more than offset by the impact of declines in the average balance of earning assets. Average earning asset balances declined 5.2% from $2,102.9 million for 2001 to $1,994.5 million for 2002. The changes in average balances and rates produced a decrease in net interest income of 3.8% from 2001 to 2002.

Interest on Commercial Loans. Commercial loans, which represented 36.5% of total loans at December 31, 2002, tend to increase the interest rate sensitivity of the overall loan portfolio, because interest rates on such loans are generally tied to BSB Bancorp’s Prime Rate.

The steady decrease in general interest rates, including BSB Bancorp’s commercial loan Prime Rate, which commenced during 2001, provided the general low interest rate environment that continued to drive the yield on commercial loans lower into the year 2002. The average balance of commercial loans declined from the same periods in 2001, as BSB Bancorp continued to reallocate its asset balances by reducing its total loan portfolio, especially commercial loans, and focusing on improving asset quality. Lower commercial loan balances were the primary factor in the overall lower levels of interest income. The average balance of commercial loans decreased by $262.0 million from 2001 to $616.4 million for the year 2002. In addition, the average yield on commercial loans decreased to 6.58% for 2002 compared to 8.03% for 2001. The decline in yield on commercial loans has also been impacted by the level of non-accruing loans.

Interest on Consumer Loans. The interest income earned from the consumer loan portfolio, which includes principally fixed-rate loans with short terms, continued to be adversely impacted by declines in volume for the year 2002 when compared to the same periods in 2001. The average balance of all consumer loans decreased $42.1 million to $364.2 million for the year 2002 from $406.3 million in 2001. The average yield on the aggregate consumer loan portfolio has decreased to 7.84% for 2002 compared to 9.15% in 2001. In addition, the change in the mix of the consumer loan portfolio contributed to the decrease in yield from 2001 to 2002. BSB Bancorp has de-emphasized the origination of mobile home loans, which generally have higher yields than other consumer loan types, but also have increased credit risk. In addition, BSB Bancorp’s indirect used auto loan portfolio was fairly flat during 2002, with year-end balances at approximately $130.0 million, while the indirect new auto loan portfolio increased from $39.5 million at December 31, 2001 to $60.1 million at December 31, 2002. Finally, the sale of BSB Bancorp’s credit card portfolio during the first quarter of 2002 also contributed to the decrease in yield from 2001 to 2002.

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Interest on Real Estate Loans. Interest on residential and commercial real estate loans totaled $27.2 million in 2002 and $29.5 million in 2001. The overall average yield on real estate loans decreased to 7.16% in 2002 from 7.90% in 2001, as BSB Bancorp pursued additional real estate loans, especially residential mortgage, as an integral part of the strategy to improve the mix and credit quality of the loan portfolio. This additional volume helped to mitigate the impact of the lower yields earned in 2002. Residential real estate loans, including both fixed- and adjustable-rate mortgages, had average balances of $253.4 million in 2002, for a net increase of $33.1 million or 15.0% over the year 2001. For 2002, adjustable-rate residential mortgages represented approximately $70.6 million or 27.9% of the average residential portfolio, which was a decrease of $10.2 million or 12.6% from the comparable averages for 2001. At December 31, 2002, adjustable-rate residential mortgages were relatively unchanged at $70.6 million compared to $80.8 million at December 31, 2001. Fixed-rate mortgages have grown steadily relative to the aggregate level of residential mortgages representing 72.1% in 2002, up from 63.4% in 2001. Originations of variable-rate loans have generally declined compared to total originations and reflect recent consumer preferences for fixed-rate mortgages associated with the low rate market trends.

During 2002, BSB Bancorp completed the consolidation of all mortgage-lending activities within a single facility to promote processing efficiency and an improvement in the quality of customer service. This new facility and operations aided the growth of BSB Bancorp’s real estate portfolio.

Interest on Investment Securities. During 2002, investment securities, mainly mortgage-backed securities, were utilized to facilitate BSB Bancorp’s redistribution of liquidity. The average balance of investment securities for 2002 was $613.8 million, an increase of $204.8 million or 50.1%, over the average balance of $408.9 million for 2001. The increase in investment securities was due in part to the additional funds available from declines in the commercial loan portfolio. Though the income from investment securities increased to $32.6 million in 2002 compared to $25.0 million in 2001 primarily due to increased volume, the impact of the increased volume was partially offset by the lower yields on such investment securities, which declined to 5.32% for 2002 compared to 6.12% for 2001. The relative yields were also influenced by the amortization of any premiums incurred to acquire such investment securities, especially mortgage-backed securities. As prepayments have increased due to the low rate environment, BSB Bancorp has had to accelerate the premium amortization, thus decreasing yields.

Interest on Deposits. Interest expense on deposits for the year ended December 31, 2002 was $35.3 million, a decrease of $30.7 million or 46.7% from $66.0 million in 2001. The average cost of funds declined to 2.63% in 2002 from 4.33% in 2001. The most significant factors impacting this trend were the declines in the average rate paid and volume of time deposits. The average balance outstanding for all time deposits was $675.9 million for 2002, a decrease of $207.5 million or 23.5% from $883.4 million in 2001. The cost of funds for all time deposits decreased to $26.4 million in 2002 with an average rate of 3.91%, compared to $48.9 million in 2001 with an average rate of 5.53%. The cost of funds for money market deposit accounts in 2002 declined to $5.7 million from $11.5 million, principally due to the significant decrease in the average rate which declined to 1.52% from 3.16%.

Interest on Borrowings and Trust Preferred Securities. The average balance of borrowings increased to $345.1 million in 2002 from $274.1 million in 2001. As the cost of borrowings decreased to 3.81% in 2002 from 5.01% in 2001, interest paid on borrowings decreased from $13.7 million to $13.2 million from 2001 to 2002. Interest expense on trust preferred securities was $2.7 million for 2002 and $2.4 million for 2001 consistent with the $35.8 million and $30.0 million average balances for 2002 and 2001. The increased volume of trust preferred securities was partially offset by a decrease in the average rate paid from 8.12% to 7.62%.

Provision for Loan Losses. The provision for loan losses was $46.2 million compared to $18.2 million in 2001. BSB Bancorp’s 2002 provision reflected management’s assessment of the increased probability of loan losses identified within the loan portfolio, principally for certain commercial loans. In the second quarter of 2002, BSB Bancorp recorded a provision for loan losses of $26.7 million primarily due to specific circumstances affecting individual borrowers and BSB Bancorp’s analysis of other borrowers whose reported financial results revealed deterioration of collateral and repayment ability.

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Non-interest Income. The following table summarizes change in the major components of non-interest income:

	2002		2001		$ Change			% Change
	(In thousands)
Service charges on deposit accounts	$	5,176	$	5,226	$	(50	)	(1.0	)%
Checkcard interchange fees		1,422		1,284		138		10.7
Mortgage servicing fees		832		1,125		(293	)	(26.0	)
Fees and commissions-brokerage services		886		698		188		26.9
Trust fees		1,308		1,618		(310	)	(19.2	)
Income from bank owned life insurance		32		—		32		100.0
Gain on sale of securities, net		292		379		(87	)	(23.0	)
Gain on sale of branch offices, net		3,063		299		2,764		924.4
Gain on sale of credit card portfolio, net		1,806		—		1,806		100.0
Other income		2,946		2,903		156		5.8
	$	17,763	$	13,532	$	4,231		31.3	%

A key item in this comparison includes the December 2002 sale of two branch offices in the Elmira, New York area and the sale of BSB Bancorp’s credit card portfolio, as previously discussed.

Service charges on deposit accounts, representing 29.1% of total non-interest income in 2002, totaled $5.2 million in both 2002 and 2001, despite a 10.4% decrease in the average balance of deposits for 2002 compared to 2001. Checkcard interchange fees were $1.4 million, an increase of 10.7% in 2002 over 2001. The increases in the related fees are primarily attributed to increases in transaction volume.

Mortgage servicing fees for 2002 were $832,000, down 26.0% from $1.1 million, reflecting the high level of prepayments during 2002. Mortgage loans serviced for others were $366.0 million and $460.9 million at December 31, 2002 and 2001, respectively.

Trust fees, which are, for the most part, dependent on the market value of assets under management, were $1.3 million for the year 2002, a decrease of $310,000 from 2001. The level of trust fees in 2002 represents a decrease of 19.2% with a comparable decrease in the valuation of related trust assets under management.

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

	2002		2001		$ Change			% Change
	(In thousands)
Salaries, pensions and employee benefits	$	24,769	$	21,828	$	2,941		13.5	%
Building occupancy		4,259		4,304		(45	)	(1.0	)
Advertising and promotion		1,293		931		362		38.9
Professional fees		2,890		2,206		684		31.0
Data processing costs		5,534		5,213		321		6.2
Services		2,905		2,951		(46	)	(1.6	)
System conversion expenses		387		—		387		100.0
Other real estate owned and repossessed asset expenses, net		688		211		477		226.1
Other expenses		5,608		5,959		(351	)	(5.9	)
	$	48,333	$	43,603	$	4,730		10.8	%

The primary factor in the increase of operating expenses relates to salaries, pensions and other employee benefits that increased $2.9 million or 13.5% in 2002 compared to 2001. Salary increases were $2.1 million for

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2002 compared to 2001 and represented increased staffing in certain areas, principally special assets and credit administration, as well as promotions and merit raises effective at the start of 2002. Benefit costs, principally in health insurance and pension costs, represent the balance of the increase in personnel-related costs.

Professional fees were impacted by the levels of problematic loans as well a negotiations related to certain credit recoveries in both years.

Advertising and promotion expense increased $362,000 to $1.3 million in 2002 compared to 2001. The increase is generally associated with BSB Bancorp’s new products and efforts to increase BSB Bancorp’s corporate identity in BSB Bancorp’s core markets.

System conversion costs of $387,000 represent one-time expenses related to BSB Bank & Trust Company’s conversion to a proof of deposit (“POD”) process in 2002 to achieve efficiencies at the teller line, consistency of float management and a more efficient, centralized fee monitoring and assessment system.

Operating costs associated with repossession and maintenance of other real estate owned and repossessed assets totaled $688,000 in 2002 compared to $211,000 in 2001. The increase in such costs is consistent with the trend for such assets, which increased by 52.9% from December 31, 2001 to December 31, 2002, as well as the higher repossession costs attributed to property representing former collateral for commercial loans.

Income Taxes. The provision for income taxes for the year ended December 31, 2002 reflects a tax benefit of $254,000 with an effective income tax rate of (16.6)%. For comparative purposes, the provision for income tax expense was $12.6 million for the year ended December 31, 2001 with an effective tax rate of 38.1%. The levels of income tax expense generally fluctuate with the respective levels on income before income taxes. The primary factor impacting BSB Bancorp’s effective tax rate in 2002 relates to various tax credits associated with the previously mentioned QEZE program. QEZE credits recognized in 2002 were $469,000. In addition, BSB Bancorp had a higher ratio of tax-exempt income to income before taxes in 2002, as compared to 2001, which also contributed to the reduced effective tax rate.

Off-Balance Sheet Arrangements

In the normal course of operations, BSB Bancorp engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements, or are recorded in amounts that differ from the notional amounts. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used by the BSB Bancorp for general corporate purposes or for customer needs. Corporate purpose transactions are used to help manage credit, interest rate and liquidity risk or to optimize capital. Customer transactions are used to manage customers’ requests for funding.

For the year ended December 31, 2003, BSB Bancorp engaged in no off-balance sheet transactions reasonably likely to have a material effect on BSB Bancorp’s consolidated financial condition.

Liquidity and Capital Resources

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

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BSB Bancorp’s primary sources of liquidity, on a consolidated basis, are deposits, payments of principal and interest from its loan and securities portfolios and the ability to use its loan and securities portfolios as collateral for secured borrowings. BSB Bank & Trust Company is a member of the FHLB of New York. At December 31, 2003, outstanding FHLB advances totaled $390.8 million. In addition, BSB Bancorp, through various facilities, has unused capacity to access, per Board approved policy limits, an additional $300.0 million of brokered deposits of which $179.9 million was outstanding at December 31, 2003. See Note 8 in the Notes to Consolidated Financial Statements of BSB Bancorp, Inc. and Subsidiaries for further details on BSB Bancorp’s borrowings.

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

Operating activities have provided net cash of $42.1 million for the year ended December 31, 2003 compared to $36.3 million in 2002 and $24.4 million 2001. The comparative impact of net income on operating cash flow was $17.0 million in 2003, $1.8 million in 2002 and $20.5 million in 2001. The provision for loan losses was generally the most significant difference between net income and net cash provided by operating activities, and amounted to $10.1 million in 2003 compared to $46.2 million in 2002 and $18.2 million in 2001. The sale proceeds of loans held for sale provided operating funds consistent with, and fluctuating, based on the level and turnover of the portfolio. Based on BSB Bancorp’s assessment of future interest rate fluctuations, loan risk and market conditions during each period, BSB Bancorp will sell or accumulate loans originated by its banking operations within its market area. Loans held for sale in 2003 are primarily associated with mortgage loan originations with extended maturities of 20 years of longer. In 2002, BSB Bancorp’s decision to contribute the maximum voluntary contribution allowable to its pension plan required the use of $6.5 million in excess of the annual pension expense charged to operations. As stated previously, such contribution reduced the future net periodic pension expense determined annually by the plan’s actuaries.

Investing activities used net cash of $190.8 million for the year ended December 31, 2003, compared to $19.1 million for 2002. This change primarily represents the deployment of net cash provided by financing activities, especially increases in deposits and FHLB term advances, to expand the loan portfolio. The reduction in the use of funds for investment activities in 2003 reflects BSB Bancorp’s shift in emphasis from securities investments as alternative investments for liquidity purposes to increased real estate loan activities consistent with current business strategy. As noted previously, residential mortgage loan activity continued at record levels for most of 2003 and commercial real estate showed significant growth. In 2003, loans to customers exceeded loan repayments by $158.6 million. The November 2003 sale of certain large, under-performing commercial loans provided $27.2 million to support operations. In 2002, BSB Bancorp used investments in securities to stabilize earnings during a period that included significant declining trends in interest rate yields. Proceeds from the 2002 sale of BSB Bancorp’s credit card portfolio provided $12.7 million of cash flow. BSB Bancorp’s investing activities also reflect $20.0 million for its initial investment in BOLI in December 2002, as well as an additional investment of $20.0 million in December 2003.

Financing activities provided net cash of $163.5 million during 2003 compared to a $26.5 million use of funds in 2002 with the primary change associated with increases in deposits. Brokered time deposits provided the most significant increase of $79.9 million in 2003. Securities sold under repurchase agreements and FHLB line of credit advances decreased by $21.3 million during the period. Sales of branches used cash of $37.1 million and $2.2 million in 2002 and 2001, respectively. FHLB term advances were utilized to provide cash for financing activities with borrowing proceeds exceeding repayments by $54.0 million in 2003 and $97.9 million in 2002. BSB Bancorp had a net use of funds from financing activities of $274.5 million in 2001, mainly to pay down higher cost deposits, particularly brokered time deposits as time deposits declined $350.9 million. The net increase in FHLB term advances of $140.0 million in 2001 provided an alternative resource.

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BSB Bancorp’s main sources of liquidity, as a holding company, are dividends from BSB Bank & Trust Company, investment income and net proceeds from borrowings and offerings of junior subordinated obligations. The main uses of liquidity are the payment of dividends to stockholders, repurchases of BSB Bancorp’s common stock, and the payment of interest to holders of junior subordinated obligations. The ability of BSB Bank & Trust Company to pay dividends is subject to various regulatory limitations. Due to reduced net income in 2002, coupled with dividends previously paid, BSB Bank & Trust Company exceeded its dividend limitations in 2002. However, in October 2002, BSB Bank & Trust Company received regulatory approval for and paid a special dividend of $30 million to BSB Bancorp. As a result of that special dividend, and based on regulatory limitations noted above, BSB Bancorp did not receive dividends from BSB Bank & Trust Company in 2003.

BSB Bancorp issued a total of $25.0 million of trust preferred securities during 2002. Of the net proceeds, $6.1 million was used to purchase, at a discount, previously issued trust preferred securities (BSB Capital Trust I), approximately $7.9 million was utilized to repurchase 315,496 shares of BSB Bancorp’s common stock, and the remainder was utilized for liquidity and general corporate purposes. The common shares were repurchased as part of previously announced Stock Repurchase Programs, the most recent of which was announced during the fourth quarter of 2002. Under this most recent Stock Repurchase Program, which was in effect through March 2003, a total of 316,070 shares have been repurchased at a total cost of approximately $7.0 million with authorization for the repurchase of approximately 316,000 additional shares.

At December 31, 2003, BSB Bancorp had immediately available funds totaling $18.2 million. Management believes current levels of cash are adequate to meet BSB Bancorp’s anticipated ordinary obligations in 2004, to pay customary cash dividends on BSB Bancorp’s common stock in 2004, if so declared. Management anticipates that BSB Bank & Trust Company will be able to resume the payment of cash dividends to BSB Bancorp, without regulatory approval, in 2004. However, circumstances, including additional common stock and trust preferred security repurchases or unanticipated cash obligations, may require BSB Bancorp to seek additional sources of funding or require BSB Bank & Trust Company to seek regulatory approval for another special cash dividend to BSB Bancorp, should BSB Bank & Trust Company be otherwise unable to make such cash dividend payments.

At December 31, 2003, BSB Bank & Trust Company’s Tier I leverage ratio, as defined by regulatory guidelines, was 7.93%, up from 7.31% at December 31, 2002, and above the minimum regulatory requirements for BSB Bank & Trust Company for both periods. BSB Bank & Trust Company’s total capital-to-risk-weighted assets ratio, calculated under the regulatory risk-based capital requirements, was 12.64%, up from 11.90% at December 31, 2002, and in excess of the regulatory requirements for both periods. The improvement in these ratios is primarily the result of positive net income compared to 2002, which was impacted by the net loss in the second quarter of 2002, and the payment of a $30.0 million special dividend to BSB Bancorp as previously noted.

At December 31, 2003, BSB Bancorp’s Tier I leverage ratio and total capital-to-risk-weighted assets ratios were 8.81% and 13.80%, compared to 9.10% and 14.48%, respectively, at December 31, 2002. BSB Bancorp’s book value per share was $15.82 at December 31, 2003 compared to $15.78 at December 31, 2002.

Critical Accounting Policies

In the course of BSB Bancorp’s normal business activity, management must select and apply many accounting policies and methodologies that lead to the financial results presented in the consolidated financial statements of BSB Bancorp. Some of these policies are more critical than others. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy because of the uncertainty and subjectivity inherent in estimating the levels of allowance needed to cover probable credit losses within the loan portfolio and the material effect that these estimates can have on BSB Bancorp’s results of operations. While management’s evaluation of the allowance for loan losses as of December 31, 2003 considers the allowance to be adequate, under adversely different conditions or assumptions, BSB Bancorp would need to

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increase the allowance. In addition, the assumptions and estimates used in the internal reviews of BSB Bancorp’s non-performing loans and potential problem loans, as well as the associated evaluation of the related collateral coverage for these loans, has a significant impact on the overall analysis of the adequacy of the allowance for loan losses. Though management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, BSB Bancorp’s allowance for loan losses policy would also require making additional provisions for loan losses. All accounting policies are important and the reader of the financial statements should review these policies, described in Note 1 to the Consolidated Financial Statements of BSB Bancorp, Inc. and Subsidiaries, to gain a greater understanding of how BSB Bancorp’s financial performance is reported.

Contractual Obligations

As of December 31, 2003, BSB Bancorp is contractually obliged under long-term agreements as follows:

			Payments Due by Period
	Total		Less Than 1 Year		1 to 3 Years		3 to 5 Years		More Than 5 Years
	(In thousands)
Federal Home Loan Bank advances	$	390,823	$	90,051	$	150,114	$	30,287	$	120,371
Junior subordinated obligations		48,202		—		—		—		48,202
Operating leases		4,282		734		1,291		709		1,548
Other		1,099		—		—		—		1,099
	$	444,406	$	90,785	$	151,405	$	30,996	$	171,220

Quantitative and Qualitative Disclosures About Market Risk

The primary market risk that BSB Bancorp is exposed to currently is interest rate risk, since all BSB Bancorp transactions are denominated in U. S. dollars with no direct currency exchange or changes in commodity price exposures. All market risk-sensitive instruments continue to be available for sale with no financial instruments entered into for trading purposes at December 31, 2003. BSB Bancorp does not use derivative financial instruments such as interest rate swaps and caps extensively and did not participate in any derivative financial instruments during the year ended December 31, 2003.

BSB Bancorp establishes the size and duration of its investment portfolio and wholesale funding sources in order to manage interest rate risk. The current pricing, structure and composition of retail loans and deposits are primary factors to be considered. In adjusting BSB Bancorp’s asset and liability position, management’s goal is to limit BSB Bancorp’s interest rate risk exposure while attempting to enhance its net interest income. BSB Bancorp’s Asset and Liability Committee (“ALCO”) meets at least monthly to make decisions on the investment and funding portfolios based on its economic outlook, the Committee’s interest rate expectations, the overall interest rate risk profile of BSB Bancorp, and several other factors such as budgeted loan portfolio and core deposit growth and composition, and liquidity requirements. BSB Bancorp utilizes simulation analysis to evaluate the impact that changes in interest rates might have on BSB Bancorp’s net interest income and cash flow.

BSB Bancorp is exposed to interest rate risk when assets and liabilities re-price at different times and by different amounts and terms as interest rates change. As a result, the net interest income earned by BSB Bancorp is subject to the effects of changing interest rates. Accordingly, the ALCO focuses on effectively managing BSB Bancorp’s gap, which is a measure of the mismatch between the dollar amount of BSB Bancorp’s interest-earning assets and interest-bearing liabilities that mature or reprice within certain time frames. If those assets exceed the liabilities within a prescribed time period, a “positive” gap results. This could tend to have a favorable impact on earnings during a period of rising interest rates and could have an unfavorable impact during a period of declining rates. Conversely, if those liabilities exceed the assets during the time period in question, a “negative” gap results, in which case a rise in the general level of interest rates could have an unfavorable impact on earnings, while a decline in rates could have a favorable influence on earnings.

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The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2003, which are anticipated by BSB Bancorp, based upon certain assumptions, to reprice or mature in each of the future time periods shown. The following table and associated discussion does not represent a BSB Bancorp forecast and should not be relied upon to predict results of operations. The results shown are based on numerous assumptions and BSB Bancorp cannot make assurances these assumptions will not change due to customer preferences, market conditions or actions BSB Bancorp may take through its ALCO to respond to such changes.

	3 months or less			More than 3 months to 12 months			More than 1 year to 3 years			More than 3 years to 5 years			More than 5 years			Total Rate- Sensitive
	(In thousands)
Rate-sensitive assets:
Commercial and consumer loans:
Fixed-rate	$	42,657		$	76,268		$	172,131		$	93,712		$	97,276		$	482,044
Adjustable-rate		206,504			228			231			253			1,786			209,002
Mortgage loans:
Fixed-rate		30,427			83,649			164,057			110,569			149,386			538,088
Adjustable-rate		65,470			54,836			52,513			35,910			11,381			220,110
Mortgage-backed securities		43,570			83,034			156,685			46,720			42,165			372,174
Other investment securities		52,968			71,594			63,527			44,165			38,945			271,199
Total rate-sensitive assets	$	441,596		$	369,609		$	609,144		$	331,329		$	340,939		$	2,092,617
Rate-sensitive liabilities:
Money market accounts	$	429,376		$	—		$	—		$	—		$	—		$	429,376
Savings accounts		45,430			45,430			45,430			45,430			—			181,720
NOW accounts		—			—			—			—			128,400			128,400
Time deposits		122,149			244,661			252,090			72,468			1,544			692,912
FHLB advances		20,015			70,045			150,131			30,149			120,483			390,823
Securities sold under repurchase agreements		18,846			—			—			—			—			18,846
Other borrowings		—			—			—			—			1,099			1,099
Junior subordinated obligations		—			—			—			—			48,202			48,202
Total rate-sensitive liabilities	$	635,816		$	360,136		$	447,651		$	148,047		$	299,728		$	1,891,378
Periodic gap	$	(194,220	)	$	9,473		$	161,493		$	183,282		$	41,211		$	201,239
Cumulative gap	$	(194,220	)	$	(184,747	)	$	(23,254	)	$	160,028		$	201,239
Cumulative gap as a percentage of rate sensitive assets		(9.28	)%		(8.83	)%		(1.11	)%		7.65	%		9.62	%

With the exception of savings, money market and NOW accounts which have no contractual term, the amounts of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with their contractual terms. All assets and liabilities are placed in time periods that represent the earlier of their next repricing or scheduled maturity. Adjustable-rate loans, for example, are placed in the time periods which correspond to their next scheduled rate change. Prepayment assumptions are made to indicate the rate at which rate-sensitive assets prepay in excess of scheduled amortization. Money market accounts were anticipated to reprice within three months based on the consistent level of current accounts and the current level of interest rates. Savings accounts are assumed to reprice in equal amounts within five years. NOW accounts are considered stable core deposits, which based on rate and repricing trends, are anticipated to reprice after five years.

Certain shortcomings are inherent in the method of analysis presented in the foregoing table. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate loans, have features that restrict the magnitude of changes in interest rates on a short-term basis and over the life of the assets. Further, in the event of changes in interest rate, prepayment and early withdrawal levels would likely deviate significantly from those assumed in preparing the table. Finally, should interest rates increase, the ability of borrowers to service their debt may decrease.

Based on management’s December 31, 2003 simulation analysis of an immediate 100 basis point parallel increase in the level of interest rates, the estimated percentage change in net interest income from the flat rate

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scenario would be an increase of 4.23% over a 12-month horizon. For an immediate 200 basis point parallel increase in the level of interest rates, the estimated change in net interest income from the flat rate scenario would be an increase of 3.77% over a 12-month horizon. Contributing to this level of increase is the assumption that non-maturity deposit rates would only increase by 25 basis points and retail time deposit rates would only increase by 50 basis points for a 100 basis point increase in overall interest rates, and non-maturity deposit rates would increase by 50 basis points and retail time deposit rates would only increase by 125 basis points for a 200 basis point increase in overall interest rates. For the 200 basis point increase scenario, the de-indexing of money market account rates in 2003 will allow BSB Bank & Trust Company to limit rate increases in response to higher market rates, which eliminates the automatic increase in rates paid on related accounts. The estimated change in net interest income from the flat rate scenario for a 100 basis point decrease in the level of interest rates (presentation is limited to a 100 basis point decline due to the currently historically low interest rate environment) would be a decrease of 7.83%. The magnitude of the effects of the declining rate scenario are impacted by the absolute level of rates, and the inability of BSB Bancorp to reduce its core deposit funding costs by the entire amount of the change assumed. These effects are also exacerbated by the higher levels of cash flow for reinvestment in a lower interest rate environment that would occur as a result of estimated increases in the level of prepayments on higher yielding loan and mortgage-backed securities in those scenarios. There can be no assurance that if interest rates did move by the amounts discussed above, that the results of operations would be impacted as indicated.

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BUSINESS OF PARTNERS TRUST FINANCIAL GROUP AND SBU BANK

Overview

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

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

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

Lending Activities

General. Historically, our principal lending activity has been the origination of fixed-rate and adjustable- rate mortgage loans collateralized by residential real estate located within our primary market area. We also originate commercial real estate loans, including multi-family residential real estate loans, commercial business loans, and consumer loans, including home equity loans.

Loan Portfolio Composition. Set forth below is selected information concerning the composition of our loan portfolio in dollar amounts and in percentages as of the dates indicated.

	At December 31,
	2003				2002				2001				2000				1999
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(In thousands)
Residential real estate	$	481,929	59.85	%	$	434,312	53.95	%	$	383,014	63.51	%	$	358,026	58.48	%	$	342,574	59.20	%
Commercial real estate		139,555	17.33			170,430	21.17			127,750	21.18			143,297	23.40			134,304	23.21
Commercial		58,936	7.32			56,785	7.05			32,477	5.39			46,673	7.62			43,300	7.48
Consumer(1)		124,830	15.50			143,471	17.83			59,821	9.92			64,286	10.50			58,539	10.11
Total loans receivable(2)		805,250	100.00	%		804,998	100.00	%		603,062	100.00	%		612,282	100.00	%		578,717	100.00	%
Less:
Net deferred fees and costs		446				442				437				508				502
Allowance for loan losses		8,608				10,989				7,934				7,564				9,328
Net loans receivable	$	796,196			$	793,567			$	594,691			$	604,210			$	568,887

(1) Includes home equity loans.

(2) Excludes loans held for sale.

Loan Maturity and Repricing Schedule. The following table sets forth certain information as of December 31, 2003, regarding the amount of loans maturing or repricing in our portfolio. Demand loans having no stated schedule of repayment and no stated maturity, and overdrafts are reported as due in one year or less. Adjustable-

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and floating-rate loans are included in the period in which interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed-rate loans are included in the period in which the final contractual repayment is due.

	Within One Year(2)		One Through Five Years		Five Through Ten Years		Ten Through Twenty Years		Beyond Twenty Years		Total
	(In thousands)
Residential real estate	$	95,787	$	207,416	$	116,067	$	58,029	$	4,630	$	481,929
Commercial real estate		47,290		85,870		6,382		13		—		139,555
Commercial		45,931		12,171		826		8		—		58,936
Consumer(1)		70,528		50,950		2,757		593		2		124,830
Total loans receivable(3)	$	259,536	$	356,407	$	126,032	$	58,643	$	4,632	$	805,250

(1) Includes home equity loans.

(2) Includes $240.2 million of loans that reprice within one year but that are scheduled to mature after one year.

(3) Excludes loans held for sale.

Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at December 31, 2003, the dollar amount of all fixed-rate and adjustable-rate loans due after December 31, 2004. Adjustable- and floating-rate loans are included based on contractual maturities.

	Due After December 31, 2004
	Fixed		Adjustable		Total
	(In thousands)
Residential real estate	$	392,699	$	83,821	$	476,520
Commercial real estate		36,911		95,125		132,036
Commercial		20,473		37,037		57,510
Consumer(1)		94,981		24,906		119,887
Total loans receivable(2)	$	545,064	$	240,889	$	785,953

(1) Includes home equity loans.

(2) Excludes loans held for sale.

Residential Mortgage Lending. We originate mortgage loans secured by one- to four-family properties, most of which serve as the primary residence of the owner. As of December 31, 2003, residential mortgage loans totaled $481.9 million, or 59.9% of our total loan portfolio. The primary focus of our originators is to maintain and expand relationships with realtors and other key contacts in order to bring new mortgages to SBU Bank. Most of our loan originations result from relationships with existing or past customers, members of our local community and referrals from realtors, attorneys and builders.

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

• Conventional fixed-rate loans with both monthly and biweekly payment options;

• FHA and VA fixed-rate loans;

• A wide variety of conventional adjustable-rate loans;

• FHA adjustable-rate loans;

• Conventional loans targeted at low and moderate income groups;

• State of New York Mortgage Agency loans; and

• Construction/permanent loans.

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

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

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

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

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

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

Because of increased risks associated with commercial real estate loans, commercial real estate loans generally have a higher interest rate and shorter term than residential mortgage loans. Commercial real estate

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loans are generally offered at one to five year adjustable-rates tied to the Federal Home Loan Bank of New York advance rates. The term of such loans generally does not exceed ten years with amortization schedules of fifteen to twenty years.

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

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

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

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

• Fixed-rate home equity loans;

• Variable rate home equity lines of credit;

• Property improvement loans;

• New and used automobile loans;

• Secured and unsecured personal loans; and

• Personal lines of credit.

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

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

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

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

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

Loan Activity. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type of loan depends upon relative borrower demand and the pricing levels as set in the local marketplace by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of real estate loan originations and repayments are influenced significantly by market interest rates, and, accordingly, the volume of our real estate loan originations and repayments can vary from period to period.

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

	Year Ended December 31,
	2003			2002			2001
	(In thousands)
Originations:
Residential real estate	$	223,233		$	162,292		$	121,967
Commercial real estate		28,510			29,083			15,620
Commercial		36,582			14,280			35,757
Consumer (1)		54,392			29,983			25,352
Total originations		342,717			235,638			198,696
Loans sold		18,091			27,908			21,307
Repayments:
Residential real estate		158,369			112,105			74,542
Commercial real estate		63,103			31,534			31,425
Commercial		32,982			22,951			49,245
Consumer (1)		72,034			32,476			29,817
Total repayments		326,488			199,066			185,029
Total sales and repayments		344,579			226,974			206,336
Loans acquired from Herkimer County Trust		—			196,746			—
Decrease in other items, net (2)		(1,554	)		(5	)		71
Net (decrease) increase	$	(3,416	)	$	205,405		$	(7,569	)

(1) Includes home equity loans.

(2) Other items include net deferred fees and costs and amortization of purchase accounting adjustments.

Loan Approval Procedures and Authority. Our lending policy generally provides for a maximum residential mortgage amount of $450,000. Loans in excess of the conforming guidelines (currently $333,700) of the secondary market require the approval of our chief credit officer, or in his absence, the chief executive officer or the senior vice president of sales. Conforming loans with no policy exceptions are processed by an automated system sponsored by Freddie Mac known as Loan Prospector and approved after validation by an authorized

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underwriter. All loans rated “caution” or rejected by Loan Prospector are reviewed by a residential mortgage underwriter for further action.

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

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

Loans to One Borrower. Federal savings bank regulations restrict loans to one borrower to an amount equal to 15% of unimpaired equity on an unsecured basis, and an additional amount equal to 10% of unimpaired equity if the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate). Our policy provides that loans to one borrower (or related borrowers) should generally not exceed the lesser of 1% of total assets, 15% of equity, or $6.0 million. Exceptions to our policy are approved on a case-by-case basis.

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

Asset Quality

General. One of our key operating objectives has been and continues to be to maintain a strong level of asset quality. We use a variety of strategies, including, but not limited to, borrower workout arrangements and aggressive marketing of foreclosed properties, in addressing problem and non-performing assets.

Collection Procedures. When a borrower fails to make required payments on a loan, we take a number of steps to induce the borrower to cure the delinquency and restore the loan to a current status. In the case of residential mortgage and consumer loans, our collections department is responsible for collection procedures from the 15^th day up to the 120^th day of delinquency. A system-generated late notice is sent to all consumer customers at ten days past due. Residential mortgage customers receive a late notice at fifteen days past due. If there is no response a phone call is made within 15-20 days past due. If no payment arrangements are made, or arrangements are not kept, weekly phone contact is made. At 31-40 days past due, if no contact has been made, a second stronger letter is mailed and continued attempts are made to contact the customer by phone. At 41-55 days a third letter is mailed and continued attempts at phone contact are made. For consumer loans 56-65 days past due a five day letter is sent stating that all arrears are due to avoid repossession. For residential mortgages 56-65 days past due a 30 day letter is sent advising the borrower they have 30 days to bring all amounts current or a demand letter will be sent. A physical inspection of the property is scheduled in this time frame. For secured consumer loans 66-120 days past due, attempted phone contact is continued and a letter is sent advising the customer of an active repossession order. Within 24 hours of the repossession a 10 day letter is sent notifying the customer of the intent to sell the collateral. For residential mortgage loans 86-95 days past due, a demand letter is sent with a seven day time frame after which the loan will be sent to the foreclosure department.

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

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

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

Delinquent Loans and Non-performing Loans and Assets. Our policies require that the chief credit officer continuously monitor the status of the loan portfolio and report to the board on a quarterly basis. These reports include information on delinquent loans, criticized and classified assets, foreclosed real estate, and our actions and plans to cure the delinquent status of the loans.

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

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

	At December 31, 2003								At December 31, 2002
	Past Due 60-89 Days				Past Due 90 Days or More				Past Due 60-89 Days				Past Due 90 Days or More
	Number of Loans	Principal Balance of Loans			Number of Loans	Principal Balance of Loans			Number of Loans	Principal Balance of Loans			Number of Loans	Principal Balance of Loans
	(In thousands)
Residential real estate	6	$	314		15	$	893		11	$	492		19	$	881
Commercial real estate	3		128		10		1,177		2		429		8		2,967
Commercial	5		711		12		417		5		316		13		653
Consumer (1)	52		356		53		561		30		227		25		246
Total	66	$	1,509		90	$	3,048		48	$	1,464		65	$	4,747
Delinquent loans to total loans			0.19	%			0.38	%			0.18	%			0.59	%

(1) Includes home equity loans.

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	At December 31, 2001
	Past Due 60-89 Days				Past Due 90 Days or More
	Number of Loans	Principal Balance of Loans			Number of Loans	Principal Balance of Loans
	(In thousands)
Residential real estate	12	$	503		28	$	1,509
Commercial real estate	2		455		5		1,068
Commercial	6		2,181		18		1,218
Consumer (1)	25		207		10		76
Total	45	$	3,346		61	$	3,871
Delinquent loans to total loans			0.55	%			0.64	%

(1) Includes home equity loans.

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

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

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

	At December 31,
	2003			2002			2001			2000			1999
	(In thousands)
Non-accruing loans:
Residential real estate	$	1,007		$	1,048		$	1,864		$	1,448		$	1,856
Commercial real estate		1,279			5,987			5,949			2,903			2,792
Commercial		931			3,302			880			1,389			4,389
Consumer (1)		545			185			98			30			63
Total non-accruing loans		3,762			10,522			8,791			5,770			9,100
Accruing loans delinquent 90 days or more		480			461			344			3,147			1,179
Total non-performing loans		4,242			10,983			9,135			8,917			10,279
Other real estate owned		121			3,092			173			180			150
Total non-performing assets	$	4,363		$	14,075		$	9,308		$	9,097		$	10,429
Total non-performing loans to total loans		0.53	%		1.36	%		1.51	%		1.46	%		1.78	%
Total non-performing assets to total assets		0.34	%		1.06	%		0.95	%		0.89	%		1.07	%
Allowance for loan losses to non-performing loans		202.92	%		100.05	%		86.85	%		84.83	%		90.75	%
Allowance for loan losses to total loans (2)		1.07	%		1.37	%		1.32	%		1.24	%		1.61	%

(1) Includes home equity loans.

(2) Total loans excludes loans held for sale.

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

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

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

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

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

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

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

• results of the quarterly credit quality review;

• historical loss experience in each segment of the loan portfolio;

• general economic and business conditions affecting our key lending areas;

• credit quality trends (including trends in non-performing loans expected to result from existing conditions);

• collateral values;

• loan volumes and concentrations;

• age of the loan portfolio;

• specific industry conditions within portfolio segments;

• duration of the current business cycle;

• bank regulatory examination results; and

• external loan review results.

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

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

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

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

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

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

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

	Years Ended December 31,
	2003			2002			2001			2000			1999
	(In thousands)
Balance at beginning of year	$	10,989		$	7,934		$	7,564		$	9,328		$	10,150
Charge-offs:
Residential real estate		87			36			244			225			384
Commercial real estate		136			2,104			874			—			1,504
Commercial		2,362			651			1,344			3,103			76
Consumer(1)		1,466			306			305			284			374
Total charge-offs		4,051			3,097			2,767			3,612			2,338
Recoveries:
Residential real estate		31			9			19			76			57
Commercial real estate		104			43			620			254			469
Commercial		175			628			548			80			444
Consumer(1)		260			150			278			341			546
Total recoveries		570			830			1,465			751			1,516
Net charge-offs		3,481			2,267			1,302			2,861			822
Provision for loan losses		1,100			1,150			1,672			1,097			—
Allowance acquired from Herkimer		—			4,172			—			—			—
Balance at end of year	$	8,608		$	10,989		$	7,934		$	7,564		$	9,328
Ratio of net charge-offs during the year to average loans outstanding during the year		0.43	%		0.37	%		0.21	%		0.48	%		0.14	%

(1) Includes home equity loans.

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

The following table sets forth the allocation of the allowance for loan losses by loan category for the periods indicated. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes when the risk factors of each such component part change. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur nor is it an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.

	At December 31,
	2003				2002				2001				2000				1999
	Amount of Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans		Amount of Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans		Amount of Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans		Amount of Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans		Amount of Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans
	(In thousands)
Residential real estate	$	1,319	59.85	%	$	1,088	53.95	%	$	446	63.51	%	$	1,141	58.48	%	$	1,618	59.20	%
Commercial real estate		1,164	17.33			6,175	21.17			5,158	21.18			5,011	23.40			4,877	23.21
Commercial		3,454	7.32			3,221	7.05			1,299	5.39			650	7.62			1,889	7.48
Consumer(1)		2,671	15.50			503	17.83			294	9.92			762	10.50			944	10.11
Unallocated		—	—			2	—			737	—			—	—			—	—
Total	$	8,608	100.00	%	$	10,989	100.00	%	$	7,934	100.00	%	$	7,564	100.00	%	$	9,328	100.00	%

(1) Includes home equity loans.

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

Securities Activities

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

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

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

	At December 31,
	2003				2002				2001
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
	(In thousands)
Available-for-sale:
U.S. Treasury and obligations of U.S. Government corporations and agencies	$	101,905	$	103,055	$	79,703	$	81,870	$	59,388	$	61,241
Municipal obligations		31,729		32,279		28,462		28,465		—		—
Corporate debt securities		15,481		15,915		15,915		16,177		981		1,026
Fannie Mae preferred stock		10,000		8,193		10,000		9,466		10,003		9,796
Other securities		—		—		—		—		1,303		1,284
Collateralized mortgage obligations		42,209		42,545		73,159		74,369		98,136		100,335
Other mortgage-backed securities		138,393		141,727		127,602		133,786		120,200		122,620
Total available-for-sale		339,717		343,714		334,841		344,133		290,011		296,302
Held-to-maturity:
Other securities		1,240		1,241		1,567		1,567		1,383		1,384
Total held-to-maturity		1,240		1,241		1,567		1,567		1,383		1,384
Total securities	$	340,957	$	344,955	$	336,408	$	345,700	$	291,394	$	297,686

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

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

	At December 31, 2003
	One Year or Less				More Than One Year to Five Years				More Than Five Years to Ten Years				After Ten Years				Total
	Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield		Carrying Value		Weighted Average Yield
	(In thousands)
U.S. Treasury and federal agency securities	$	31,519	3.23	%	$	71,536	2.84	%	$	—	—	%	$	—	—	%	$	103,055	2.96	%
Municipal obligations		4,789	1.88			5,681	2.92			8,282	3.33			13,527	3.35			32,279	3.35
Corporate securities		3,788	3.53			6,356	4.46			—	—			5,771	5.93			15,915	4.77
Collateralized mortgage obligations		105	2.38			71	8.99			13,339	3.93			29,030	4.24			42,545	3.81
Other mortgage-backed securities		33	3.51			3,016	3.49			64,729	4.52			73,949	5.52			141,727	5.01
Total debt securities	$	40,234	3.09	%	$	86,660	2.99	%	$	86,350	4.32	%	$	122,277	5.07	%	$	335,521	4.10	%

Sources of Funds

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

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

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

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

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

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

	Maturity
	3 Months or Less		Over 3 to 6 Months		Over 6 to 12 Months		Over 12 Months		Total
	(In thousands)
Time accounts less than $100,000	$	48,323	$	39,219	$	67,715	$	86,502	$	241,759
Time accounts of $100,000 or more		12,655		10,669		14,827		17,363		55,514
Total of time accounts	$	60,978	$	49,888	$	82,542	$	103,865	$	297,273

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

	Period to Maturity from December 31, 2003												At December 31,
	One Year or Less		Over One to Two Years		Over Two to Three Years		Over Three to Four Years		Over Four to Five Years		Over Five Years		2003		2002		2001
	(In thousands)
Rate:
Less than 2.00%	$	109,166	$	7,990	$	193	$	—	$	—	$	—	$	117,349	$	16,481	$	205
2.00 to 4.00%		67,555		23,203		7,374		7,236		6,277		49		111,694		205,815		53,179
4.01 to 5.00%		4,238		4,151		8,817		10,647		2		—		27,855		38,432		73,348
5.01 to 6.00%		7,346		1,778		3,290		2,486		—		—		14,900		24,213		73,513
6.01 to 7.00%		4,445		14,134		1,807		91		—		12		20,489		38,332		89,192
7.01% and above		658		2,957		1,334		37		—		—		4,986		5,533		2,273
Total	$	193,408	$	54,213	$	22,815	$	20,497	$	6,279	$	61	$	297,273	$	328,806	$	291,710

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

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

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

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

	December 31,
	2003			2002			2001
	(In thousands)
FHLB Overnight Line of Credit:
Maximum month-end balance	$	13,000		$	—		$	19,000
Balance at end of year		1,000			—			—
Average balance		1,058			—			2,444
Weighted average interest rate at end of year		1.04	%		—			—
Weighted average interest rate during year		1.16	%		—			5.39	%
Repurchase Agreements:
Maximum month-end balance	$	44,294		$	44,971		$	62,657
Balance at end of year		26,069			44,971			29,452
Average balance		34,668			28,028			49,835
Weighted average interest rate at end of year		1.04	%		1.73	%		2.63	%
Weighted average interest rate during year		1.21	%		2.28	%		5.74	%
FHLB Advances:
Maximum month-end balance	$	263,500		$	247,000		$	227,000
Balance at end of year		263,500			247,000			227,000
Average balance		237,263			227,986			209,791
Weighted average interest rate at end of year		3.58	%		4.64	%		5.15	%
Weighted average interest rate during year		4.19	%		4.99	%		5.55	%

Trust Services

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

Municipal Activities

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

Investment Services

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

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

Title Insurance

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

Competition

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

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

Personnel

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

Properties

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

OWNED Location	Original Year Acquired	Net Book Value (in thousands)
Main Office	1839	$	4,300
233 Genesee Street
Utica, NY 13501
Commercial Drive Branch	2002		636
4630 Commercial Drive
New Hartford, NY 13413
Dolgeville Branch	2002		321
71 N. Main Street
Dolgeville, NY
Ellinwood Office Building	1993		3,091
2 Ellinwood Drive
New Hartford, NY 13413

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OWNED Location	Original Year Acquired	Net Book Value (in thousands)
Frankfort Branch	2002		57
134 E. Main Street
Frankfort, NY
Ilion Branch	2002		524
150 Central Ave.
Ilion, NY
Little Falls Branch	2002		1,262
501 E. Main Street
Little Falls, NY
Newport Branch	2002		143
15 Bridge Street
Newport, NY
North Utica Branch	2001		1,573
1-3 Herkimer Road
Utica, NY 13502
Oriskany Branch	2002		92
110 River Street
Oriskany, NY 13424
Slawson St. Storage Facility	2002		36
3 Slawson Street
Dolgeville, NY
100 South Main Street Office Building	2002		670
Herkimer, NY
Whitesboro Branch	1997
80 Oriskany Boulevard
Whitesboro, NY 13492			1,618
Total Owned		$	14,323

LEASED Location	Original Year Leased	Date of Lease Expiration	Net Book Value (in thousands)
Clinton ATM Facility	1997	10/13/2007	$	115
Corner of College St. & Chenango Ave.
Clinton, NY 13323
Fayetteville Branch	2000	4/30/2010		169
6872 E. Genesee Street
Fayetteville, NY 13066
Hannaford Branch	2002	6/30/2008		4
401 East Albany Street
Herkimer, NY
Marcy Branch	2002	7/31/2007		—
Rt 49 Plaza
Marcy, NY

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LEASED Location	Original Year Leased	Date of Lease Expiration	Net Book Value (in thousands)
New Hartford Shopping Center Branch	1961	6/30/2006		154
120 Genesee Street
New Hartford, NY 13413
North Herkimer Branch	2002	12/31/2008		2
319 North Main Street
Herkimer, NY
Oriskany Airport ATM Facility	2002	7/5/2004		—
110 River Street
Oriskany, NY
Rome Branch	1997	6/30/2007		3
1919 Black River Boulevard
Rome, NY 13440
Washington Mills Branch	1999	3/31/2006		61
40 Kellogg Road
New Hartford, NY 13413
Total Leased			$	508
Total Leased and Owned			$	14,831

Legal Proceedings

There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which Partners Trust Financial Group or its subsidiary is a party or of which any of its property is the subject.

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BUSINESS OF BSB BANCORP AND BSB BANK & TRUST COMPANY

Overview

BSB Bancorp, Inc. is the bank holding company for BSB Bank & Trust Company. BSB Bancorp owns 100% of the issued and outstanding common stock of BSB Bank & Trust Company, which is the primary asset of BSB Bancorp. BSB Bank & Trust Company is headquartered in Binghamton, New York and at December 31, 2003 conducted business in Broome, Chenango, Onondaga and Tioga Counties and adjacent areas of New York State. The business of BSB Bancorp is the business of BSB Bank & Trust Company, which is BSB Bancorp’s sole segment. All references to BSB Bancorp include the activities of BSB Bank & Trust Company, unless the context indicates otherwise.

Lending Activities

BSB Bancorp offers commercial and residential permanent and construction mortgage loans, commercial and industrial loans (“C&I”), small business loans, various direct and indirect consumer loans including home equity loans and other types of consumer loans. As a community bank, all loans are approved locally, either by individual loan officers, the management loan committee or the directors’ loan committee, depending on the size and type of loan. Interest rates charged by BSB Bancorp are affected principally by the demand for such loans and the supply of funds available for lending purposes. These factors are in turn affected by general economic conditions, including local competition, monetary policies of the Federal government, including the Federal Reserve Board, legislative tax policies and governmental budgetary matters.

One of BSB Bancorp’s objectives for 2003 was to continue the process initiated in 2001 of restructuring its asset mix and, as part of the process of achieving this objective, reduce the size of the C&I portfolio. Another part of the restructuring process was to increase the size of the real estate loan portfolio, increasing both residential and commercial mortgage loans. This was consistent with the goal of improving asset quality and creating more sustainable and stable earnings over time.

BSB Bancorp’s loans totaled $1.4 billion at December 31, 2003, representing 65.5% of BSB Bancorp ‘s total assets at that date, compared to $1.3 billion, and 66.2% of BSB Bancorp’s total assets at December 31, 2002. BSB Bancorp continued to lower the balance of C&I loans within its portfolio of assets. The balance of C&I loans decreased to $323.6 million or 22.3% of all loans at December 31, 2003 compared to $492.2 million or 36.5% of all loans at December 31, 2002. These loans are generally tied to BSB Bancorp’s prime rate (“Prime Rate”).

As interest rates declined during the year, BSB Bancorp considered it prudent to sell its longest duration residential mortgage loan originations while retaining its shorter term fixed- and variable-rate loans and bi-weekly mortgage loans with maturities of less than 30 years. In this strategy, real estate loans increased to 52.3% of the loan portfolio at December 31, 2003 from 35.4% at December 31, 2002. This increase in the percent of real estate loans to total loans is consistent with BSB Bancorp’s overall strategy to improve asset quality by dedicating itself to implementing a strong credit culture, translating into a stronger credit risk profile for the future.

The balance of consumer loans was $367.4 million at December 31, 2003 compared to $378.0 million at December 31, 2002. The decline in consumer loans is largely the result of the decrease in the balance of mobile home loans from $55.4 million at December 31, 2002 to $45.1 million at December 31, 2003.

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Loan Portfolio Composition. The following table sets forth the composition of BSB Bancorp’s loan portfolio by loan type as of the dates indicated.

	At December 31,
	2003				2002				2001				2000				1999
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
									(In thousands)
Commercial loans	$	323,634	22.33	%	$	492,171	36.53	%	$	750,552	50.56	%	$	1,012,430	55.06	%	$	916,442	52.69	%
Consumer loans:
Personal-direct		70,965	4.90	%		65,768	4.88	%		61,078	4.11	%		64,965	3.53	%		72,497	4.17	%
Personal-indirect		249,558	17.22	%		270,597	20.08	%		268,787	18.10	%		324,402	17.65	%		352,426	20.25	%
Other		46,889	3.23	%		41,596	3.09	%		48,489	3.27	%		49,470	2.69	%		47,808	2.75	%
Total consumer loans		367,412	25.35	%		377,961	28.05	%		378,354	25.48	%		438,837	23.87	%		472,731	27.17	%
Real estate:
Fixed-rate:
Residential		498,651	34.41	%		262,199	19.46	%		145,856	9.82	%		127,482	6.93	%		97,221	5.59	%
FHA & VA		1,128	0.08	%		1,844	0.14	%		2,775	0.19	%		4,008	0.22	%		5,513	0.32	%
Commercial		36,092	2.49	%		34,767	2.58	%		18,433	1.24	%		10,278	0.56	%		11,516	0.66	%
Commercial FHA		153	0.01	%		160	0.01	%		170	0.01	%		179	0.01	%		186	0.01	%
Total fixed-rate		536,024	36.99	%		298,970	22.19	%		167,234	11.26	%		141,947	7.72	%		114,436	6.58	%
Adjustable-rate:
Residential		59,002	4.07	%		66,301	4.92	%		72,304	4.87	%		88,700	4.82	%		74,480	4.28	%
Commercial		163,172	11.26	%		112,028	8.31	%		116,263	7.83	%		156,831	8.53	%		161,496	9.28	%
Total adjustable-rate		222,174	15.33	%		178,329	13.23	%		188,567	12.70	%		245,531	13.35	%		235,976	13.56	%
Total real estate loans		758,198	52.32	%		477,299	35.42	%		355,801	23.96	%		387,478	21.07	%		350,412	20.14	%
	$	1,449,244	100.0	%	$	1,347,431	100.0	%	$	1,484,707	100.0	%	$	1,838,745	100.0	%	$	1,739,585	100.0	%

The following table sets forth scheduled contractual maturities of loans at December 31, 2003. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdraft loans are reported as due in one year or less. The following table also sets forth the dollar amount of loans which are scheduled to mature after one year which have fixed- and adjustable-interest rates.

Residential Real Estate	Commercial Real Estate Loans		Commercial Business Loans		Consumer Loans		Loans		Total
	(In thousands)
Amounts due:
Within one year	$	32,376	$	42,335	$	157,723	$	85,877	$	318,311
After one year through five years		143,947		78,491		124,390		183,423		530,251
Beyond five years		382,458		78,591		41,521		98,112		600,682
Total	$	558,781	$	199,417	$	323,634	$	367,412	$	1,449,244
Amounts due after one year:
Fixed	$	469,870	$	35,948	$	114,089	$	238,456	$	858,363
Adjustable	$	56,535	$	121,134	$	51,822	$	43,079	$	272,570

Contractual maturities of loans do not necessarily reflect the actual life of loans in BSB Bancorp’s portfolio. The average life of mortgage loans is substantially less than their contractual terms because of loan prepayments and enforcement of due-on-sale clauses. Such clauses give BSB Bancorp the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells the real property subject to the mortgage and the loan is not repaid.

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Residential Real Estate Lending. BSB Bancorp historically has been, and continues to be, a leading originator of residential real estate loans in its market area. At December 31, 2003, $558.8 million or 38.6% of BSB Bancorp ‘s total loan portfolio consisted of residential mortgage loans. In 2003 and 2002, residential mortgage loan originations amounted to $390.8 million and $200.5 million, respectively, which represented approximately 57.1% and 38.0%, respectively, of BSB Bancorp ‘s total loan originations.

The continued decline in interest rates during 2003 to their current low levels caused consumer preference to remain with fixed-rate residential loans. Loans were originated or refinanced at lower fixed rates as consumers looked to lock in the attractive financing rates. In 2003 BSB Bancorp sold $55.8 million in residential mortgages, an increase from $24.7 million sold in 2002. The bi-weekly residential loan has been the most popular product among BSB Bancorp’s customers as they are able to obtain attractive rates with an actual average life closer to that of a 20-year loan. For 2003, total originations of bi-weekly residential loans were $264.5 million or 38.6% of all mortgage originations. By comparison, in 2002, total bi-weekly residential loan originations were $84.0 million or 41.9% of mortgage originations. The trend to refinance at lower fixed-rates is reflected in the 2003 originations of 10-year mortgages ($64.7 million) and 15-year mortgages ($157.4 million). By comparison, BSB Bancorp originated, in 2002, a total of $52.4 million of 10- and 15-year fixed-rate mortgages, with 72.1% of these in the 15-year category.

Significant changes in the penetration of BSB Bancorp’s two major markets were achieved during 2003, as retail residential real estate loans closed in Central New York were approximately 49.5% of the total in 2003 as compared to approximately 43% in 2002.

Commercial and Industrial Lending. As of December 31, 2003, commercial loans amounted to $323.6 million or 22.3% of BSB Bancorp’s total loans. BSB Bank & Trust Company’s policy, consistent with regulation, restricts loans to any borrower and related entities to 15% of stockholders’ equity, unless the amount in excess of 15% is secured by liquid collateral. Loan relationships approaching 15% of BSB Bank & Trust Company’s stockholders’ equity generally require diversification in both repayment source and collateral. Outstanding loan balances for BSB Bancorp’s 10 largest C&I relationships range from $2.9 million to $19.8 million and are made up of 37 individual loans. Each of these loans has varied sources of repayment and collateral. Total loan commitments these relationships ranged from $10.4 million to $27.2 million at December 31, 2003. The average size of a C&I loan increased from $222,000 in 2002 to $238,000 in 2003.

BSB Bancorp offers a variety of commercial loan services, including term loans and revolving lines of credit, as well as letters of credit. Commercial lending involves somewhat greater credit risks to BSB Bancorp than most other types of lending. BSB Bancorp has looked to decrease the overall portfolio size to a more manageable level that would represent a smaller percent of the total loan portfolio. Consistent with this objective, the C&I loan portfolio has decreased $168.5 million to $323.6 million or 22.3% of the entire loan portfolio at December 31, 2003. As a part of the strategy to decrease the C&I loan portfolio, BSB Bancorp sold certain large, under-performing loans with an aggregate carrying value of $36.7 million during the fourth quarter of 2003.

Management continues to review commercial loan applications from companies with a strong financial base and strong credit history, principally within BSB Bancorp’s market area. Commercial loan originations amounted to $53.8 million or 7.9% of total loans originated in 2003 compared to $99.4 million or 18.4% of total loans originated in 2002.

The commercial loan portfolio is diversified by industry, type and size, and the loans have been made primarily to small- and medium-sized businesses in the regional market. Approximately 48.1% of BSB Bancorp’s commercial loans bear floating interest rates tied to the Prime Rate. The average yield on the commercial loan portfolio was 6.27% in 2003 and 6.58% in 2002. BSB Bancorp’s average Prime Rate was 4.12% in 2003 and 4.67% in 2002. Commercial loans are made on both a collateralized and uncollateralized basis and include collateralized lines of credit. Although most have shorter terms, the maximum term of a non-real estate collateralized commercial loan is ten years.

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BSB Bancorp’s commercial loan officers are responsible for generating new business, the underwriting and assignment of internal risk ratings as loans are committed, and monitoring the creditworthiness of borrowers and for changing risk ratings when appropriate. The Loan Analysis unit analyzes the financial information and recommends risk ratings for larger credits. The Loan Review department reviews risk ratings assigned and has authority to change ratings and recommends risk ratings for larger credits, as appropriate. The risk ratings are used in conjunction with a monthly risk rating migration analysis program to assist in determining levels of loss allowance needed. Delinquency reports are reviewed during the month to prompt the loan officer to call or send written notice to the borrower.

The authority to approve commercial loans varies by the size of the loan. Loans under $150,000 must have a secondary approval of the loan officer’s team leader. Loans exceeding $5.0 million require multiple approvals from the senior loan officer or the CEO, plus the Credit Deputy and the Directors’ Loan Committee. For commercial loans at intermediate levels, BSB Bancorp requires designated approvals of the senior loan officers, the CEO, plus the Credit Deputy. The Board of Directors approves individual loan authority.

For loan portfolio analysis, geographic concentrations are reviewed at the same time as industry concentrations. Approximately 69.2% of commercial loans are located in BSB Bancorp’s primary market area of Broome, Chenango, Onondaga and Tioga Counties. Of the remaining 30.8%, 28.0% are spread through other counties of New York State with primary concentrations in Monroe, Cortland and Tompkins Counties. The remainder of the C&I loans are in other states.

BSB Bancorp monitors commercial loan and commercial real estate industry stratifications at least four times per year and continues to require diversity throughout its commercial loan and commercial real estate portfolios.

In addition to the various types of lending services, BSB Bancorp also offers to commercial customers a range of depository and related services, including commercial demand deposit accounts, cash management, payroll and direct deposit to employees’ accounts.

Commercial Real Estate Lending. BSB Bancorp originated $97.7 million in commercial real estate loans in 2003 compared to $42.8 million in 2002. At December 31, 2003, BSB Bancorp had $199.4 million of commercial real estate loans outstanding, representing approximately 13.8% of BSB Bancorp’s total loan portfolio. Of the $199.4 million outstanding at December 31, 2003, $36.2 million were fixed-rate loans with amortization periods of 3 to 25 years. Adjustable-rate loans at December 31, 2003 were $163.2 million and had rates determined by indices such as Prime Rate, the London Interbank Offer Rate (“LIBOR”) or Treasury bill rates. These adjustable-rate loans reprice every one, three or five years based on the current index and any spread over that index, if applicable. With the current level of rates at historic lows and with financial institutions throughout the market area competitively pricing loans, BSB Bancorp has seen a small increase in fixed-rate loan balances from $34.9 million at December 31, 2002 to $36.2 million at December 31, 2003. The origination of commercial real estate loans in 2002 was primarily from BSB Bancorp’s major market areas in a four county area of the Southern Tier and Central regions of New York. In 2003, commercial real estate loan originations in the same four county area, were only 45.6% of all such originations. BSB Bancorp’s strategy to grow the commercial real estate portfolio has been impacted by the lack of local economic growth of the moderate-sized commercial companies within BSB Bancorp’s principal market areas. As a result, recent growth of this portfolio includes originations of 16.0% from adjacent counties and 25.9% from other states, principally in the New England area. Projects outside BSB Bancorp’s primary market area are generally with existing customers with operations in such areas.

In setting interest rates and origination fees on new loans and maturity extensions, management considers both current market conditions and its analysis of the risk associated with the particular project. When the loan is underwritten, the following items are part of the consideration: the properties’ cash flow and its ability to service the debt, collateral coverage, the percent of occupancy if applicable, creditworthiness of tenants, creditworthiness of borrowers and guarantors, and other factors that could impact the repayment of the debt.

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The approvals for commercial real estate loans follows the same levels of authority as described for commercial and industrial loans.

Consumer Lending. BSB Bancorp engages in a variety of consumer lending activities including auto loans, both direct and indirect, home equity line of credit loans, overdraft loans, student loans and direct personal loans. Consumer loans provide diversification within the loan portfolio and allow BSB Bancorp to meet the credit needs of BSB Bancorp’s customers. The short-term nature of these loans shortens the duration of the entire loan portfolio. As of December 31, 2003, a total of $367.4 million of consumer loans was outstanding as compared to $378.0 million at December 31, 2002. The decline in consumer loans is largely a result of the decrease in mobile home loans from $55.4 million at December 31, 2002 to $45.1 million at December 31, 2003. Existing mobile home loans are aging off the loan portfolio and are not being replaced with new originations as witnessed by the decline of originations for mobile home loans from $2.9 million in 2002 to $101 thousand in 2003. Consumer loans generally involve more risk of collectibility than mortgage loans because of the type and nature of the collateral and, in certain cases, the absence of collateral. As a result, consumer lending collections are dependent on the borrowers’ continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, personal bankruptcy and by adverse economic conditions. BSB Bancorp has maintained a strong presence in indirect lending within BSB Bancorp’s market areas. New auto loans historically have a lower incidence of loss than used autos.

Of the $320.5 million in personal loans outstanding at December 31, 2003, $71.0 million or 22.1% represented direct consumer loans originated by BSB Bancorp’s lending staff. The remaining $249.5 million or 77.9% represented the indirect consumer loan portfolio originated through relationships with mobile home service companies, automobile and other retail dealers. Indirect originations in 2003 totaled $95.0 million or 56.5% of all consumer loan originations. Of these indirect originations, used auto loans were the largest source at $65.0 million. The used auto loans ending balance at December 31, 2003 was $124.5 million, down from $128.5 million at December 31, 2002. These loans typically are shorter term and pay off faster than new auto loans. Indirect new auto loan balances have remained constant at $60.1 million at December 31, 2002 and December 31, 2003. Originations of indirect new auto loans have decreased from $46.9 million in 2002 to $29.7 million in 2003. BSB Bancorp faces vigorous competition from automakers offering “zero percent” financing and other incentives to market their products. All personal loans originated for BSB Bancorp are advanced at fixed-interest rates, with a high percentage of the loans offering repayment terms up to 60 months.

Home equity lines of credit are primarily an adjustable-rate consumer loan product with a term of 20 or 30 years. Such loans are generally collateralized by the borrower’s primary residence, when the loan to value ratio, taking into account the first mortgage loan, does not exceed a maximum of 95% based on the borrower’s credit rating. As of December 31, 2003, the outstanding balance of total home equity lines of credit was $43.4 million, an increase of $7.1 million from $36.3 million at December 31, 2002. The increase in home equity line of credit loans is a result of BSB Bancorp’s overall strategy of increasing the origination of loans collateralized by real estate. Interest rates on home equity lines of credit are adjusted monthly to reflect changes in the Prime Rate.

Consumer loans are marketed throughout BSB Bancorp’s branches and via print and visual media promotions. Authority for approval of consumer loans varies by loan type and individual authority limits as approved by the Board of Directors and must follow the approved underwriting practices of BSB Bancorp which normally include employment status, credit history and credit score.

In the first quarter of 2002, BSB Bancorp sold its $10.7 million credit card portfolio to American Express Company and recognized a net gain before taxes of approximately $1.8 million on the sale.

Consumer lending, with its short-term characteristics, contributes to the improvement of BSB Bancorp’s overall interest rate sensitivity because of its more rapid amortization compared to residential and commercial real estate loans.

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Asset Quality

Loan Review. BSB Bancorp maintains a Loan Review program in order to measure the quality of its loan portfolio, to enable management to report on the level of impairment within the loan portfolio and to recommend appropriate loan loss allowance levels to senior management and the board of directors. The Loan Review department is responsible for analysis and monitoring of loans subsequent to their commitment or acquisition by BSB Bancorp. Loan reviews provide a systematic process to ensure appropriate corrective action for any potential problem loan.

The Loan Review department provides senior management and the board of directors with information regarding the quality and structure of all loan portfolios. Monthly reporting for each loan portfolio includes reports on past due and non-performing trends, an evaluation of the loan loss provision, analysis of the adequacy of the allowance for loan losses, as well as a summary of loans deemed as impaired or troubled debt restructurings. Quarterly reporting includes a management action listing for certain commercial loans based upon the risk ratings assigned during the current review. Loan Review also reports on changes in risk ratings between quarters and industry concentration.

Delinquent Loans. If a borrower fails to make a scheduled payment on a loan, BSB Bancorp 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 for residential mortgage and consumer loans. Commercial customers are contacted within five days after a payment becomes past due. BSB Bancorp has established a Special Assets unit that performs all collection activity for retail loans. Also, commercial loans are transferred to this unit as soon as it is determined that loan payments may not continue on a timely basis.

While BSB Bancorp generally prefers to work with borrowers to resolve such problems, BSB Bancorp does initiate foreclosure or repossession proceedings or pursues other legal collection procedures, as necessary, to minimize any potential loss.

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

BSB Bancorp’s Loan Review department performs a risk rating analysis as an integral part of the review of each loan portfolio. For the commercial and commercial real estate portfolios, the risk rating analysis includes a grading system following a standard risk rating matrix. Based upon this matrix, BSB Bancorp determines a classification for such loans and other assets that are considered to be of lesser quality, as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified as substandard, with the added characteristic that the identified weaknesses make collection or liquidation in full improbable. Assets classified as “loss” are those considered uncollectable and of such little value that the continuance as assets without the establishment of a specific loss reserve is not warranted.

Performing loans past due 30-89 days increased to $6.9 million at December 31, 2003 from $6.1 million at December 31, 2002. As noted above, over the last two years BSB Bancorp has focused on establishing consistent and conservative underwriting standards, as well as identifying and managing non-performing assets. As part of this process, BSB Bancorp has also expanded the definition of loans identified as potential problem loans to include all accruing loans classified as substandard in order to focus management efforts to address problems. By

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identifying these loans under BSB Bancorp’s current rating system, management is focused on addressing problems associated with loans before they become non-performing. Potential problem loans are loans that are currently performing, but where known information about possible credit problems of the related borrowers causes management to have serious doubt as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as non-performing at some time in the future. Performing substandard loans decreased to $53.4 million ($0.8 million of which are accruing troubled debt restructured loans) at December 31, 2003 compared to $78.2 million ($12.2 million of which are accruing troubled debt restructured loans) at December 31, 2002. Potential problem loans at December 31, 2003 primarily consisted of commercial and industrial loans.

Non-performing Assets and Other Real Estate Owned. Loans are placed on a non-accrual status when, in the judgment of management, the probability of collection of principal or interest is deemed to be insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. Other than with respect to consumer loans, BSB Bancorp does not accrue interest on loans greater than 90 days or more past due unless the estimated fair value of the collateral and active collection efforts are believed to be adequate to result in full recovery. Loans are removed from non-accrual status when they become current as to principal and interest, or when in the opinion of management, the loans are expected to be fully collectible as to amounts due for both principal and interest.

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

	At December 31,
	2003			2002			2001			2000			1999
	(In thousands)
Non-accrual loans:
Commercial loans	$	11,186		$	34,614		$	42,424		$	17,104		$	1,852
Residential real estate loans		622			616			882			2,071			2,161
Commercial real estate loans		32			2,647			4,235			1,522			53
Consumer loans		134			288			—			—			—
Troubled debt restructured loans		1,126			12,172			12,255			10,660			6,596
Total non-accrual loans		13,100			50,337			59,796			31,357			10,662
Accruing loans with principal or interest payments 90 days or more overdue		109			278			879			781			945
Total non-performing loans		13,209			50,615			60,675			32,138			11,607
Other real estate owned and repossessed assets		1,231			3,109			2,034			1,805			2,442
Total non-performing assets	$	14,440		$	53,724		$	62,709		$	33,943		$	14,049
Total non-performing loans to total loans		0.91	%		3.76	%		4.09	%		1.75	%		0.67	%
Total non-performing assets to total assets		0.65	%		2.64	%		3.04	%		1.47	%		0.63	%

Accruing loans classified as troubled debt restructured loans totaled $13.8 million, $13.8 million, $8.8 million, $4.8 million and $13.1 million at December 31, 2003, 2002, 2001, 2000 and 1999, respectively. BSB Bancorp does not consider these loans to be non-performing.

During 2003, BSB Bancorp sold certain large, under-performing loans with an aggregate carrying value of $36.7 million. The proceeds from the sale of these loans, net of estimated transaction costs, was $27.2 million. The $9.5 million difference between the carrying value and the net proceeds from the sale of these loans generally reflects BSB Bancorp’s previously established loan loss allowances and was charged-off against the allowance for loan losses. They had no impact on BSB Bancorp’s income statement. Prior to the decision to sell, these loans were either non-performing or performing loans classified as substandard. As a result of the sale,

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non-performing loans decreased $14.5 million and substandard performing loans declined $22.2 million. Charge-offs of $32.5 million of commercial loans and non-accruing troubled debt restructured loans amounted to $32.5 million that reduced non-performing loans in 2003. New non-performing commercial loans and non-accruing troubled debt restructured loans of $25.8 million were added in 2003, partially offset by $13.3 million of pay-downs or pay-offs in these loan categories for the same period.

A loan is considered impaired, based on current information and events, if it is probable that BSB Bancorp will be unable to collect the scheduled payments of principal or interest when due under the contractual terms of the loan agreement. The measurement of impaired loans may be based upon the present value of expected future cash flows discounted at the contractual interest rate, or for loans that have become collateral dependent are based on the fair value of the collateral. At December 31, 2003, BSB Bancorp’s recorded investment in loans for which impairment has been recognized in accordance with SFAS No. 114 totaled $26.1 million with an impairment allowance aggregating $6.8 million. At December 31, 2002, total loans for which impairment has been recognized in accordance with SFAS No. 114 totaled $63.2 million with an impairment allowance aggregating $15.2 million, with impaired loans of $18.8 million having no impairment allowance.

Allowance for Loan Losses. The process of originating loans, of any type, includes an inherent risk that loan losses will be experienced. The risk of loss varies with, among other things, general economic conditions, the type of loan, creditworthiness of the borrower and, for a collateralized loan, the quality of the collateral securing the loan. In an effort to minimize loan losses, BSB Bancorp monitors its loan portfolio by reviewing delinquent loans and taking appropriate measures as discussed above. In addition, with respect to BSB Bancorp’s commercial real estate and commercial business loans, BSB Bancorp closely watches all loans with a risk rating that indicate potential adverse factors. Also, the loan review process includes, on an annual basis, a review of the borrowers’ financial statements and, in some cases, inspections of borrowers’ collateral properties.

The allowance for loan losses represents the amount available for probable loan losses in BSB Bancorp’s loan portfolio as estimated by management. Management performs a comprehensive assessment, at least quarterly, of the allowance for loan losses. Based upon the periodic reports completed by the Loan Review program, the allowance is assessed with a migration analysis by applying estimated loss ratios to the risk ratings of loans both individually and by category. The estimated 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 “classifications” and concentrations of loans, transfer risks and other pertinent factors. Specific reserves are evaluated through review of impaired loans, non-performing loans and certain performing loans designated as problems. The evaluation includes regular disciplined analysis of the portfolio covering the risk profile and experience of the existing portfolio, along with growth, concentration and management resources. The allowance for loan losses reflects management’s best estimate of probable loan losses.

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At December 31, 2003, the allowance for loan losses was $47.4 million or 3.27% of total loans outstanding providing coverage for non-performing loans of 359.01%. The coverage of non-performing loans was 124.96% at December 31, 2002, and the allowance for loan losses was $63.3 million or 4.69% of total loans outstanding. The table below summarizes the activity in BSB Bancorp’s allowance for loan losses over the last five years. BSB Bancorp’s improved coverage ratio for non-performing loans is consistent with management’s priority to strategically balance the mix of BSB Bancorp’s loan portfolio and recognize the influence of general economic and business conditions, especially those influencing BSB Bancorp’s regional businesses. Management’s assessment of the adequacy of the allowance for loan losses incorporates an evaluation of BSB Bancorp’s overall loan portfolio, based on both general economic factors and specific factors influencing loans covered by the risk-rating system described above.

	Years Ended December 31,
	2003			2002			2001			2000			1999
	(In thousands)
Allowance at beginning of period	$	63,250		$	58,829		$	59,291		$	29,134		$	25,030
Charge-offs:
Commercial loans		32,527			42,934			16,688			21,058			11,635
Consumer loans		4,089			4,422			6,657			4,272			5,110
Residential real estate loans		94			88			228			151			267
Commercial real estate loans		891			1,112			58			110			381
Total loans charged-off		37,601			48,556			23,631			25,591			17,393
Recoveries:
Commercial loans		10,212			4,578			3,459			836			1,173
Consumer loans		1,472			2,229			1,340			1,030			1,087
Residential real estate loans		—			—			—			—			83
Commercial real estate loans		—			—			146			161			17
Total recoveries		11,684			6,807			4,945			2,027			2,360
Net charge-offs		25,917			41,749			18,686			23,564			15,033
Provision for loan losses		10,088			46,170			18,224			53,721			19,137
Allowance at end of period	$	47,421		$	63,250		$	58,829		$	59,291		$	29,134
Ratio of net charge-offs to:
Average total loans outstanding		1.84	%		3.07	%		1.13	%		1.31	%		0.88	%
Ratio of allowance to:
Non-performing loans		359.01	%		124.96	%		96.96	%		184.49	%		251.00	%
Year-end total loans outstanding		3.27	%		4.69	%		3.96	%		3.22	%		1.67	%

The allowance for loan losses required an aggregate provision for loan losses of $10.1 million in 2003 compared to $46.2 million in 2002. The decreased provision for loan losses in 2003 was primarily due to the decreased net loan charge-offs, and the reduction of non-performing and problematic loans, discussed above. At December 31, 2002, the coverage of non-performing loans was 124.96%, as the allowance for loan losses was $63.3 million or 4.69% of total loans outstanding. At December 31, 2003, the allowance decreased to $47.2 million or 3.27% of total loans outstanding, with the coverage of non-performing loans increasing to 359.01%. The improved coverage ratio for non-performing loans is consistent with management’s priority to strategically balance the mix of BSB Bancorp’s loan portfolio and recognize the influence of general economic and business conditions, especially those influencing BSB Bancorp’s regional businesses.

The following table sets forth the allocation of the allowance for loan losses by loan category for the years indicated. This allocation is based on management’s assessment, as of a given point in time, of the risk characteristics of each of the component parts of the total loan portfolio and is subject to changes as and when the risk factors of each such component part change. The allocation is neither indicative of the specific amounts or

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the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.

	At December 31,
	2003		2002		2001		2000		1999
	(In thousands)
Real estate:
Commercial	$	8,002	$	6,543	$	2,905	$	2,817	$	2,329
Residential		1,097		881		644		272		240
Commercial		26,905		44,502		48,487		48,616		21,446
Consumer		11,417		11,324		6,793		7,586		5,119
	$	47,421	$	63,250	$	58,829	$	59,291	$	29,134

Below are tables showing the amount of the allowance allocated to each loan type as a percentage of the total allowance, as well as the percentage of each loan type relative to the total loan portfolio:

Year	2003		2002		2001		2000		1999
Category percent to total allowance:
Real estate:
Commercial	16.87	%	10.35	%	4.94	%	4.75	%	7.99	%
Residential	2.31		1.39		1.09		0.46		0.82
Commercial	56.74		70.36		82.42		82.00		73.62
Consumer	24.08		17.90		11.55		12.79		17.57
	100.00	%	100.00	%	100.00	%	100.00	%	100.00	%
Loan category percent to total loans:
Real estate:
Commercial	13.76	%	10.91	%	9.08	%	9.10	%	9.96	%
Residential	38.56		24.51		14.88		11.97		10.19
Commercial	22.33		36.53		50.56		55.06		52.68
Consumer	25.35		28.05		25.48		23.87		27.17
	100.00	%	100.00	%	100.00	%	100.00	%	100.00	%

Securities Activities

The objectives of BSB Bancorp’s investment portfolio include: (a) to generate a source of liquidity or absorb liquidity as loan demand fluctuates, (b) establish a medium to implement interest-rate risk management strategies as needed, (c) provide regulatory and operational liquidity to conduct day-to-day business activities of BSB Bancorp, (d) inject high credit quality assets into the balance sheet and (e) generate a favorable return on investments without undue compromise of other objectives.

As of December 31, 2003, BSB Bancorp‘s investment securities portfolio of $643.4 million constituted 29.1% of its total assets. Such securities consist of United States Treasury securities, United States Government sponsored enterprise securities, mortgage-backed securities (including collateralized mortgage obligations (“CMOs”)), obligations of state and local governments and corporate debt and equity securities. Securities available for sale at December 31, 2002 were $538.5 million. BSB Bancorp is a member of the FHLB and is required to hold capital stock of the FHLB. At December 31, 2003, there was $19.5 million of this FHLB capital stock, which is carried at cost. The stock is not transferable and can only be redeemed by the FHLB.

Collateralized mortgage obligations are securities backed by pools of mortgages. The vast majority of CMOs purchased by BSB Bancorp are issued by government-sponsored enterprises such as Freddie Mac and

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Fannie Mae. BSB Bancorp owns and occasionally buys private issuer CMOs. BSB Bancorp purchases mostly senior traunches that have been rated in the top two categories by major rating services such as Moody’s and Standard and Poor’s.

BSB Bancorp also purchases and sells mortgage participation certificates that consist primarily of certificates issued by Fannie Mae and Freddie Mac. At December 31, 2003, BSB Bancorp‘s gross mortgage-backed securities portfolio of $372.1 million included $263.8 million of CMOs and $108.3 million in participation certificates.

The U.S. Government Agency obligations in BSB Bancorp’s investment portfolio consist primarily of securities callable by the issuing agencies with calls ranging out to four years. The call features limit the appreciation potential of the securities as the probability of them being called on the call date rises as interest rates decline.

The following table sets forth the carrying value of BSB Bancorp’s securities portfolio as of December 31 of the years indicated:

	At December 31,
	2003				2002				2001
	Percent Value		Carrying of Total		Percent Value		Carrying of Total		Percent Value		Carrying of Total
	(In thousands)
Available for sale portfolio:
U. S. Government and Agency securities	$	163,451	26.2	%	$	104,453	19.4	%	$	82,129	16.8	%
Municipal obligations		23,773	3.8			11,607	2.2			12,219	2.5
Mortgage-backed securities		108,340	17.4			221,253	41.1			238,375	48.9
Collateralized mortgage obligations		263,835	42.3			175,817	32.6			149,712	30.7
Equity securities		23,183	3.7			23,773	4.4			3,672	0.8
Corporate debt securities		41,250	6.6			1,642	0.3			1,578	0.3
Total securities available for sale	$	623,832	100.0	%	$	538,545	100.0	%	$	487,685	100.0	%
Held to maturity portfolio:
Corporate debt securities		—	—		$	33,179	59.9	%	$	2,874	20.9	%
Municipal obligations		—	—			15,682	28.3			9,291	67.4
Mortgage-backed securities		—	—			6,480	11.7			1,566	11.4
Collateralized mortgage obligations		—	—			32	0.1			43	0.3
Total securities held to maturity		—	—		$	55,373	100.0	%	$	13,774	100.0	%
Total securities portfolio	$	623,832			$	593,918			$	501,459

In March 2003, BSB Bancorp sold its entire holdings of $9.1 million in certain corporate securities based upon an internal analysis concerned with anticipated downgrades associated with deteriorating fundamentals of the issuer. These corporate securities have been classified as held to maturity securities from the time of their initial purchase in 2002. Under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, such sales transactions cast doubt on BSB Bancorp’s intent to hold other held to maturity securities to maturity. As a result, in March 2003, BSB Bancorp reclassified its entire remaining held to maturity portfolio to available for sale. The aggregate amortized cost of the held to maturity portfolio was $44.9 million at the time of the transfer.

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The following table presents the maturities of and the weighted average yield on BSB Bancorp’s aggregate investment portfolio, at amortized cost, at December 31, 2003. At this date, BSB Bancorp had no securities which exceeded 10% of stockholders’ equity. No tax equivalent adjustments have been made.

	In One Year or Less				After One Year through Five Years				After Five Years through Ten Years				After Ten Years				Total
	Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate		Amount		Rate
Available for sale:
U.S. Government and agency securities	$	4,974	6.25	%	$	30,051	4.83	%	$	112,248	4.36	%	$	14,958	4.79	%	$	162,231	0.55	%
Municipal obligations		6,775	2.76	%		8,534	4.64	%		2,603	4.82	%		5,078	4.84	%		22,990	4.15	%
Mortgage-backed securities		495	6.92	%		5,909	4.29	%		24,495	5.07	%		74,756	5.64	%		105,655	5.44	%
Collateralized mortgage obligations		—	—			133	5.61	%		17,944	5.66	%		245,001	4.50	%		263,078	4.58	%
Equity securities		—	—			—	—			—	—			23,592	4.59	%		23,592	4.59	%
Corporate debt securities		499	6.25	%		1,002	7.25	%		—	—			39,688	4.99	%		41,189	5.06	%
Total available for sale	$	12,743	4.42	%	$	45,629	4.78	%	$	157,290	4.63	%	$	403,073	4.78	%	$	618,735	0.74	%

In the table above, equity securities, which normally have no fixed term to maturity, have been included in the “After Ten Years” category for this presentation. Mortgage-backed securities and collateralized mortgage obligations are listed based on the contractual maturity. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without penalties.

Sources of Funds

Deposits. At December 31, 2003, BSB Bancorp had $1.6 billion in total deposits (including escrow funds). Deposits are attracted principally from within BSB Bancorp‘s primary market area through the offering of a broad selection of deposit instruments, including commercial savings and demand deposits, negotiable order of withdrawal (“NOW”) accounts, money market deposit accounts, statement savings accounts, time deposits and retirement accounts for both individuals and small businesses.

The following table shows the distribution of the deposit accounts in BSB Bancorp by type of deposits as of December 31 for the years indicated:

	2003						2002						2001
	Weighted Average						Weighted Average						Weighted Average
	Amount		Percent		Rate		Amount		Percent		Rate		Amount		Percent		Rate
	(In thousands)
Savings	$	181,720	11.44	%	0.60	%	$	175,637	12.17	%	0.83	%	$	166,275	11.11	%	1.75	%
NOW		128,400	8.08		0.21			131,535	9.12		0.25			123,985	8.28		0.85
Money market		429,376	27.02		1.17			339,191	23.51		1.08			350,119	23.39		1.54
Non-interest-bearing demand		156,678	9.86		—			154,758	10.73		—			159,096	10.63		—
Time deposits		692,912	43.60		2.65			641,635	44.47		2.43			697,462	46.59		3.51
Total deposits at end of period	$	1,589,086	100.00	%	1.56	%	$	1,442,756	100.00	%	1.46	%	$	1,496,937	100.00	%	2.29	%

BSB Bancorp attempts to manage the flow of deposits by pricing its accounts to remain generally competitive with other financial institutions in its market area. BSB Bancorp has used its pricing policies to moderate deposit inflow to control its cost of funds in view, among other considerations, of its capital adequacy requirements. Management believes that this action does not have an adverse effect on its ability to acquire deposits.

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The following table presents, by various interest rate categories, the amounts of time deposit accounts at December 31, 2002 and 2003, respectively, which mature during the periods indicated:

					Amounts at December 31, 2003
					Maturing Within
	December 31,				One		Two		Three
	2002		2003		Year		Years		Years		Thereafter
	(In thousands)
Time deposits:
0% to 1.99%	$	106,545	$	243,298	$	223,189	$	19,633	$	476	$	—
2% to 3.99%		369,324		372,222		119,968		103,745		91,004		57,505
4% to 5.99%		147,886		76,741		23,212		12,171		24,874		16,484
6% to 7.99%		17,297		600		446		144		—		10
8% to 9.99%		583		51		43		—		—		8
Total time deposits	$	641,635	$	692,912	$	366,858	$	135,693	$	116,354	$	74,007

The following table presents, by various interest rate categories, the amounts of time deposit accounts of $100,000 or more at December 31, 2003, which mature during the periods indicated:

			Maturing Within
	Total		Three Months		Over Three to Six Months		Twelve Months		Thereafter
(Dollars in thousands)	(In thousands)
0% to 2.99%	$	173,521	$	25,508	$	18,965	$	30,952	$	98,096
3% to 3.99%		106,272		12,578		9,171		1,471		83,052
4% to 5.99%		13,381		752		129		1,968		10,532
Total	$	293,174	$	38,838	$	28,265	$	34,391	$	191,680

Borrowings. BSB Bancorp has available a number of sources for borrowing funds. BSB Bancorp’s principal borrowings are advances from the FHLB and securities sold under repurchase agreements.

Trust Services

BSB Bancorp provides full trust services to individuals, corporations and non-profit organizations including executor of estates, trustee under wills, living trust agreements, custodian services, investment management services and acts as trustee of qualified retirement plans. At December 31, 2003, BSB Bancorp managed $288.5 million in trust assets.

Competition

BSB Bancorp faces significant competition in attracting deposits and loans. Its most direct competition for deposits has historically come from commercial banks, thrift institutions and credit unions located in its market area. BSB Bancorp also faces additional significant competition for investors’ funds from short-term money market mutual funds and issuers of corporate and government securities. BSB Bancorp competes for deposits principally by offering depositors a wide variety of deposit programs, convenient branch locations and banking hours, tax-deferred retirement programs and other services. BSB Bancorp also utilizes newspaper, radio, television and other media to advertise its deposit and loan services. BSB Bancorp does not rely upon any individual group or entity for a material portion of its deposits.

BSB Bancorp’s competition for loans comes principally from thrift institutions, credit unions, mortgage banking companies and commercial banks. BSB Bancorp competes for loan originations primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides consumers and commercial borrowers, real estate brokers, automobile dealers, builders and regional correspondent mortgage originators. Factors which affect competition include the general availability of lendable funds and credit, general and local economic conditions, current interest rate levels and volatility in the lending markets.

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Personnel

As of December 31, 2003, BSB Bancorp, on a consolidated basis, had 483 full-time and 114 part-time employees. The employees are not represented by any collective bargaining unit, and BSB Bancorp considers its relationship with its employees to be good.

Properties

BSB Bancorp does not own or lease any property, other than that owned or leased by BSB Bank & Trust Company and its subsidiaries. BSB Bank & Trust conducts its business from its executive office and currently 20 full-service offices located in Broome, Chenango, Onondaga and Tioga Counties of upstate New York. The following table sets forth certain information relating to each of BSB Bank & Trust’s offices as of December 31, 2003:

Office Location	Owned or Leased	Lease Expiration Including Options		Net Book Value(1)
				(In thousands)
Main Office	58-68 Exchange St., Binghamton	Owned	N/A	$	1,090
Annex	58 Exchange St., Binghamton	Owned	N/A		936
99 Hawley St.	99 Hawley St., Binghamton	Owned	N/A		303
92 Hawley St.	92 Hawley St., Binghamton	Owned	N/A		1,275
Endwell Office	540 Hooper Rd., Endwell	Owned	N/A		257
Vestal Plaza Office	4700 Vestal Parkway East, Vestal	Leased	2011		117
Tioga Office	1054 State Route 17C, Owego	Leased	2013		43
Oakdale Mall Office	223 Reynolds Rd., Johnson City	Leased	2016		12
Norwich Office	118 State Highway 320, Norwich	Leased	2015		36
Northgate Plaza Office	1250 Front St., Binghamton	Leased	2017		46
West Side Office	273 Main St., Binghamton	Leased	2012		46
Endicott Office	43 Washington Ave., Endicott	Owned	N/A		857
East Side Office	156 Robinson St., Binghamton	Leased	2021		383
Mortgage Office	1923 Vestal Pkwy, East Vestal	Owned	N/A		658
Skaneateles Office	33 E. Genesee St., Skaneateles	Owned	N/A		432
Downtown Syracuse	431 E. Fayette St., Syracuse	Owned	N/A		2,986
Rano Blvd. Office	100 Rano Blvd., Vestal	Leased	2019		147
Cicero Office	5791 East Seymour St., Cicero	Owned	N/A		517
Camillus Office	100 Kasson Rd., Camillus	Leased	2010		35
Shop City Office	426 Grant Blvd., Syracuse	Leased	2009		50
Airport Plaza P&C Office	3803 Brewton Rd., N. Syracuse	Leased	2009		90
Penn Can P&C Office	7785 Frontage Rd., Cicero	Leased	2009		96
North Medical Office	5100 West Taft Rd., Liverpool	Leased	2017		75
Fayetteville Office	7320 Genesee St. E. Syracuse	Owned	N/A		842

(1) Net book value of leasehold improvements is included.

BSB Bank & Trust Company also operates 55 ATMs (MachineTeller^®), an extensive system within the market area, that provide 24-hour banking services. BSB Bank & Trust Company operates 12 proprietary bank service locations (StoreTeller^®) situated in a large area supermarket chain. BSB Bank & Trust Company has issued approximately 100,000 plastic cards that allow depositors to use the ATMs and in-store facilities.

Legal Proceedings

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

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REGULATION

General

SBU Bank is examined and supervised by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. SBU Bank also is a member of and owns stock in the Federal Home Loan Bank of New York, which is one of the twelve regional banks in the Federal Home Loan Bank System.

New Partners Trust Financial Group will be regulated by the Office of Thrift Supervision as a savings and loan holding company. It will be required to file reports with, and otherwise comply with the rules and regulations of, the Office of Thrift Supervision.

Any change in the laws, regulations or policies applicable to financial institutions and their holding companies could have a material adverse impact on new Partners Trust Financial Group and SBU Bank and their operations. This summary of laws and regulations does not purport to be a complete explanation of all applicable laws and regulations and is qualified in its entirety by reference to the actual laws and regulations.

Federal Banking Regulation

Business Activities. A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the Office of Thrift Supervision. Under these laws and regulations, SBU Bank may invest in mortgage loans secured by residential and commercial real estate; commercial and consumer loans; certain types of debt securities; and other specified assets, subject to specified limits on certain investments. SBU Bank may also establish subsidiaries that may engage in activities not otherwise permissible, including certain real estate activities and securities and insurance brokerage.

Loans to One Borrower. A Federal savings bank generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus on an unsecured basis. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which is defined to include certain securities and bullion, but generally does not include real estate.

Qualified Thrift Lender Test. As a federal savings bank, SBU Bank is required to satisfy a qualified thrift lender, or “QTL” test. Under the QTL test, SBU Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12 month period. “Portfolio assets” generally means total assets less the sum of:

• specified liquid assets up to 20% of total assets;

• goodwill and other intangible assets; and

• the value of property used in the conduct of SBU Bank’s business.

“Qualified thrift investments” includes various types of loans made for residential and housing purposes, investments related to such purposes, including certain mortgage-backed and related securities, and loans for personal, family, household and certain other purposes up to a limit of 20% of our portfolio assets. Recent legislation broadened the scope of “qualified thrift investments” to include 100% of an institution’s credit card loans, education loans and small business loans. SBU Bank may also satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended.

A savings bank that fails the qualified thrift lender test must either convert to a bank charter or operate under specified restrictions. As of December 31, 2003, SBU Bank satisfied the qualified thrift lender test. Although we expect to continue to satisfy the qualified thrift lender test following the acquisition of BSB Bancorp, we cannot assure you that we will continue to do so.

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Capital Distributions. Office of Thrift Supervision regulations govern capital distributions by a federal savings bank, which include cash dividends, stock repurchases and other transactions charged to the capital account. A savings institution must file an application for approval of a capital distribution if:

• the total capital distributions for the applicable calendar year exceed the sum of the institution’s net income for that year to date plus the institution’s retained net income for the preceding two years;

• the institution would not be at least adequately capitalized following the distribution;

• the distribution would violate any applicable statute, regulation, agreement or Office of Thrift Supervision-imposed condition; or

• the institution is not eligible for expedited treatment of its filings.

SBU Bank is currently in compliance with these requirements. As of December 31, 2003, approximately $23.2 million was available at SBU Bank after the payment of all declared dividends to pay future dividends to Partners Trust Financial Group without prior Office of Thrift Supervision approval.

Even if an application is not otherwise required, every savings institution that is a subsidiary of a holding company must still file a notice with the Office of Thrift Supervision at least 30 days before the board of directors declares a dividend or approves a capital distribution.

The Office of Thrift Supervision may disapprove a notice or application if:

• the institution would be undercapitalized following the distribution;

• the proposed capital distribution raises safety and soundness concerns; or

• the capital distribution would violate a prohibition contained in any statute, regulation or agreement.

Further, no dividend may be paid that would reduce SBU Bank’s capital below the liquidation account to be established in the conversion.

Liquidity. A federal savings bank is required to maintain sufficient amount of liquid assets to ensure its safe and sound operation.

Community Reinvestment Act and Fair Lending Laws. All savings institutions have a responsibility under the Community Reinvestment Act and related regulations of the Office of Thrift Supervision to help meet the credit needs of their communities, including low- and moderate-income neighborhoods. In connection with its examination of a federal savings bank, the Office of Thrift Supervision is required to assess the institution’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. An institution’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in regulatory restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of Thrift Supervision, as well as other federal regulatory agencies and the Department of Justice. SBU Bank received a satisfactory Community Reinvestment Act rating in its most recent federal examination, which was conducted by the Office of Thrift Supervision.

Transactions with Related Parties. A federal saving bank’s authority to engage in transactions with its “affiliates” is limited by the Office of Thrift Supervision regulations and by Sections 23A and 23B of the Federal Reserve Act (the “FRA”) as implemented by the Federal Reserve Board’s Regulation W. The term “affiliates” for these purposes generally means any company that controls or is under common control with an institution. Partners Trust Financial Group and its non-savings institution subsidiaries would be affiliates of SBU Bank. In general, transactions with affiliates must be on terms that are as favorable to the institution as comparable

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transactions with non-affiliates. In addition, certain types of these transactions are restricted to an aggregate percentage of the institution’s capital. Collateral in specified amounts must usually be provided by affiliates in order to receive loans from the institution. In addition, the Office of Thrift Supervision regulations prohibit a savings bank from lending to any of its affiliates that is engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Under the Gramm-Leach-Bliley Act, all financial institutions, including Partners Trust Financial Group and SBU Bank, are required to adopt privacy policies, restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer’s request, and establish procedures and practices to protect customer data from unauthorized access.

SBU Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and Regulation O of the Federal Reserve Board. Among other things, these provisions require that extensions of credit to insiders (a) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features and (b) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of SBU Bank’s capital. In addition, extensions of credit in excess of certain limits must be approved by SBU Bank’s board of directors.

Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over federal savings institutions and has the authority to bring enforcement action against all “institution-related parties,” including stockholders, and attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers or directors of the institutions, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The Federal Deposit Insurance Corporation also has the authority to recommend to the Director of the Office of Thrift Supervision that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take action under specified circumstances.

Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe for all insured depository institutions standards relating to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted Interagency Guidelines Prescribing Standards for Safety and Soundness to implement the safety and soundness standards required under Federal law. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems; internal audit systems; credit underwriting; loan documentation; interest rate risk exposure; asset growth; and compensation, fees and benefits. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to submit a compliance plan.

Capital Requirements. Office of Thrift Supervision regulations require savings institutions to meet three minimum capital standards:

1) a 1.5% tangible capital ratio;

2) a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS rating system); and

3) an 8% risk-based capital ratio.

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The prompt corrective action standards discussed below in effect establish a minimum 2% tangible capital standard. Office of Thrift Supervision regulations require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.

The risk-based capital standard for savings institutions requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet items, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

The Office of Thrift Supervision has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of particular circumstances or the particular risk profile of the institution.

At December 31, 2003, SBU Bank’s capital exceeded all applicable requirements.

Prompt Corrective Action Regulations. Under the prompt corrective action regulations, the Office of Thrift Supervision is required to take certain, and is authorized to take other, supervisory actions against undercapitalized savings associations. For this purpose, a savings association is placed in one of the following five categories based on the association’s capital:

• well capitalized (at least: 5% leverage capital, 6% tier 1 risk-based capital, and 10% total risk-based capital);

• adequately capitalized (at least: 4% leverage capital, 4% tier 1 risk-based capital, and 8% total risk-based capital);

• undercapitalized (less than: 8% total risk-based capital, 4% tier 1 risk-based capital, or 3% leverage capital);

• significantly undercapitalized (less than: 6% total risk-based capital, 3% tier 1 risk-based capital, or 3% leverage capital); and

• critically undercapitalized (less than 2% tangible capital).

Generally, the banking regulator is required to appoint a receiver or conservator for an institution that is “critically undercapitalized.” The regulation also provides that a capital restoration plan, compliance with which must be guaranteed by any company controlling the institution, must be filed with the Office of Thrift Supervision within 45 days of the date an institution receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” In addition, numerous mandatory supervisory actions become immediately applicable to the institution, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions, depending on the category of undercapitalization. The Office of Thrift Supervision could also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

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At December 31, 2003, SBU Bank met the criteria for being considered “well-capitalized.”

Insurance of Deposit Accounts. Deposit accounts in SBU Bank are insured by the Bank Insurance Fund of the FDIC, generally up to a maximum of $100,000 per separately insured depositor. SBU Bank’s deposits are therefore subject to FDIC deposit insurance assessments.

The FDIC has adopted a risk-based system for determining deposit insurance assessments. Under this system, all insured institutions are placed into one of nine categories, and are assessed insurance premiums, currently ranging from 0% to 0.27% of insured deposits, based upon their level of capital and supervisory evaluation. The FDIC is authorized to raise the assessment rates as necessary to maintain the required ratio of reserves to insured deposits of 1.25%. As of December 31, 2003, SBU Bank was not subject to assessment.

In addition, all FDIC insured institutions are required to pay assessments to the FDIC to fund interest payment on bonds issued by the Financing Corporation, an agency of the federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. These assessments will continue until the Financing Corporation bonds mature in 2017. The rate of such payments is subject to adjustment and approximated 0.0161% of insured deposits in 2003.

Prohibitions Against Tying Arrangements. Federal savings banks are subject to certain prohibitions on “tying arrangements.” A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Federal Home Loan Bank System. SBU Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions. As a member of the Federal Home Loan Bank of New York, we are required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its borrowings from the Federal Home Loan Bank, whichever is greater. As of December 31, 2003, SBU Bank was in compliance with this requirement. The Federal Home Loan Banks are required to provide funds for the past resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members.

USA PATRIOT Act. Under Title III of the USA PATRIOT Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions, including Partners Trust Financial Group and SBU Bank, are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act, which applies to SBU Bank.

Federal Reserve System

The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. At December 31, 2003, SBU Bank was in compliance with these reserve requirements. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy liquidity requirements imposed by the Office of Thrift Supervision.

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Holding Company Regulation

General. Partners Trust Financial Group is a savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such, Partners Trust Financial Group is registered with the Office of Thrift Supervision and is subject to Office of Thrift Supervision regulations, examinations, supervision and reporting requirements. In addition, the Office of Thrift Supervision has enforcement authority over Partners Trust Financial Group and any non-savings institution subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.

Permitted Activities. Pursuant to Section 10(o) of the Home Owners’ Loan Act and Office of Thrift Supervision regulations and policy, a mutual holding company and a federally chartered mid-tier holding company such as Partners Trust Financial Group, a federal corporation, may engage in the following activities:

• investing in the stock of a savings association;

• acquiring a mutual association through the merger of such association into a savings association subsidiary of such holding company or an interim savings association subsidiary of such holding company;

• merging with or acquiring another holding company, one of whose subsidiaries is a savings association;

• investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices;

• furnishing or performing management services for a savings association subsidiary of such company;

• holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company;

• holding or managing properties used or occupied by a savings association subsidiary of such company;

• acting as trustee under deeds of trust;

• any other activity (a) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, as amended (“Bank Holding Company Act”), unless the Director of the Office of Thrift Supervision, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (b) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987;

• purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Director; and

• any activity permissible for financial holding companies under section 4(k) of the Bank Holding Company Act of 1956, as amended.

Permissible activities that are deemed to be financial in nature or incidental thereto under section 4(k) of the Bank Holding Company Act include:

• lending, exchanging, transferring, investing for others or safeguarding money or securities;

• insurance activities or providing and issuing annuities, and acting as principal, agent or broker;

• financial, investment or economic advisory services;

• issuing or selling instruments representing interests in pools of assets that a bank is permitted to hold directly;

• underwriting, dealing in, or making a market in securities;

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• activities previously determined by the Federal Reserve Board to be closely related to banking;

• activities that bank holding companies are permitted to engage in outside of the U.S.;

• merchant banking activities; and

• portfolio investments made by an insurance company.

Following the conversion, new Partners Trust Financial Group will not be limited to the mutual holding company activities, but will continue be limited to those permissible activities that are deemed to be financial in nature or incidental thereto under section 4(k) of the Bank Holding Company Act and those activities authorized by law for multiple savings and loan holding companies.

The Home Owners’ Loan Act prohibits a savings and loan holding company, including new Partners Trust Financial Group, directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company thereof, without prior written approval of the Office of Thrift Supervision. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary savings institution, a nonsubsidiary holding company, or a nonsubsidiary company engaged in activities other than those permitted by the Home Owners’ Loan Act; or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors.

The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions.

Federal Securities Laws

Upon completion of the offering, new Partners Trust Financial Group common stock will be registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. New Partners Trust Financial Group will then be subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The registration under the Securities Act of 1933 of shares of the common stock in the offering does not cover the resale of the shares. Shares of the common stock purchased by persons who are not affiliates of Partners Trust Financial Group may be resold without registration. Shares purchased by an affiliate of Partners Trust Financial Group will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If Partners Trust Financial Group meets the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of Partners Trust Financial Group who complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of Partners Trust Financial Group, or the average weekly volume of trading in the shares during the preceding four calendar weeks. Provision may be made in the future by Partners Trust Financial Group to permit affiliates to have their shares registered for sale under the Securities Act of 1933.

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

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

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TAXATION

Federal Taxation

General. We are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to us.

Method of Accounting. For federal income tax purposes, we file a calendar year consolidated federal income tax return, reporting income and expenses using the accrual method of accounting.

Bad Debt Reserve. The Small Business Job Protection Act of 1996 (the “Job Protection Act”), repealed the “reserve method” of accounting for bad debts by most thrift institutions effective for tax years beginning after 1995. Larger thrift institutions such as SBU Bank are required to use the “specific charge-off method”. In addition, the Job Protection Act required the recapture of the excess of tax bad debt reserves over those established as of December 31, 1987.

Taxable Distributions and Recapture. Prior to the Job Protection Act, bad debt reserves created prior to January 1, 1988 were subject to recapture into taxable income should SBU Bank fail to meet certain thrift asset and definitional tests. The Job Protection Act eliminated these thrift related recapture rules; however, pre-1988 reserves remain subject to recapture should SBU Bank make certain non-dividend distributions or cease to maintain a bank charter. At December 31, 2003, SBU Bank’s total federal pre-1988 reserve was approximately $5.1 million.

Tax Return Examination. Our federal income tax returns have been examined and audited or closed without audit by the IRS for tax years through 1999.

Alternative Minimum Tax. The Internal Revenue Code of 1986 imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”) including, depreciation deductions in excess of allowable AMT amounts and 75% of the excess of adjusted current earnings (“ACE”) over AMTI. ACE equals AMTI adjusted for certain items, primarily tax-exempt interest and the increase in cash surrender value of life insurance investments. Payments of AMT may be used as credits against regular tax liabilities in future years. We have not been subject to the alternative minimum tax.

Net Operating Losses. A financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding twenty taxable years. At December 31, 2003, we had no net operating loss carryforwards for federal income tax purposes.

State Taxation

New York State Taxation. Partners Trust Financial Group and certain subsidiaries will report income on a combined calendar year basis to New York State. New York State franchise tax on banking corporations is imposed in an amount equal to the greater of (a) 7.5% of “entire net income” allocable to New York State, (b) 3% of “alternative entire net income” allocable to New York State, (c) 0.01% of the average value of assets allocable to New York State, or (d) nominal minimum tax. Entire net income is based on federal taxable income with certain inclusions, exclusions, and adjustments. Alternative entire net income is based on entire net income with certain modifications. Two of our subsidiaries are Article 9-A taxpayers and file New York State Corporation Franchise Tax Returns. The Article 9-A tax is imposed in an amount equal to the greater of (a) 7.5% of entire net income allocable to New York State, (b) 0.178% of allocated capital, (c) 2.5% of alternative minimum taxable income, or (d) nominal minimum tax.

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New York State Bad Debt Reserves. New York State enacted legislation in 1996, which among other things, decoupled the federal and New York State laws regarding thrift bad debt deductions and permits the continued use of the bad debt provisions that applied under federal law prior to the enactment of the 1996 Act. Provided SBU Bank continues to satisfy certain definitional tests and other conditions, for New York State income tax purposes, it is permitted to continue to use a reserve method for bad debt deductions. The annual addition to the state reserve may be computed using a specific formula based on an institution’s loss history or a statutory percentage equal to 32% of its New York State taxable income.

The acquisition of BSB Bancorp will cause our asset mix to change. While immediately following the acquisition we expect the combined bank to continue to qualify as a thrift for tax purposes, in the future we may fail to qualify, which would result in the recapture of the New York State base-year tax bad debt reserves, and a charge to tax expense of approximately $1.1 million.

Delaware State Taxation. As a Delaware business corporation, we will be required to file annual returns and pay annual fees and franchise taxes to the State of Delaware.

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MANAGEMENT OF NEW PARTNERS TRUST FINANCIAL GROUP

Shared Management Structure

The Directors of Partners Trust Financial Group are the same persons who are the Directors of SBU Bank. The Directors of new Partners Trust Financial Group will be the same persons who were the directors of Partners Trust Financial Group, with the addition of those Directors appointed in connection with the acquisition of BSB Bancorp. In addition, each of the executive officers of Partners Trust Financial Group is an executive officer of SBU Bank. Although there are no present plans to do so, both new Partners Trust Financial Group and Partners Trust Bank may choose to appoint additional or different persons as directors in the future. We expect that Partners Trust Financial Group and Partners Trust Bank will continue to have common executive officers until there is a business reason to establish separate management structures.

Directors of Partners Trust Financial Group

The board of directors of Partners Trust Financial Group currently consists of 10 members and will consist of 13 members immediately following the conversion and acquisition of BSB Bancorp. Robert Allen, William Craine and David Niermeyer will be appointed to the board of directors immediately following completion of the BSB Bancorp acquisition, with Mr. Craine serving as Chairman of the board of directors. Upon the conversion and acquisition of BSB Bancorp, there will be a total of twelve independent directors. Directors serve staggered terms of up to three years so that approximately one-third of the directors are elected at each annual meeting of stockholders. John Stetson is expected to retire from the board of directors upon the completion of his term in 2004.

The following table states our directors’ names, their ages as of December 31, 2003, the years when they began serving as directors, and the year when their terms expire:

Directors	Age(1)	Position	Director Since	Expiration of Term
John A. Zawadzki	55	President, Chief Executive Officer and Director	2000	2005
Robert W. Allen(2)(3)	60	Director	2004	2007
William C. Craine(2)(3)	55	Chairman of the Board of Directors, Director	2004	2006
Elizabeth B. Dugan(2)	64	Director	1988	2005
Richard R. Griffith(2)	56	Director	2001	2004
Gordon M. Hayes, Jr.(2)	55	Director	1990	2006
Nicholas O. Matt(2)	58	Director	2001	2004
Dr. Marybeth K. McCall(2)	51	Director	1997	2006
David A. Niermeyer(2)(3)	62	Director	2004	2007
William L. Schrauth(2)	68	Director	1975	2006
John B. Stetson(2)	75	Director	1968	2004
Dwight E. Vicks, Jr.(2)	70	Director	1977	2005
John R. Zapisek(2)	65	Director	1987	2005

(1) As of December 31, 2003.

(2) Independent director.

(3) To be appointed immediately following the acquisition of BSB Bancorp.

The Business Background of Our Directors. The business experience for the past five years of each of our current and proposed directors is as follows:

John A. Zawadzki. Mr. Zawadzki has been the President and Chief Executive Officer of SBU Bank since August 2000 and the President and Chief Executive Officer of Partners Trust Financial Group since April 2002. Prior to that time, he served as Regional President of Fleet National Bank. Mr. Zawadzki has over 30 years of commercial banking experience in the Upstate New York marketplace.

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Robert W. Allen. Mr. Allen has been the General Partner, Allen Family Limited Partnership since April 1999 and the Chief Executive Officer, Southern Belle Dairy Co., LLC since February 2002. He served as President and Chief Executive Officer, Tuscan/Lehigh Dairies, L.P., Lansdale, Pennsylvania, from May 1997 to March 1999.

William C. Craine. Mr. Craine has served as Chairman of BSB Bancorp and BSB Bank & Trust since February 2000. He has served as Chief Executive Officer of Granite Capital Holdings, Inc. since January 2003 and Chairman since November 1998.

Elizabeth B. Dugan. Ms. Dugan is retired. She previously served as Acting Executive Director and Associate Executive Director of the United Way of the Greater Utica Area, Inc.

Richard R. Griffith. Mr. Griffith is President of Sturges Manufacturing Co. Inc., a manufacturer of webbing straps and related assemblies located in Utica, New York. Mr. Griffith also serves on the board of Commercial Travelers Insurance Company.

Gordon M. Hayes, Jr. Mr. Hayes has served as the Associate Director of Planned Giving for Colgate University, located in Hamilton, New York since November 2001. Prior to that time, he served as Executive Director of the Community Foundation of Oneida and Herkimer Counties.

Nicholas O. Matt. Mr. Matt is President of the MATT Brewing Co., brewers of Saranac beer and soft drinks, located in Utica, New York. He serves on a number of local community and business boards, including the board of Utica National Insurance Group.

Marybeth K. McCall. Dr. McCall has served as Senior Vice President of Crouse Hospital since October 2001. Prior to that time, she served as Senior Vice President and Medical Director of Faxton-St. Lukes’ Healthcare.

David A. Niermeyer. Mr. Niermeyer has been President and Chief Executive Officer of Stakmore Co., Inc., Owego, New York, since April 1980.

William L. Schrauth. Mr. Schrauth served as President and Chief Executive Officer of SBU Bank until August 2000.

John B. Stetson. Mr. Stetson is a consultant, and serves on a number of local community and business boards. He was president of Stetson-Harza, an architectural and engineering firm, until his retirement in 1993.

Dwight E. Vicks, Jr. Mr. Vicks is Chairman of Vicks Lithograph and Printing Corporation, and is actively involved in the management of this Utica, New York-based company. He also serves on a number of business boards, including as Chairman of the board of directors of Galaxy Funds, a mutual fund family for Fleet/Boston Financial.

John R. Zapisek. Mr. Zapisek served as Executive Vice President, Chief Financial Officer and Treasurer and director of Utica Mutual Insurance Company, Graphic Arts Mutual Insurance Company, and Republic - Franklin Insurance Company, until his retirement in 2001. His is still a director of these companies.

Meetings of the Board of Directors and Committees

Our board of directors meets on a monthly basis and may hold additional special meetings. During 2003, the board of directors held 12 regular meetings and two special meetings.

The board of directors maintains an executive committee, audit committee, compensation committee and governance committee.

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The members of the executive committee rotate bi-monthly, with Mr. Zawadzki serving as a regular member and Chair. The executive committee meets when the board is not in session to exercise general control and supervision in all matters pertaining to Partners Trust Financial Group, subject at all times to the direction of the board of directors. The executive committee met six times during the year ended December 31, 2003.

The audit committee consists of Directors Griffith, Hayes, Matt, Stetson and Zapisek, with Director Hayes serving as Chair. The committee reviews the annual audit prepared by the independent accountants, recommends the appointment of accountants and reviews the internal audit function and internal accounting controls. The audit committee met five times during the year ended December 31, 2003. Mr. Zapisek has been designated the audit committee financial expert.

The compensation committee consists of Directors Dugan, Matt, McCall, Schrauth and Vicks, with Director McCall serving as Chair. The committee provides advice and recommendations to the board of directors in the areas of employee salaries and benefit programs. The compensation committee met four times during the year ended December 31, 2003.

The governance committee consists of Directors Dugan, Griffith, Stetson, Vicks and Zapisek, with Director Zapisek serving as Chair. This committee is responsible for the continuing review of the governance structure of the board of directors. The committee advises and makes recommendations to the board of directors on all matters concerning directorship practices. The governance committee also serves as the nominating committee of the board of directors. The governance committee met four times during the year ended December 31, 2003.

All the current members of the audit committee, the compensation committee and the governance committee are independent directors as defined by the regulations of the Nasdaq National Market. Additionally, there were no compensation committee “interlocks” during the fiscal year ending December 31, 2003, which generally means that no executive officer of Partners Trust Financial Group served as a director or member of the compensation committee of another entity, one of whose executive officers served as a director of Partners Trust Financial Group or member of the compensation committee.

Director Compensation

We pay each non-employee director a quarterly retainer of $2,250. A fee of $1,000 is provided to each non-employee director for attendance at a board meeting. Non-employee directors receive a fee of $400 for each committee meeting attended. Employee directors do not receive any additional compensation for serving on the board of directors.

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

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Executive Officers of Partners Trust Financial Group

The following individuals are the executive officers of Partners Trust Financial Group and hold the offices set forth below opposite their names. The biographical information for each executive officer who is not a Director is also set forth below.

Executive Officer	Age(1)	Position
John A. Zawadzki	55	President, Chief Executive Officer and Director
Steven A. Covert	41	Executive Vice President, Chief Financial Officer and Corporate Secretary
Richard F. Callahan	51	Assistant Corporate Secretary and Senior Vice President, Sales and Marketing of SBU Bank
Daniel J. O’Toole	40	Senior Vice President and Chief Credit Officer of SBU Bank

(1) As of December 31, 2003.

The executive officers of Partners Trust Financial Group are elected annually and hold office until their respective successors have been elected or until death, resignation, retirement or removal by the board of directors.

The business experience for the past five years of each of the executive officers of Partners Trust Financial Group who is not a Director is set forth below:

Steven A. Covert. Mr. Covert is Executive Vice President, Chief Financial Officer and Corporate Secretary and has served as Executive Vice President and Chief Financial Officer of SBU Bank since December 2000. He also serves as Corporate Secretary. He was Executive Vice President and Chief Financial Officer of CNY Financial Corp. and its subsidiary, Cortland Savings Bank, from June 1998 to July 2000.

Richard F. Callahan. Mr. Callahan is Assistant Corporate Secretary, and has served as Senior Vice President, Sales and Marketing of SBU Bank since January 2001. Prior to that time, he served as District Manager and Senior Vice President of Fleet Bank in Utica, New York.

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

Our Executive Officers after the Merger

The following individuals will be our executive officers after the merger with BSB Bancorp and will hold the offices set forth below opposite their names.

Executive Officer	Age(1)	Position
John A. Zawadzki	55	President, Chief Executive Officer and Director
Steven A. Covert	41	Executive Vice President and Chief Financial Officer
Howard W. Sharp	57	Executive Vice President
Richard F. Callahan	51	Senior Vice President-Retail Banking and Assistant Corporate Secretary
William M. Le Beau	55	Senior Vice President, Risk Management Officer and Corporate Secretary
Daniel J. O’Toole	40	Senior Vice President and Chief Credit Officer

(1) As of December 31, 2003.

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Howard W. Sharp has been a director of BSB Bancorp since November 2000. Mr. Sharp has been the President and Chief Executive Officer of BSB Bancorp and BSB Bank & Trust since November 2000. Prior to that, he was the Regional President, Syracuse, NY Region of M&T Bank from April 1998 to November 2000. From November 1989 to April 1998, he held various executive positions at OnBancorp, Inc. and OnBank & Trust Co., including Senior Executive Vice President and Chief Operating Officer.

William M. Le Beau has been with BSB Bank & Trust and BSB Bancorp since December 2000. He has been the Executive Vice President, Risk Management since February 2002. From December 2000 until February 2002, he was Senior Vice President, Risk Management for BSB Bank & Trust and BSB Bancorp. From 1998 to December 2000, he was Vice President, Community Reinvestment, of M&T Bank.

Executive Officer Compensation

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

		Annual Compensation(1)					Long Term Compensation
Name and Position	Year	Salary			Bonus		Restricted Stock Awards(2)	Options	All Other Compensation(3)
John A. Zawadzki, President and Chief Executive Officer	2003	$	296,210		$	150,000	—	—	$	67,429
	2002	$	278,000		$	110,000	$847,682	125,000	$	67,646
	2001	$	270,000		$	185,000	—	—	$	62,967
Steven A. Covert, Executive Vice President, Chief Financial Officer and Corporate Secretary	2003	$	167,923		$	55,000	—	—	$	6,329
	2002	$	158,000		$	92,028	$678,162	100,000	$	6,518
	2001	$	150,000		$	50,000	—	—	$	525
Richard F. Callahan, Assistant	2003	$	128,442		$	30,000	—	—	$	4,573
Corporate Secretary and Senior Vice President, Sales and Markting of SBU Bank	2002	$	121,000		$	38,028	$339,068	40,000	$	4,426
	2001	$	115,000		$	20,873	—	—	$	473
Daniel J. O’Toole, Senior Vice	2003	$	140,000		$	20,873	—	—	$	720
President and Chief Credit Officer of SBU Bank	2002	$	32,308	(4)	$	25,000	$169,534	40,000		—

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

(2) As of December 31, 2003, the executive officers held the following shares of restricted stock: Mr. Zawadzki, 51,181 shares with a value of $1,740,154; Mr. Covert, 40,946 shares with a value of $1,392,164; Mr. Callahan, 25,590 shares with a value of $870,060; and Mr. O’Toole, 10,236 shares with a value of $348,024. The values are based on the closing price of Partners Trust Financial Group’s common stock on the Nasdaq National Market of $34.00 on December 31, 2003. The 2002 awards are calculated based on the closing market price of the Company’s common stock on the Nasdaq National Market of $13.25 on October 10, 2002, the grant date. The total number of shares of restricted stock awarded to Messrs. Zawadzki, Covert, Callahan and O’Toole in fiscal 2002 was 63,976 shares, 51,182 shares, 25,590 shares, and 12,795 shares, respectively. This restricted stock vests in five annual installments beginning on October 10, 2003. Dividends are being paid on all restricted stock grants.

(3) The amounts shown represent (a) contributions made by SBU Bank under SBU Bank’s 401(k) plan ($5,598 in 2003, $5,931 in 2002, and $2,337 in 2001 for Mr. Zawadzki; $5,609 in 2003 and $5,888 in 2002 for Mr. Covert; and $3,853 in 2003 and $3,796 in 2002 for Mr. Callahan; (b) the dollar value of the benefit of premiums paid for split-dollar life insurance policies, projected on an actuarial basis ($1,111 in 2003 and

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$1,085 in 2002 for Mr. Zawadzki), (c) life insurance premiums paid by SBU Bank ($720 in 2003, $630 in 2002 and $630 in 2001 for Mr. Zawadzki; $720 in 2003, $630 in 2002 and $525 in 2001 for Mr. Covert; $720 in 2003, $630 in 2002 and $473 in 2001 for Mr. Callahan; and $720 in 2003 for Mr. O’Toole; and (d) $60,000 in 2003, $60,000 in 2002 and $60,000 in 2001 paid to Mr. Zawadzki to compensate him for options he forfeited in connection with leaving his position at his prior employer.

(4) Mr. O’Toole commenced his employment with SBU Bank in September 2002.

Benefit Plans

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

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

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

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

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

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

If the executive’s employment terminates as a result of a change in control (as defined in the agreement), either involuntarily or due to resignation following (i) a significant change in the nature or scope of authority, (ii) a reduction in total compensation from that prior to a change in control, (iii) a change in the general location where the employee is required to perform services (or in the case of Mr. Covert’s employment agreement, by more than 50 miles) from that prior to the change in control, then the executive would be entitled to a severance benefit equal to 2.99 times the executive’s average annual compensation included in gross income for income tax purposes during the five full calendar years, or shorter period of employment, that immediately precedes the year in which the change in control occurs. If any change in control benefits paid to Messrs. Zawadzki or Covert under the agreements constitute an excess parachute payment, the payment will be limited to the extent necessary

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to ensure that no amount paid will constitute an excess parachute payment under Sections 280G or 4999 of the Internal Revenue Code. Messrs. Zawadzki and Covert would receive approximately $1.7 million and $879,000, respectively, pursuant to their employment agreements upon a change in control of SBU Bank, based upon current levels of compensation. These amounts do not include any benefit paid as a result of accelerated vesting of stock options or restricted stock.

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

Executive Supplemental Retirement Income Agreement and Split Dollar Life Insurance Arrangement. In June 2001, we entered into an unfunded Executive Supplemental Retirement Income Agreement (the “SERP”) with Mr. Zawadzki. Upon Mr. Zawadzki’s retirement from SBU Bank at or after age 65, he will be entitled to an annual supplemental retirement income benefit equal to 60% of his average annual base salary during the preceding 36 months of full-time employment, payable in monthly installments over 180 months. Based on Mr. Zawadzki’s 2004 base salary of $350,000 and assuming a 3% increase in base salary per year, the annual retirement benefits payable to him at age 65 would be approximately $270,000. If Mr. Zawadzki remains in continuous service with SBU Bank, he may elect to receive an early retirement benefit at or after age 62 equal to a percentage of his supplemental retirement income benefit. The percentage will be 70% if he retires at age 62, 80% at age 63 and 90% at age 64.

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

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

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other material change in the bank’s structure or business activities, he will be entitled to his benefits under the SERP regardless of whether his post-termination activities compete with SBU Bank.

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

Incentive Savings Plan. SBU Bank maintains the SBU Incentive Savings Plan (the “401(k) Plan”), a tax-qualified defined contribution plan. Employees age 21 or older who have worked at SBU Bank for one year in which they have 1,000 or more hours of service are eligible to participate in the 401(k) Plan. Participants may contribute up to 15% of their compensation (as defined in the 401(k) Plan) on a before-tax basis and up to 5% on an after-tax basis. SBU Bank matches 100% of before-tax contributions up to 2% of each participant’s compensation and up to 50% of the next 2% of the participant’s compensation, for a maximum matching contribution equal to 3% of compensation. SBU Bank may from time to time change the 401(k) Plan to provide for a different matching contribution. Participants become vested in the employer matching contributions at the rate of 20% per year of service, starting upon completion of one year of service, and become fully vested upon completion of five years of service. In addition, participants’ accounts become fully vested in the event of termination of employment due to retirement, disability or death. Participants are always 100% vested in their before- and after-tax contributions.

The 401(k) Plan permits participants to direct the investment of their accounts into various investment options set forth under the plan, including an “Employer Stock Fund” which invests primarily in Partners Trust Financial Group common stock.

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

Retirement Plan. We maintain the Retirement Plan of SBU Bank in RSI Retirement Trust (the “Retirement Plan”), a tax-qualified defined benefit pension plan. Effective November 1, 2002, SBU Bank froze all pension benefit accruals and participation in the Retirement Plan. This means that commencing November 1, 2002, no employee who is not already a participant will be eligible for enrollment in the Retirement Plan, no further benefits will accrue to any participant and average annual earnings used to compute benefits under the Retirement Plan will not include any compensation earned by a participant on or after November 1, 2002. Retirement Plan participants become entitled to retirement benefits upon attainment of normal retirement age (for employees who became participants on or after October 1, 1988, normal retirement age is the later of attainment of age 65 or the fifth anniversary of participation in the plan; for employees who became participants before October 1, 1988, normal retirement age is age 65). The normal retirement benefit is equal to (a) 2% of the participant’s average annual earnings multiplied by credited service prior to January 1, 1986, plus (b) 1-2/3% of the participant’s average annual earnings multiplied by the participant’s credited service after December 31, 1985, reduced by (c) a portion of the participant’s primary Social Security benefit offset. The sum of years of credited service of (a) and (b) may not exceed 30 years. An early retirement benefit will be reduced to reflect the longer period over which the benefit will be paid.

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

	Years of Service and Benefit Payable at Retirement
Final Average Compensation	15	20	25	30
$  50,000	$  8,043	$10,724	$13,405	$16,086
75,000	13,662	18,216	22,770	27,325
100,000	19,820	26,426	33,033	39,639
125,000	26,082	34,776	43,470	52,164
150,000	32,345	43,126	53,908	64,689
200,000 and above	44,870	59,826	74,783	89,739

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

Employee Stock Ownership Plan and Trust. We adopted the Partners Trust Financial Group, Inc. Employee Stock Ownership Plan (the “ESOP”), effective January 1, 2002, in connection with the April 2002 initial public offering. Employees who are at least 21 years old, who have at least one year of employment with SBU Bank or an affiliated corporation and who complete at least 1,000 hours of service each calendar year, are eligible to participate. As part of the April 2002 initial public offering, the ESOP borrowed $5,118,080 from Partners Trust at a fixed rate of interest equal to the prime rate on the date of the loan and used those funds to purchase 511,808 shares in the stock offering, pledging the purchased common stock as collateral for the loan. The loan will be repaid principally from discretionary employer contributions to the ESOP over a period of up to 10 years. The loan documents provide that the loan may be repaid over a shorter period, without penalty. Shares purchased by the ESOP are being held in a suspense account for allocation among participants as the loan is repaid.

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

Option Grants

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

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

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

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

	Aggregated Option Exercises During Fiscal Year Ended December 31, 2003 and Fiscal Year-End Option Values
	Shares Acquired Upon Exercise	Value Realized ($)	Number of Unexercised Options at Year-End		Value of Unexercised In- The-Money Options at Year-End
Name			Exercisable/ Unexercisable (#)		Exercisable/ Unexercisable ($)
John A. Zawadzki	—	—	25,000	100,000	$	518,750	$	2,075,000
Steven A. Covert	—	—	20,000	80,000		415,000		1,660,000
Richard F. Callahan	—	—	8,000	32,000		166,000		664,000
Daniel J. O’Toole	—	—	8,000	32,000		166,000		664,000

Recognition and Retention Plan. We intend to implement another stock-based recognition and retention plan no earlier than six months after the conversion. Stockholder approval of this plan will be required. Under this plan, we may award stock options and shares of restricted stock to key employees and directors. The number of stock options available under this plan will be equal to 10% of the number of shares sold in the conversion. The number of shares available for restricted stock awards will equal 4% of the number of shares sold in the conversion. Shares of restricted stock will be awarded at no cost to the recipient. We will incur additional compensation expense as a result of this plan. See “Pro Forma Data” for an illustration of the effects of this plan.

Equity Compensation Plan Information

The following table presents information regarding Partners Trust Financial Group’s equity compensation plan.

	Number of securities to be issued upon exercise of outstanding options	Weighted-average exercise price of outstanding options	Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved by security holders	567,000	$13.44	69,759
Equity compensation plans not approved by security holder	—	—	—

Transactions with Directors and Executive Officers

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

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The Sarbanes-Oxley Act generally prohibits loans by Partners Trust Financial Group to its executive officers and directors. However, the Sarbanes-Oxley Act contains a specific exemption from such prohibition for loans by SBU Bank to its executive officers and directors in compliance with federal banking regulations. Federal regulations require that all loans or extensions of credit to executive officers and directors of insured institutions must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and must not involve more than the normal risk of repayment or present other unfavorable features. SBU Bank is, therefore, prohibited from making any new loans or extensions of credit to executive officers and directors at different rates or terms than those offered to the general public, except for loans made pursuant to programs generally available to all employees. Notwithstanding this rule, federal regulations permit SBU Bank to make loans to executive officers and directors at reduced interest rates if the loan is made under a benefit program generally available to all other employees and does not give preference to any executive officer or director over any other employee.

Acquisition of BSB Bancorp

In connection with the acquisition of BSB Bancorp, Partners Trust Financial Group entered into employment agreements with Messrs. Sharp, Wiley and Le Beau and BSB Bancorp has entered into letter agreements with Messrs. Wiley and Le Beau that are in addition to certain agreements to which they are currently parties. The BSB Bancorp acquisition will trigger change of control provisions in Mr. Wiley’s and Mr. Le Beau’s letter agreements, and payments will be made to Mr. Sharp in connection with his existing employment agreement. These agreements and other matters relating to employees of BSB Bancorp are discussed in greater detail below.

Employment Agreements with Messrs. Sharp, Wiley and Le Beau. Each of Messrs. Sharp, Wiley and Le Beau have entered into new employment agreements with Partners Trust Financial Group that become effective upon the acquisition of BSB Bancorp. If Messrs. Sharp, Wiley or Le Beau voluntarily terminate their employment with SBU Bank for good reason (as defined in their employment agreements) or SBU Bank terminates their employment without cause (as defined in their employment agreements), the executive will receive a lump sum payment of his base salary for the remainder of his employment term within 30 days of termination. In addition, unless he voluntarily terminates his employment without good reason (as defined in their employment agreements) or he is terminated by SBU Bank for cause (as defined in their employment agreements), the executive will continue to receive group life, health, dental, accident and long term disability insurance coverage for the remainder of his employment term. If any of these payments to Messrs. Sharp, Wiley or Le Beau would constitute an “excess parachute payment” within the meaning of Internal Revenue Code Sections 280G and 4999, SBU Bank has agreed to pay the executive an additional amount, referred to as a gross-up payment, equal to the excise tax imposed on the payments, plus taxes imposed on the additional payment; provided that the gross-up payment will provide the executive with a net after-tax benefit of at least $10,000. These agreements are described in greater detail below.

Employment Agreement with Mr. Sharp. Under our agreement with Mr. Sharp, effective upon our acquisition of BSB Bancorp, he will serve as a senior executive of new Partners Trust Financial Group, with duties commensurate with this position. He will be paid an annual base salary of $450,000 and will be eligible to participate in our employee benefit plans. If Mr. Sharp dies during his employment term, he or his beneficiary will receive a lump sum payment of his base salary for the remainder of the employment term. If Mr. Sharp is terminated due to disability, he will receive his base salary for the remainder of the employment term. In the case of termination due to death or disability, Mr. Sharp will also receive any other disability or death benefits that would have been provided to a similarly situated executive. Mr. Sharp has agreed not to compete with us during the term of the agreement and for a period of three years following the termination of his employment. Mr. Sharp’s agreement terminates on June 30, 2006.

Employment Agreements with Mr. Wiley and Mr. Le Beau. Pursuant to the terms of the employment agreements entered into with each of Messrs. Wiley and Le Beau, effective upon our acquisition of BSB Bancorp, Mr. Wiley and Mr. Le Beau will serve as the Vice President and Treasurer, and the Senior Vice

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President, Risk Management Officer and Corporate Secretary, respectively, of Partners Trust Bank. Messrs. Wiley and Le Beau will each be paid an annual base salary of $125,000, will be eligible to receive an annual bonus and will be eligible to participate in our employee benefit plans. They will also receive equity incentive award grants on a basis consistent with similarly situated executives of new Partners Trust Financial Group. The term of Messrs. Wiley and Le Beau’s employment agreements is thirty-six months.

Severance Agreements and Related Letter Agreements with Messrs. Wiley and Le Beau. A number of current BSB Bancorp executives are parties to severance agreements requiring change of control payments in connection with certain qualifying terminations of employment following a change of control of BSB Bancorp. In addition, Messrs. Wiley and Le Beau entered into letter agreements with BSB Bancorp in connection with the BSB Bancorp acquisition. As in the new agreements described above, each of the letter agreements provides that BSB Bancorp will pay any required gross-up payments in the manner described above under “—Employment Agreements with Messrs. Sharp, Wiley and Le Beau.” These agreements are described in greater detail below.

Existing Wiley Change of Control Severance Agreement. BSB Bancorp entered into a three-year change of control severance agreement with Mr. Wiley on May 14, 2001. The agreement is extended automatically by one year on each anniversary date of the agreement, unless BSB Bancorp or Mr. Wiley provides written notice to the contrary at least 180 days prior to such anniversary date. Mr. Wiley has entered into a letter agreement with BSB Bancorp to provide that immediately prior to consummation of the BSB Bancorp acquisition Mr. Wiley shall be paid $619,493 in full satisfaction of BSB Bancorp’s cash severance obligations under the severance agreement.

BSB Bancorp and Mr. Wiley also entered into a supplemental retirement benefit agreement dated October 30, 2003 to provide for a supplemental retirement benefit and the deferral of compensation. The letter agreement also amended the supplemental retirement benefit agreement to provide that immediately prior to the acquisition of BSB Bancorp, Mr. Wiley shall be paid $604,933 in full satisfaction of BSB Bancorp’s obligations under the supplemental retirement benefit agreement.

Existing Le Beau Change of Control Severance Agreement. BSB Bancorp entered into a three-year change of control severance agreement with Mr. Le Beau on December 6, 2000. The agreement is extended automatically by one year on each anniversary date of the agreement, unless BSB Bancorp or Mr. Le Beau provides written notice to the contrary at least 180 days prior to such anniversary date. Mr. Le Beau has entered into a letter agreement with BSB Bancorp to provide that immediately prior to consummation of the BSB Bancorp acquisition Mr. Le Beau shall be paid $683,100 in full satisfaction of BSB Bancorp’s cash severance obligations under the severance agreement.

BSB Bancorp and Mr. Le Beau also entered into a supplemental retirement benefit agreement dated October 30, 2003 to provide for a supplemental retirement benefit and the deferral of compensation. The letter agreement also amended the supplemental retirement benefit agreement to provide that immediately prior to the acquisition of BSB Bancorp, Mr. Le Beau shall be paid $601,841 in full satisfaction of BSB Bancorp’s obligations under the supplemental retirement benefit agreement.

Existing Sharp Employment Agreement and Supplemental Retirement Benefit Agreement. On October 22, 2001, BSB Bancorp entered into an employment agreement with Mr. Sharp to serve as the President and Chief Executive Officer of BSB Bancorp. Mr. Sharp’s 2003 base salary was $381,000.

Pursuant to the terms of this agreement, due to the acquisition of BSB Bancorp, Mr. Sharp will receive a lump sum cash payment equal to 2.99 times the average annual cash compensation paid by BSB Bancorp to Mr. Sharp for the five full calendar years, or shorter period of employment, that immediately precedes the acquisition, approximately $1.2 million, and will continue to receive certain other employment benefits for three years following the acquisition. In addition, as with the letter agreements of Messrs. Wiley and Le Beau, BSB Bancorp is required to pay a gross-up payment, if necessary.

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BSB Bancorp and Mr. Sharp also entered into a supplemental retirement benefit agreement dated October 30, 2003 to provide for a supplemental retirement benefit and the deferral of compensation. In connection with the acquisition, Mr. Sharp will become 100% vested in his benefits under this agreement and will be entitled to an enhanced supplemental retirement benefit equal to [approximately $2.0 million].

Other Employees of BSB Bancorp. We have agreed to use our reasonable best efforts to ensure that qualified branch level employees of BSB Bancorp remain employed with us in a comparable position following consummation of the BSB acquisition. However, other than with regard to Messrs. Sharp, Wiley and Le Beau, we have not guaranteed employment to any employees of BSB Bancorp for any specified period or conferred any right of employment or right under any specific benefit plan, program, policy or arrangement. Employees of BSB Bancorp who are employed by new Partners Trust Financial Group after the BSB Bancorp acquisition will generally be eligible for same employee benefits and compensation levels that we currently provide to our employees.

BSB Bancorp Severance Plan. We have also agreed to honor the existing BSB Bancorp severance policy. Full-time employees of BSB Bancorp and its subsidiaries who are terminated during the one-year period following the acquisition will be eligible to receive a lump-sum severance payment of between one and four weeks base pay (plus bonus, for vice presidents) per full year of service, with maximum payments ranging from sixteen to seventy-two weeks pay, depending on position.

Stock Options. In connection with the BSB Bancorp acquisition, each outstanding option to purchase shares of BSB Bancorp common stock will be converted into the right to purchase a number of shares of new Partners Trust Financial Group common stock equal to the number of shares of BSB Bancorp common stock that were subject to the option, multiplied by the exchange ratio, at an exercise price per share equal to the current exercise price per share divided by the exchange ratio, and otherwise subject to the terms of the applicable BSB Bancorp stock option plans and the stock option agreements thereunder.

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BENEFICIAL OWNERSHIP OF COMMON STOCK

The following table sets forth information known to us regarding beneficial ownership of our common shares as of February 3, 2004, and as adjusted to reflect the sale of the common shares offered by this prospectus, by:

• Each person known by us to be the beneficial owner of more than 5% of our common shares;

• Each of our named executive officers;

• Each of our directors; and

• All of our executive officers and directors as a group.

Unless otherwise noted below, and subject to applicable community property laws, to our knowledge, each person has sole voting and investment power over the shares shown as beneficially owned, except to the extent authority is shared by spouses under applicable law.

The number of shares beneficially owned by each stockholder is determined under rules promulgated by the SEC. The information does not necessarily indicate beneficial ownership for any other purpose. Common shares subject to options currently exercisable, or exercisable within 60 days after February 3, 2004, are deemed outstanding for purposes of computing the percentage beneficially owned by the person or entity holding such securities but are not deemed outstanding for purposes of computing the percentage beneficially owned by any other person or entity.

Beneficial Owner	Number of Common Shares Beneficially Owned Prior to the Offering	Percentage of Outstanding Common Shares Before the Offering
5% Stockholders
Partners Trust, MHC	7,627,353	53.7	%
Executive Officers and Directors
Richard F. Callahan	47,978	0.3	%
Steven A. Covert	88,421	0.6
Elizabeth B. Dugan	23,830	0.2
Richard R. Griffith	19,528	0.1
Gordon M. Hayes, Jr.	13,660	0.1
Nicholas O. Matt	19,524	0.1
Marybeth K. McCall	22,330	0.2
Daniel J. O’Toole	20,795	0.1
William L. Schrauth	15,330	0.1
John B. Stetson	29,739	0.2
Dwight E. Vicks, Jr.	32,330	0.2
John R. Zapisek	30,624	0.2
John A. Zawadzki	113,181	0.8
All Executive Officers and Directors as a Group (13 persons)	477,270	3.4	%

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SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS

The table below sets forth, for each of new Partners Trust Financial Group’s directors and executive officers and for all of the directors and executive officers as a group, the following information:

(1) the number of shares of new Partners Trust Financial Group common stock to be held upon consummation of the conversion, based upon their beneficial ownership of Partners Trust Financial Group common stock as of February 3, 2004;

(2) the proposed purchases of shares in the subscription offering, assuming sufficient shares of commons stock are available to satisfy their subscriptions; and

(3) the total amount of new Partners Trust Financial Group common stock to be held upon consummation of the conversion.

In each case, it is assumed that subscription shares are sold at the midpoint of the offering range. See “The Conversion—Limitations on Common Stock Purchases.”

	Number of Shares Received in Exchange for Partners Trust Financial Group Common Stock(2)	Proposed Purchases of Stock in the Offering(1)			Total Common Stock to be Held
Name of Beneficial Owner		Number of Shares	Amount		Number of Shares	Percentage of Total Outstanding(3)
Robert W. Allen	139,180	10,000	$	100,000	149,180	0.3	%
Richard F. Callahan	110,081	3,000		30,000	113,081	0.2
Steven A. Covert	202,873	7,500		75,000	210,373	0.4
William C. Craine	211,509	10,000		100,000	221,509	0.4
Elizabeth B. Dugan	54,676	2,000		20,000	56,676	0.1
Richard R. Griffith	44,805	2,500		25,000	47,305	0.1
Gordon M. Hayes, Jr.	31,342	3,000		30,000	34,342	0.1
William M. Le Beau	151,872	—		—	151,872	0.3
Nicholas O. Matt	44,796	3,000		30,000	47,796	0.1
Marybeth K. McCall	51,234	5,000		50,000	56,234	0.1
David A. Niermeyer	82,998	10,000		100,000	92,998	0.2
Daniel J. O’Toole	47,712	7,500		75,000	55,212	0.1
Howard W. Sharp	612,571	10,000		100,000	622,571	1.2
William L. Schrauth	35,173	3,500		35,000	38,673	0.1
John B. Stetson	68,233	2,000		20,000	70,233	0.1
Dwight E. Vicks, Jr.	74,178	10,000		100,000	84,178	0.2
John R. Zapisek	70,264	5,000		50,000	75,264	0.1
John A. Zawadzki	259,682	10,000		100,000	269,682	0.5
Total for Directors and Executive Officers (18 persons)	2,293,179	104,000	$	1,040,000	2,397,179	4.6	%

(1) Includes proposed subscriptions, if any, by associates.

(2) Based on information presented in “Beneficial Ownership of Common Stock” and the sale of 17,500,000 shares in the offering and a resulting exchange ratio of 2.2944. Also includes shares received in merger assuming a 60/40 stock/cash allocation.

(3) Calculated by dividing the total shares of new Partners Trust Financial Group common stock to be sold at the midpoint of the offering range (17,500,000 shares) and the total shares of new Partners Trust Financial Group common stock to be issued to BSB Bancorp stockholders plus the number of shares each individual may acquire pursuant to the exercise of stock options within 60 days of February 3, 2004, as described in “Beneficial Ownership of Common Stock.”

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THE CONVERSION

The boards of directors of SBU Bank, Partners Trust Financial Group and Partners Trust, MHC have approved the plan of conversion and reorganization. The plan of conversion and reorganization must also be approved by the members of Partners Trust, MHC (depositors of SBU Bank) and the stockholders of Partners Trust Financial Group. A special meeting of members and a special meeting of stockholders have been called for this purpose. [The Office of Thrift Supervision also has conditionally approved the plan of conversion and reorganization; however, such approval does not constitute a recommendation or endorsement of the plan of conversion and reorganization by that agency.]

General

In connection with the approval of the merger agreement, the respective boards of directors of Partners Trust, MHC, Partners Trust Financial Group and SBU Bank adopted the plan of conversion and reorganization on December 23, 2003 and amended such plan on February 24, 2004. Pursuant to the plan of conversion and reorganization, our organization will convert from the mutual holding company form of organization to the fully stock form. Partners Trust, MHC, the mutual holding company parent of Partners Trust Financial Group, will be merged into SBU Bank, and Partners Trust, MHC will no longer exist. Partners Trust Financial Group, which owns 100% of SBU Bank, will be succeeded by a new Delaware corporation with the same name. As part of the conversion, shares of common stock representing the ownership interest of Partners Trust, MHC, will be offered for sale in the stock offering. When the conversion is completed, all of the capital stock of SBU Bank will be owned by Partners Trust Financial Group, our newly formed Delaware holding company, and all of the common stock of Partners Trust Financial Group will be owned by public stockholders. A diagram of our corporate structure before and after the conversion is set forth in the Summary of this document.

Immediately after the completion of the conversion, it is expected that BSB Bancorp will merge with and into new Partners Trust Financial Group with new Partners Trust Financial Group being the survivor of the merger in accordance with the terms of the merger agreement. Immediately thereafter, BSB Bank & Trust will merge with and into SBU Bank with SBU Bank being the survivor of the merger operating under the name Partners Trust Bank.

Under the plan of conversion and reorganization, at the conclusion of the conversion and offering, each share of Partners Trust Financial Group common stock owned by persons other than Partners Trust, MHC will be converted automatically into the right to receive shares of new Partners Trust Financial Group common stock determined pursuant to an exchange ratio. The exchange ratio will ensure that immediately after the exchange of existing shares of Partners Trust Financial Group for new shares, the public stockholders of Partners Trust Financial Group common stock will own approximately the same aggregate percentage of shares of common stock of new Partners Trust Financial Group that they owned immediately prior to the conversion, excluding any shares they purchased in the offering and excluding any shares issued in connection with the acquisition of BSB Bancorp.

The conversion will be consummated only upon the issuance of at least the minimum number of shares of our common stock offered pursuant to the plan of conversion and reorganization.

The plan of conversion and reorganization provides that we will offer shares of common stock for sale in the subscription offering to eligible account holders, our employee stock ownership plan, supplemental eligible account holders and other depositors. Subject to the prior rights of these holders of subscription rights, we may offer common stock for sale in a community offering to members of the general public, with a preference given in the following order:

1. First, to Partners Trust Financial Group public stockholders as of January 30, 2004;

2. Second, to depositors with accounts at BSB Bank & Trust Company on November 30, 2003 and who reside in Oneida, Herkimer, Onondaga, Broome, Chenango, or Tioga County, New York; and

3. Third, to members of the local community and the general public.

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At the discretion of the board of directors, up to 20% of the shares of Partners Trust Financial Group to be sold in the community offering may be offered on a first-priority basis in the community offering to “qualified institutional buyers,” which include certain large insurance companies, investment companies, pension and employee benefit plans, trusts, investment advisers, dealers and banks, and to institutional “accredited investors.”

We have the right to accept or reject, in whole or in part, any orders to purchase shares of the common stock received in the community offering. The community offering may begin at the same time as the subscription offering and must be completed within 45 days after the completion of the subscription offering unless otherwise extended by the Office of Thrift Supervision. See “—Community Offering.”

We determined the number of shares of common stock to be offered in the offering based upon an independent valuation appraisal of the estimated pro forma market value of Partners Trust Financial Group to reflect the proposed conversion and the merger. All shares of common stock to be sold in the offering will be sold at $10.00 per share. Investors will not be charged a commission to purchase shares of common stock. The independent valuation will be updated and the final number of the shares of common stock to be issued in the offering will be determined at the completion of the offering. See “—Stock Pricing and Number of Shares to be Issued” for more information as to the determination of the estimated pro forma market value of the common stock.

The following is a brief summary of the conversion and is qualified in its entirety by reference to the provisions of the plan of conversion and reorganization. A copy of the plan of conversion and reorganization is available for inspection at each branch office of SBU Bank and at the Northeast Regional and the Washington, D.C. offices of the Office of Thrift Supervision. The plan of conversion and reorganization is also filed as an exhibit to Partners Trust Financial Group’s application to convert from mutual to stock form of which this prospectus is a part, copies of which may be obtained from the Office of Thrift Supervision. See “Where You Can Find Additional Information.”

Reasons For Conversion

The primary reasons for the conversion and related stock offering are:

• to provide us with the capital to execute our business strategy;

• to provide us with the capital to acquire BSB Bancorp, Inc. and its subsidiary, BSB Bank & Trust Company;

• to facilitate growth through other acquisitions and de novo branching as opportunities arise;

• to support internal growth through lending in communities we serve;

• to enhance existing products and services and support the development of new products and services;

• to improve our overall competitive position; and

• to enhance stockholder returns through higher earnings and more flexible capital management strategies.

As a fully converted stock holding company, we will have greater flexibility in structuring future mergers and acquisitions, including the form of consideration that we can use to pay for an acquisition. Our current mutual holding company structure limits our ability to offer shares of our common stock as consideration for a merger or acquisition since Partners Trust, MHC is required to own a majority of our shares of common stock. Potential sellers often want stock for at least part of the purchase price. Our new stock holding company structure will enable us to offer stock or cash consideration, or a combination thereof, and will, therefore, enhance our ability to compete with other bidders when acquisition opportunities arise. Other than our agreement to acquire BSB Bancorp, we currently have no arrangements or understandings regarding any specific acquisition.

The conversion will afford our officers and employees the opportunity to increase their stock ownership, which we believe to be an effective performance incentive and an effective means of attracting and retaining

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qualified personnel. The conversion also will provide our customers and local community members with an opportunity to acquire our stock.

The primary disadvantages of the conversion are the significant expense and effort of consummating the conversion and the fact that operating in the stock holding company form of organization could subject Partners Trust Financial Group to contests for corporate control. The board of directors determined that the advantages of the conversion outweighed the disadvantages.

Approvals Required

The affirmative vote of a majority of the total number of outstanding votes entitled to be cast by the members of Partners Trust, MHC at the special meeting of members is required to approve the plan of conversion and reorganization. By their approval of the plan of conversion and reorganization, the members of Partners Trust, MHC will also be approving the merger of Partners Trust, MHC into SBU Bank. The affirmative vote of the holders of at least two-thirds of the outstanding shares of common stock of Partners Trust Financial Group and the affirmative vote of the holders of a majority of the outstanding shares of common stock of Partners Trust Financial Group held by the stockholders of Partners Trust Financial Group, other than Partners Trust, MHC, are also required to approve the plan of conversion and reorganization. The plan of conversion and reorganization also must be approved by the Office of Thrift Supervision, [which has given its conditional approval].

Share Exchange Ratio

Office of Thrift Supervision regulations provide that in a conversion of a mutual holding company to full stock form, the public stockholders will be entitled to exchange their shares for common stock of the new holding company, provided that the mutual holding company demonstrates to the satisfaction of the Office of Thrift Supervision that the basis for the exchange is fair and reasonable. Each publicly held share of Partners Trust Financial Group common stock will, on the effective date of the conversion, be automatically converted into the right to receive a number of new shares of Partners Trust Financial Group common stock. The number of new shares of common stock will be determined pursuant to the exchange ratio which ensures that the public stockholders of Partners Trust Financial Group common stock will own approximately the same percentage of new common stock in new Partners Trust Financial Group after the conversion as they held in Partners Trust Financial Group immediately prior to the conversion, exclusive of their purchase of additional shares of common stock in the offering, their receipt of cash in lieu of fractional exchange shares and the issuance of shares of common stock to stockholders of BSB Bancorp. In addition, if options to purchase shares of Partners Trust Financial Group are exercised before consummation of the conversion, there will be an increase in the percentage of shares of Partners Trust Financial Group held by public stockholders, an increase in the number of shares issued to public stockholders in the share exchange and a decrease in the exchange ratio and the offering range. At January 31, 2004, there were 14,197,606 shares of Partners Trust Financial Group common stock outstanding and 6,570,253 shares were publicly held. The exchange ratio is not dependent on the market value of Partners Trust Financial Group common stock. The exchange ratio is calculated based on the percentage of Partners Trust Financial Group common stock held by the public, the independent valuation of Partners Trust Financial Group prepared by RP Financial and the number of shares of common stock in the offering. The exchange ratio is expected to range from approximately 1.9502 exchange shares for each publicly held share of Partners Trust Financial Group at the minimum of the offering range to 3.0343 exchange shares for each publicly held share of Partners Trust Financial Group at the adjusted maximum of the offering range.

If you are currently a stockholder of Partners Trust Financial Group your existing shares will be canceled and exchanged for new shares of new Partners Trust Financial Group. The number of shares you receive will be based on the final exchange ratio determined as of the closing of the conversion.

The following table shows how the exchange ratio will adjust based on the number of shares of common stock sold in the offering. The table also shows how many shares a hypothetical owner of Partners Trust Financial Group common stock would receive in the exchange, adjusted for the number of shares sold in the

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offering. The table excludes the effect of the option exercises and issuance of shares of common stock to stockholders of BSB Bancorp.

	New Shares to be Sold in This Offering		New Shares to be Exchanged for Existing Shares of Partners Trust Financial Group		Total Shares of Common Stock to be Issued in Acquisition		Total Shares of Common Stock to be Issued in Conversion, Offering and Acquisition	Exchange Ratio	New Shares to be Received for 100 Existing Shares
	Amount	Percent	Amount	Percent	Amount	Percent
Minimum	14,875,000	31.2	12,813,425	26.9	19,972,470	41.9	47,660,895	1.9502	195
Midpoint	17,500,000	33.2	15,074,617	28.7	19,972,470	38.0	52,547,087	2.2944	229
Maximum	20,125,000	35.0	17,335,810	30.2	19,972,470	34.8	57,433,280	2.6385	263
Adjusted Maximum	23,143,750	36.7	19,936,181	31.6	19,972,470	31.7	63,052,401	3.0343	303

Outstanding options to purchase shares of new Partners Trust Financial Group common stock also will convert into and become options to purchase shares of new Partners Trust Financial Group common stock. The number of shares of common stock to be received upon exercise of these options will be determined pursuant to the exchange ratio. The aggregate exercise price, duration and vesting schedule of these options will not be affected by the conversion. At December 31, 2003, there were 567,000 outstanding options to purchase shares of Partners Trust Financial Group common stock, 106,200 of which were vested. Such options will be converted into options to purchase 1,105,763 shares of common stock at the minimum of the offering range and 1,496,030 shares of common stock at the maximum of the offering range. If all existing options were exercised for authorized, but unissued shares of common stock following the conversion, stockholders would experience dilution of approximately 2.3% at the minimum of the offering range and 2.6% at the maximum of the offering range. Because Office of Thrift Supervision regulations prohibit us from repurchasing our common stock during the first year following the conversion unless compelling business reasons exist for such repurchases, we may use authorized but unissued shares to fund option exercises that occur during the first year following conversion.

Ownership of New Partners Trust Financial Group After the Transactions

The following table shows information regarding the shares of common stock that we will issue in the stock offering and the acquisition. The table also shows the number of shares that will be owned by Partners Trust Financial Group’s public stockholders at the completion of the conversion who will receive our shares of common stock in exchange for their existing shares of common stock.

Information is presented at the minimum, midpoint, maximum and adjusted maximum of the offering range. The number of shares of common stock to be issued is based, in part, on our independent appraisal.

	14,875,000 Shares Issued at Minimum Offering Range			17,500,000 Shares Issued at Midpoint of Offering Range			20,125,000 Shares Issued at Maximum of Offering Range			23,143,750 Shares Issued at Adjusted Maximum of Offering Range
	Number	Percent of Total		Number	Percent of Total		Number	Percent of Total		Number	Percent of Total
Shares Outstanding After Conversion, Offering and Acquisition:
Purchasers in the stock offering	14,875,000	31.2	%	17,500,000	33.3	%	20,125,000	35.0	%	23,143,750	36.7	%
Partners Trust Financial Group public stockholders in the share exchange	12,813,425	26.9		15,074,617	28.7		17,335,810	30.2		19,936,181	31.6
BSB Bancorp stockholders in the merger	19,972,470	41.9		19,972,470	38.0		19,972,470	34.8		19,972,470	31.7
Total shares outstanding after conversion, stock offering and merger (1)	47,660,895	100.0	%	52,547,087	100.0	%	57,433,280	100.0	%	63,052,401	100.0	%

(1) Does not include options that were unexercised as of February 3, 2004. Information regarding outstanding options to purchase shares of common stock of Partners Trust Financial Group is set forth in “Beneficial Ownership of Common Stock.”

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Effects of Conversion on Depositors, Borrowers and Members

Continuity. While the conversion is being accomplished, the normal business of SBU Bank of accepting deposits and making loans will continue without interruption. SBU Bank will continue to be a federally chartered savings association and will continue to be regulated by the Office of Thrift Supervision. After the conversion, SBU Bank will continue to offer existing services to depositors, borrowers and other customers. The directors serving Partners Trust Financial Group at the time of the conversion will be the directors of Partners Trust Financial Group after the conversion, although three existing directors of BSB Bancorp will become additional directors of new Partners Trust Financial Group and SBU Bank at the completion of the acquisition of BSB Bancorp.

Effect on Deposit Accounts. Pursuant to the plan of conversion and reorganization, each depositor of SBU Bank at the time of the conversion will automatically continue as a depositor after the conversion, and the deposit balance, interest rate and other terms of such deposit accounts will not change as a result of the conversion. Each such account will be insured by the Federal Deposit Insurance Corporation to the same extent as before the conversion. Depositors will continue to hold their existing certificates, passbooks and other evidences of their accounts.

Effect on Loans. No loan outstanding from SBU Bank will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as it was contractually determined prior to the conversion.

Effect on Voting Rights of Members. At present, all depositors of SBU Bank are members of, and have voting rights in, Partners Trust, MHC as to all matters requiring membership action. Upon completion of the conversion, Partners Trust, MHC will cease to exist and depositors will cease to be members of Partners Trust, MHC and will no longer have voting rights. Upon completion of the conversion, all voting rights in SBU Bank will be vested in new Partners Trust Financial Group as the sole stockholder of SBU Bank. The stockholders of new Partners Trust Financial Group will possess exclusive voting rights with respect to new Partners Trust Financial Group common stock.

Tax Effects. Partners Trust Financial Group will receive an opinion of counsel or tax advisor with regard to federal and New York state income tax consequences of the conversion to the effect that the conversion will not be taxable for federal or New York state income tax purposes to Partners Trust, MHC, Partners Trust Financial Group, the public stockholders of Partners Trust Financial Group, members of Partners Trust, MHC, eligible account holders, supplemental eligible account holders, or SBU Bank. See “– Tax Aspects.”

Effect on Liquidation Rights. Each depositor in SBU Bank has both a deposit account in SBU Bank and a pro rata ownership interest in the net worth of Partners Trust, MHC based upon the deposit balance in his or her account. This ownership interest is tied to the depositor’s account and has no tangible market value separate from the deposit account. This interest may only be realized in the event of a complete liquidation of Partners Trust, MHC and SBU Bank. Any depositor who opens a deposit account obtains a pro rata ownership interest in Partners Trust, MHC without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all of the balance in the deposit account but nothing for his or her ownership interest in the net worth of Partners Trust, MHC, which is lost to the extent that the balance in the account is reduced or closed.

Consequently, depositors in a stock subsidiary of a mutual holding company normally have no way of realizing the value of their ownership interest, which has realizable value only in the unlikely event that Partners Trust, MHC and SBU Bank are liquidated. If this occurs, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of Partners Trust, MHC after other claims, including claims of depositors to the amounts of their deposits, are paid.

In the unlikely event that SBU Bank were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by distribution of the “liquidation account” to depositors as of December 15, 2002 and March 31, 2004 who continue to maintain their deposit accounts as of the date of

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liquidation, with any assets remaining thereafter distributed to new Partners Trust Financial Group as the holder of SBU Bank’s capital stock. Pursuant to the rules and regulations of the Office of Thrift Supervision, a post-conversion merger, consolidation, sale of bulk assets or similar combination or transaction with another insured savings institution would not be considered a liquidation and, in such a transaction, the liquidation account would be assumed by the surviving institution. See “– Liquidation Rights.”

There are no plans to liquidate SBU Bank in the future.

Stock Pricing and Number of Shares to be Issued

The plan of conversion and reorganization and federal regulations require that the aggregate purchase price of the common stock sold in the offering must be based on the estimated pro forma market value of the common stock, as determined by an independent valuation. SBU Bank and Partners Trust Financial Group have retained RP Financial to prepare an independent valuation appraisal. For its services in preparing the initial valuation, RP Financial will receive a fee of $135,000. SBU Bank and Partners Trust Financial Group have agreed to indemnify RP Financial and its employees and affiliates against specified losses, including any losses in connection with claims under the federal securities laws arising out of its services as independent appraiser, except where such liability results from its negligence or bad faith.

The independent valuation appraisal considered the pro forma impact of the offering and the acquisition of BSB Bancorp. Consistent with the Office of Thrift Supervision appraisal guidelines, the appraisal applied three primary methodologies: the pro forma price-to-book value approach applied to both reported book value and tangible book value; the pro forma price-to-earnings approach applied to reported and core earnings; and the pro forma price-to-assets approach. The market value ratios applied in the three methodologies were based upon the current market valuations of the peer group companies, subject to valuation adjustments applied by RP Financial to account for differences between Partners Trust Financial Group and the peer group. RP Financial placed the greatest emphasis on the price-to-earnings and price-to-book approaches in estimating pro forma market value.

The independent valuation was prepared by RP Financial in reliance upon the information contained in this prospectus, including the consolidated financial statements of Partners Trust Financial Group. RP Financial also considered the following factors, among others:

• the present and projected operating results and financial condition of Partners Trust Financial Group, including the pro forma impact of the acquisition of BSB Bancorp;

• the economic and demographic conditions in Partners Trust Financial Group’s and BSB Bancorp’s existing market areas;

• certain historical, financial and other information relating to Partners Trust Financial Group;

• a comparative evaluation of the operating and financial characteristics of Partners Trust Financial Group with those of other similarly situated publicly traded savings institutions located in the State of New York, and other nearby areas including the mid-Atlantic and New England regions;

• the aggregate size of the offering of the common stock;

• the impact of the conversion and offering on Partners Trust Financial Group’s stockholders’ equity and earnings potential, including the pro forma impact of the acquisition of BSB Bancorp;

• the proposed dividend policy of Partners Trust Financial Group; and

• the trading market for securities of comparable institutions and general conditions in the market for such securities.

Included in RP Financial’s independent valuation were certain assumptions as to the pro forma earnings of Partners Trust Financial Group after the conversion that were utilized in determining the appraised value. These

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assumptions included estimated expenses, an assumed after-tax rate of return on the net offering proceeds and purchases in the open market of 4% of the common stock issued in the offering by the recognition and retention plan at the $10.00 purchase price. See “Pro Forma Data” for additional information concerning these assumptions. The use of different assumptions may yield different results.

The independent valuation of RP Financial states that as of December 31, 2003, the estimated pro forma market value, or valuation range, of Partners Trust Financial Group ranged from a minimum of $476.6 million to a maximum of $574.3 million, with a midpoint of $525.5 million. The board of directors of Partners Trust Financial Group decided to offer the shares of common stock for a price of $10.00 per share. The aggregate offering price of the shares will be equal to the valuation range multiplied by the percentage of Partners Trust Financial Group common stock owned by Partners Trust, MHC. The number of shares offered will be equal to the aggregate offering price of the shares divided by the price per share. Based on the valuation range, the percentage of Partners Trust Financial Group common stock owned by Partners Trust, MHC and the $10.00 price per share, the minimum of the offering range will be 14,875,000 shares, the midpoint of the offering range will be 17,500,000 shares, the maximum of the offering range will be 20,125,000 shares and the adjusted maximum of the offering range will be 23,143,750 shares.

The board of directors of Partners Trust Financial Group reviewed the independent valuation and, in particular, considered the following:

• Partners Trust Financial Group’s financial condition and results of operations, including the pro forma impact of the acquisition of BSB Bancorp;

• comparison of financial performance ratios of Partners Trust Financial Group to those of other financial institutions of similar size;

• market conditions generally and in particular for financial institutions;

• the historical trading price of the publicly held shares of Partners Trust Financial Group common stock; and

• comparison of Partners Trust Financial Group’s pro forma pricing multiples to the pricing multiples of the peer group companies.

All of these factors are set forth in the independent valuation. The board of directors also reviewed the methodology and the assumptions used by RP Financial in preparing the independent valuation and believes that such assumptions were reasonable. The offering range may be amended with the approval of the Office of Thrift Supervision, if required, as a result of subsequent developments in the financial condition of Partners Trust Financial Group or SBU Bank or market conditions generally. In the event the independent valuation is updated to amend the pro forma market value of Partners Trust Financial Group to less than $476.6 million or more than $630.5 million, the appraisal will be filed with the Securities and Exchange Commission by a post-effective amendment to Partners Trust Financial Group’s registration statement.

THE INDEPENDENT VALUATION IS NOT INTENDED, AND MUST NOT BE CONSTRUED, AS A RECOMMENDATION OF ANY KIND AS TO THE ADVISABILITY OF PURCHASING OUR COMMON STOCK. RP FINANCIAL DID NOT INDEPENDENTLY VERIFY OUR CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION THAT WE PROVIDED TO THEM, NOR DID RP FINANCIAL INDEPENDENTLY VALUE OUR ASSETS OR LIABILITIES. THE INDEPENDENT VALUATION CONSIDERS SBU BANK AS A GOING CONCERN AND SHOULD NOT BE CONSIDERED AS AN INDICATION OF THE LIQUIDATION VALUE OF SBU BANK. MOREOVER, BECAUSE THE VALUATION IS NECESSARILY BASED UPON ESTIMATES AND PROJECTIONS OF A NUMBER OF MATTERS, ALL OF WHICH MAY CHANGE FROM TIME TO TIME, NO ASSURANCE CAN BE GIVEN THAT PERSONS PURCHASING OUR COMMON STOCK IN THE OFFERING OR RECEIVING COMMON STOCK IN CONNECTION WITH THE CONVERSION OR ACQUISITION OF BSB BANCORP WILL THEREAFTER BE ABLE TO SELL THEIR SHARES AT PRICES AT OR ABOVE THE $10.00 PRICE PER SHARE.

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Following commencement of the subscription offering, the maximum of the valuation range may be increased by up to 15% without resoliciting subscribers to up to $630.5 million, which will result in a corresponding increase of up to 15% in the maximum of the offering range to up to 23,143,750 shares, to reflect changes in the market and financial conditions or demand for the shares. We will not decrease the minimum of the valuation range and the minimum of the offering range without a resolicitation of subscribers. The subscription price of $10.00 per share will remain fixed. See “– Limitations on Common Stock Purchases” as to the method of distribution and allocation of additional shares that may be issued in the event of an increase in the offering range to fill unfilled orders in the offering.

If the update to the independent valuation at the conclusion of the offering results in an increase in the maximum of the valuation range to more than $630.5 million and a corresponding increase in the offering range to more than 23,143,750 shares, or a decrease in the minimum of the valuation range to less than $476.6 million and a corresponding decrease in the offering range to fewer than 14,875,000 shares, then, after consulting with the Office of Thrift Supervision, we may terminate the plan of conversion and reorganization, cancel deposit account withdrawal authorizations and promptly return by check all funds received with interest at SBU Bank’s passbook savings rate of interest. Alternatively, we may hold a new offering, establish a new offering range, extend the offering period and commence a resolicitation of subscribers or take other actions as permitted by the Office of Thrift Supervision in order to complete the conversion or offering. Any resolicitation following the conclusion of the subscription and community offerings would not exceed 45 days unless further extended by the Office of Thrift Supervision for periods of up to 90 days.

An increase in the number of shares to be issued in the offering would decrease both a subscriber’s ownership interest and Partners Trust Financial Group’s pro forma earnings and stockholders’ equity on a per share basis while increasing pro forma earnings and stockholders’ equity on an aggregate basis. A decrease in the number of shares to be issued in the offering would increase both a subscriber’s ownership interest and Partners Trust Financial Group’s pro forma earnings and stockholders’ equity on a per share basis, while decreasing pro forma earnings and stockholders’ equity on an aggregate basis. For a presentation of the effects of these changes, see “Pro Forma Data.”

Copies of the independent valuation appraisal report of RP Financial and the detailed memorandum setting forth the method and assumptions used in the appraisal report are available for inspection at the administrative offices of SBU Bank and as specified under “Where You Can Find Additional Information.”

Exchange of Stock Certificates

The conversion of existing outstanding shares of Partners Trust Financial Group common stock into the right to receive shares of new Partners Trust Financial Group common stock will occur automatically on the effective date of the conversion. As soon as practicable after the effective date of the conversion, we or a bank or trust company or other entity designated by us in the capacity of exchange agent, will send a transmittal form to each public stockholder of Partners Trust Financial Group who holds stock certificates. The transmittal forms are expected to be mailed within five business days after the effective date of the conversion and will contain instructions on how to exchange shares of Partners Trust Financial Group common stock for shares of new Partners Trust Financial Group common stock. We expect that stock certificates evidencing shares of new Partners Trust Financial Group common stock will be distributed within five business days after we receive properly executed transmittal forms and other required documents. Shares held by public stockholders in street name will be exchanged automatically upon the effective date of the conversion; no transmittal forms will be mailed relating to these shares.

No fractional shares of new Partners Trust Financial Group common stock will be issued to any public stockholder of Partners Trust Financial Group when the conversion is completed. For each fractional share that would otherwise be issued to a stockholder who holds a stock certificate, we will pay by check an amount equal to the product obtained by multiplying the fractional share interest to which the holder would otherwise be

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entitled to by the $10.00 offering purchase price per share. Payment for fractional shares will be made as soon as practicable after the receipt by the exchange agent of the transmittal forms and the surrendered Partners Trust Financial Group stock certificates. If your shares of common stock are held in street name, you will automatically receive cash in lieu of fractional shares.

YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES UNTIL YOU HAVE RECEIVED TRANSMITTAL FORMS, WHICH WILL INCLUDE FORWARDING INSTRUCTIONS.

After the conversion, until existing certificates representing shares of Partners Trust Financial Group common stock are surrendered for exchange in compliance with the terms of the transmittal form, stockholders will not receive shares of new Partners Trust Financial Group common stock and will not be paid dividends on such shares. When stockholders surrender their certificates, any unpaid dividends will be paid without interest. For all other purposes, however, each certificate that represents shares of Partners Trust Financial Group common stock outstanding at the effective date of the conversion will be considered to evidence ownership of shares of new Partners Trust Financial Group common stock into which those shares have been converted by virtue of the conversion.

If a certificate for Partners Trust Financial Group common stock has been lost, stolen or destroyed, our exchange agent will issue a new stock certificate upon receipt of appropriate evidence as to the loss, theft or destruction of the certificate, appropriate evidence as to the ownership of the certificate by the claimant, and appropriate and customary indemnification, which is normally effected by the purchase of a bond from a surety company at the stockholder’s expense.

All shares of new Partners Trust Financial Group common stock that we issue in exchange for existing shares of Partners Trust Financial Group common stock will be considered to have been issued in full satisfaction of all rights pertaining to such shares of common stock, subject, however, to our obligation to pay any dividends or make any other distributions with a record date prior to the effective date of the conversion that may have been declared by us on or prior to the effective date and which remain unpaid at the effective date.

Subscription Offering and Subscription Rights

In accordance with the plan of conversion and reorganization, rights to subscribe for shares of common stock in the subscription offering have been granted in the following descending order of priority. The filling of all subscriptions that we receive will depend on the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription offering and to the maximum, minimum and overall purchase limitations set forth in the plan of conversion and reorganization and as described below under “—Limitations on Common Stock Purchases.”

Priority 1: Eligible Account Holders. Each SBU Bank, SBU Municipal Bank or The Herkimer Country Trust Company depositor with aggregate deposit account balances (aggregated by bank) of $50.00 or more (a “Qualifying Deposit”) on December 15, 2002 (“Eligible Account Holders”) will receive, without payment therefor, nontransferable subscription rights to purchase up to the greater of (i) 100,000 shares of new Partners Trust Financial Group common stock, (ii) 0.10% of the total number of shares of new Partners Trust Financial Group common stock issued in the offering, or (iii) fifteen times the product (rounded down to the nearest whole number) obtained by multiplying the number of shares of common stock offered in the offering by a fraction of which the numerator is the amount of the Eligible Account Holder’s Qualifying Deposit and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders, in each case as of December 15, 2002, subject to the overall purchase limitations. See “—Limitations on Common Stock Purchases.”

If there are not sufficient shares available to satisfy all subscriptions, shares will first be allocated so as to permit each Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, unallocated

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shares will be allocated to each Eligible Account Holder whose subscription remains unfilled in the proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount subscribed for by any one or more Eligible Account Holders, the excess shall be reallocated among those Eligible Account Holders whose subscriptions are not fully satisfied until all available shares have been allocated.

To ensure proper allocation of our shares of common stock, each Eligible Account Holder must list on his or her stock order form all deposit accounts in which he or she has an ownership interest on December 15, 2002. In the event of oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed. In addition, in the event of an oversubscription, the subscription rights of Eligible Account Holders who are also executive directors or officers of Partners Trust Financial Group or their associates will be subordinated to the subscription rights of other Eligible Account Holders to the extent attributable to increased deposits in the twelve months preceding December 15, 2002.

Priority 2: Tax-Qualified Plans. Our employee stock ownership plan will receive, without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 10% of the common stock issued in the offering, including any shares to be issued as a result of an increase in the maximum of the offering range after commencement of the offering and prior to the completion of the conversion. We anticipate our employee stock ownership plan will purchase 8.0% of the shares of common stock issued in the offering, including any increase in the number of shares of common stock after the date hereof as a result of an increase of up to 15% in the maximum of the offering range. Subscriptions by the employee stock ownership plan will not be aggregated with shares of common stock purchased directly by or which are otherwise attributable to any other participants in the offering, including subscriptions of any of our trustees, officers, employees or associates thereof. In the event the Partners Trust Financial Group employee stock ownership plan is unable to purchase 8.0% of the shares of the common stock in the subscription offering, it is anticipated that the employee stock ownership plan will consider purchasing an amount of shares in the open market sufficient to increase its ownership to 8% of the number of shares of new Partners Trust Financial Group common stock sold in the offering. See “Management of Partners Trust Financial Group—Benefit Plans—Employee Stock Ownership Plan and Trust” and “—Limitations on Common Stock Purchases.”

Priority 3: Supplemental Eligible Account Holders. Each SBU Bank depositor with a Qualifying Deposit on March 31, 2004 (“Supplemental Eligible Account Holders”) will receive, without payment therefor, nontransferable subscription rights to purchase up to the greater of (i) 100,000 shares of new Partners Trust Financial Group common stock, (ii) 0.10% of the total number of shares of common stock issued in the offering, or (iii) fifteen times the product (rounded down to the nearest whole number) obtained by multiplying the number of shares of common stock offered in the offering by a fraction of which the numerator is the amount of the Supplemental Eligible Account Holder’s Qualifying Deposit and the denominator is the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders, in each case as of March 31, 2004, subject to the availability of sufficient shares after filling in full all subscription orders of the Eligible Account Holders and tax-qualified employee stock benefit plans and subject to the overall purchase limitations. See “—Limitations on Common Stock Purchases.”

If there are not sufficient shares available to satisfy all subscriptions, shares will first be allocated so as to permit each Supplemental Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each Supplemental Eligible Account Holder whose subscription remains unfilled in the proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Supplemental Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount subscribed for by any one or more Supplemental Eligible Account Holders, the excess shall be reallocated among those Supplemental Eligible Account Holders whose subscriptions are not fully satisfied until all available shares have been allocated.

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To ensure proper allocation of our shares of common stock, each Supplemental Eligible Account Holder must list on his or her stock order form all deposit accounts in which he or she has an ownership interest on March 31, 2004. In the event of oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed.

Priority 4: Other Depositors. To the extent that there are shares of common stock remaining after satisfaction of subscriptions by Eligible Account Holders, our tax-qualified employee stock benefit plans, and Supplemental Eligible Account Holders, each depositor of SBU Bank on the voting record date of [            ], 2004 who is not an Eligible Account Holder or Supplemental Eligible Account Holder (“Other Depositors”) will receive, without payment therefor, nontransferable subscription rights to purchase up to 100,000 shares of common stock, subject to the overall purchase limitations. See “—Limitations on Common Stock Purchases.” If there are not sufficient shares available to satisfy all subscriptions, shares will first be allocated so as to permit each Other Depositor to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each Other Depositor whose subscription remains unfilled in the proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Other Depositors whose subscriptions remain unfilled.

Expiration Date. The Subscription Offering will expire at [  :    ] a.m., New York Time, on [            ], unless extended by us for up to 45 days or such additional periods with the approval of the Office of Thrift Supervision, if necessary. Subscription rights will expire whether or not each eligible depositor can be located. We may decide to extend the expiration date of the subscription offering for any reason, whether or not subscriptions have been received for shares at the minimum, midpoint or maximum of the offering range. Subscription rights which have not been exercised prior to the expiration date will become void.

We will not execute orders until at least the minimum number of shares of common stock have been issued. If at least 14,875,000 shares have not been issued within 45 days after the expiration date and the Office of Thrift Supervision has not consented to an extension, all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to the subscribers with interest at SBU Bank’s passbook savings rate and all deposit account withdrawal authorizations will be canceled. If an extension beyond the 45-day period following the expiration date is granted by the Office of Thrift Supervision, we will provide each person who subscribed for common stock with an amendment to this prospectus indicating that each person who subscribed for common stock may increase, decrease, or rescind their subscription within the time remaining in the extension period.

Extensions may not go beyond [            ], which is two years after the special meeting of depositors of Partners Trust, MHC to vote on the conversion.

Community Offering

To the extent that shares of common stock remain available for purchase after satisfaction of all subscriptions of the Eligible Account Holders, our tax-qualified employee stock benefit plans, Supplemental Eligible Account Holders and Other Depositors, we may offer shares pursuant to the plan of conversion and reorganization to members of the general public in a community offering. Shares may be offered with the following preferences:

1. First, to Partners Trust Financial Group public stockholders as of January 30, 2004;

2. Second, to depositors with accounts at BSB Bank & Trust Company on November 30, 2003 and who reside in Oneida, Herkimer, Onondaga, Broome, Chenango, or Tioga County, New York; and

3. Third, to members of the local community and the general public.

Subscribers in the community offering may purchase up to 100,000 shares of common stock, subject to the overall purchase limitations. See “—Limitations on Common Stock Purchases.” The minimum purchase is 25

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shares. In the event orders in any of the above categories exceed the number of shares available for sale, shares may be allocated on a pro rata basis within a category based on the amount of the respective orders. We will use our best efforts to distribute shares sold in the community offering in such a manner as to promote the widest distribution practicable of such stock.

THE OPPORTUNITY TO PURCHASE SHARES OF COMMON STOCK IN THE COMMUNITY OFFERING CATEGORY IS SUBJECT TO OUR RIGHT, IN OUR SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE OF THE OFFERING.

At the discretion of the board of directors, up to 20% of the shares to be sold in the community offering may be offered on a first-priority basis to “qualified institutional buyers” (as defined in Rule 144A under the Securities Act of 1933), which include certain large insurance companies, investment companies, pension and employee benefit plans, trusts, investment advisers, dealers and banks, and institutional “accredited investors” (as defined in Rule 501(a)(1), (2), (3), (7) or (8) under the Securities Act), which include certain banks, business development companies, organizations and trusts that meet minimum asset thresholds, in order to expand the stockholder base of Partners Trust Financial Group.

The term “residing” or “resident” as used in this prospectus means any person who occupies a dwelling within the New York counties of Oneida, Herkimer, Onondaga, Broome, Chenango, or Tioga, has a present intent to remain within this community for a period of time, and manifests the genuineness of that intent by establishing an ongoing physical presence within the community, together with an indication that this presence within the community is something other than merely transitory in nature. We may utilize deposit or loan records or other evidence provided to us to decide whether a person is a resident. In all cases, however, the determination shall be in our sole discretion.

Syndicated Community Offering/Underwritten Public Offering

Depending on market conditions, our board of directors may decide to offer for sale all shares of common stock not subscribed for or purchased in the subscription and community offerings in a syndicated community offering through selected dealers managed by Sandler O’Neill and Partners, acting as Partners Trust Financial Group’s agent in the sale of the common stock. However, we retain the right to accept or reject in whole or in part any orders in the syndicated community offering. Neither Sandler O’Neill nor any registered broker-dealer shall have any obligation to take or purchase any shares of common stock in the syndicated community offering; however, Sandler O’Neill has agreed to use its best efforts in the sale of shares in the syndicated community offering. Common stock sold in the syndicated community offering will be sold at a purchase price per share which is the same price as all other shares being offered in the conversion. Orders for common stock in the syndicated community offering will first be filled to a maximum of 2% of the total number of shares sold in the conversion and thereafter any remaining shares will be allocated on an equal number of shares basis per order until all orders have been filled, provided no fractional shares will be issued.

It is estimated that the selected dealers will receive a negotiated commission based on the amount of common stock sold by the selected dealer, payable by Partners Trust Financial Group. During the syndicated community offering, selected dealers may only solicit indications of interest from their customers to place orders with Partners Trust Financial Group as of a certain date (the Order Date) for the purchase of shares of common stock. When and if Partners Trust Financial Group and Sandler O’Neill believe that enough indications and orders have been received in the offering to consummate the conversion, Sandler O’Neill will request, as of the Order Date, selected dealers to submit orders to purchase shares for which they have received indications of interest from their customers. Selected dealers will send confirmations of the orders to such customers on the next business day after the Order Date. Selected dealers will debit the accounts of their customers on a date which will be three business days from the Order Date (Debit Date). Customers who authorize selected dealers to debit their brokerage accounts are required to have the funds for payment in their account on but not before the

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Debit Date. On the next business day following the Debit Date, selected dealers will remit funds to the account that Partners Trust Financial Group will establish for each selected dealer. In the event that the selected dealers’ customers submit checks for the purchase price, such checks must be made payable to Partners Trust Financial Group. Such checks will be sent directly by noon of the next business day after receipt to the escrow accounts which Partners Trust Financial Group will establish. After payment has been received by Partners Trust Financial Group from selected dealers, funds will earn interest at SBU Bank’s passbook savings rate until the conversion is completed. In the event the conversion is not completed, funds will be returned promptly with interest to the selected dealers who, in turn, will promptly credit their customers’ brokerage account.

We may begin the syndicated community offering or underwritten public offering at any time following the commencement of the subscription offering, provided that the completion of the sale of new Partners Trust Financial Group common stock will be conditioned upon the approval of the plan of conversion and reorganization by those persons holding a deposit account in SBU Bank as of January 30, 2003, the voting record date.

THE OPPORTUNITY TO PURCHASE SHARES OF COMMON STOCK IN THE SYNDICATED COMMUNITY OFFERING OR UNDERWRITTEN PUBLIC OFFERING IS SUBJECT TO OUR RIGHT, IN OUR SOLE DISCRETION, TO ACCEPT OR REJECT ANY SUCH ORDERS IN WHOLE OR IN PART EITHER AT THE TIME OF RECEIPT OF AN ORDER OR AS SOON AS PRACTICABLE FOLLOWING THE EXPIRATION DATE OF THE OFFERING.

If for any reason we cannot effect a syndicated community offering, or in the event that there is an insignificant number of shares remaining unsold after the subscription and community offerings or in the syndicated community offering, we will try to make other arrangements for the sale of unsubscribed shares, if possible. The Office of Thrift Supervision must approve any such arrangements.

Limitations on Common Stock Purchases

The plan of conversion and reorganization includes the following limitations on the number of shares of common stock that may be purchased in the offering:

(1) No person may purchase fewer than 25 shares of common stock, provided, however, that in the event the minimum number of shares of new Partners Trust Financial Group common stock purchased times the price per share exceeds $500, then the minimum purchase requirement will be reduced to the maximum number of shares which, when multiplied by the price per share, will not exceed $500;

(2) Our tax-qualified employee stock benefit plans, including our employee stock ownership plan, may purchase in the aggregate up to 10% of the shares of common stock issued in the offering, including shares issued in the event of an increase in the offering range of up to 15%;

(3) Except for our tax qualified employee benefit plans, as described above, no person or entity, together with associates or persons acting in concert with such person or entity, may purchase more than 200,000 shares in all categories of the offering combined;

(4) Current stockholders of Partners Trust Financial Group are subject to an ownership limitation. As previously described, current stockholders of Partners Trust Financial Group will receive shares of new Partners Trust Financial Group common stock in exchange for their existing shares of Partners Trust Financial Group common stock. The number of shares of common stock that a stockholder may purchase in the offering, together with associates or persons acting in concert with such stockholder, when combined with the shares that the stockholder and his or her associates will receive in exchange for existing Partners Trust Financial Group common stock, may not exceed 5% of the shares of common stock of new Partners Trust Financial Group to be issued and outstanding at the completion of the conversion; and

(5) The maximum number of shares of common stock that may be purchased in all categories of the offering by executive officers and directors of Partners Trust Financial Group, Partners Trust, MHC and SBU Bank and their associates, in the aggregate, when combined with new shares of common stock issued in exchange for existing shares, may not exceed 25% of the shares issued in the conversion.

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If the number of shares of new Partners Trust Financial Group common stock otherwise allocable pursuant to the subscription offering, the community offering or the syndicated community offering / underwritten public offering, inclusive, to any person or that person’s associates would be in excess of the maximum number of shares permitted as set forth above, the number of shares allocated to each such person will be reduced to the lowest limitation applicable to that person, and then the number of shares allocated to each group consisting of a person and that person’s associates will be reduced so that the aggregate allocation to that person and his or her associates complies with the above limits.

Depending upon market or financial conditions, our board of directors, with the approval of the Office of Thrift Supervision and without further approval of members of Partners Trust, MHC, may decrease or increase the purchase and ownership limitations provided that the maximum purchase limitations may not be increased to a percentage in excess of 5% of the shares issued in the offering except as provided below. If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be, and, in our sole discretion, some other large subscribers who through their subscriptions evidence a desire to purchase the maximum allowable number of shares may be given the opportunity to increase their subscriptions up to the then applicable limit. In the event that the maximum purchase limitation is increased to 5% of the shares issued in the offering, such limitation may be further increased to 9.99%, provided that orders for new Partners Trust Financial Group common stock exceeding 5% of the shares issued in the offering may not exceed in the aggregate 10% of the total shares issued. Requests to purchase additional shares in the event that the purchase limitation is so increased will be determined by the board of directors in its sole discretion. The effect of this type of resolicitation will be an increase in the number of shares of common stock owned by subscribers who choose to increase their subscriptions.

In the event of an increase in the offering range of up to 15% of the total number of shares of common stock offered in the offering, shares will be used to fill the tax qualified employee benefit plans’ orders and then will be allocated in accordance with the priorities set forth in this section.

The plan of conversion and reorganization defines the term “associate” with respect to a particular person to mean:

(1) any corporation or organization, other than Partners Trust Financial Group, SBU Bank or a majority-owned subsidiary of SBU Bank, of which the person is an officer, partner or 10% beneficial stockholder;

(2) any trust or other estate in which the person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity; provided, however, it does not include any employee stock benefit plan in which the person has a substantial beneficial interest or serves as trustee or in a similar fiduciary capacity and provided further, that for purposes of aggregating total shares that may be held by officers and directors, it does not include any tax-qualified stock benefit plan; and

(3) any relative or spouse of the person, or any relative of such spouse, who either has the same home as the person or who is a director or officer of Partners Trust Financial Group or SBU Bank or any of its parents or subsidiaries.

Our directors are not treated as associates of each other solely because of their membership on the board of directors.

The plan of conversion and reorganization defines the term “acting in concert” to mean:

(1) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or

(2) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise.

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A person or company that acts in concert with another person or company (“other party”) shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee stock benefit plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether common stock held by the trustee and common stock held by the employee stock benefit plan will be aggregated. We may presume that certain persons are acting in concert based upon, among other things, joint account relationships and the fact that persons may have filed joint Schedules 13D or 13G with the SEC with respect to other companies. For purposes of the plan, our directors are not deemed to be acting in concert solely by reason of their board membership.

We have the sole discretion to determine whether prospective purchasers are associates or acting in concert. Common stock purchased in the offering will be freely transferable except for shares purchased by executive officers and directors of Partners Trust Financial Group or SBU Bank and except as described below. Any purchases made by any associate of Partners Trust Financial Group or SBU Bank for the explicit purpose of meeting the minimum number of shares of common stock required to be sold in order to complete the offering shall be made for investment purposes only and not with a view toward redistribution. In addition, under NASD guidelines, members of the NASD and their associates are subject to certain restrictions on transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of these securities. For a further discussion of limitations on purchases of our shares of common stock at the time of conversion and thereafter, see “– Certain Restrictions on Purchase or Transfer of Our Shares After Conversion” and “Restrictions on Acquisition of Partners Trust Financial Group.”

Plan of Distribution and Marketing Arrangements

Offering materials have been initially distributed to certain persons by mail, with additional copies made available through our conversion center and Sandler O’Neill. All prospective purchasers are to send payment directly to SBU Bank, where such funds will be held in a segregated savings account and not released until the offering is completed or terminated.

We have engaged Sandler O’Neill, a broker-dealer registered with the NASD, as a financial and marketing advisor in connection with the offering of our common stock. In its role as financial and marketing advisor, Sandler O’Neill will assist us in the offering as follows: (i) consulting as to the securities marketing implications of any aspect of the plan of conversion or related corporate documents; (ii) reviewing with our board of directors the financial and securities marketing implications of the independent appraiser’s appraisal of the common stock; (iii) reviewing all offering documents, including the prospectus, stock order forms and related offering materials (we are responsible for the preparation and filing of such documents); (iv) assisting in the design and implementation of a marketing strategy for the offering; (v) assisting us in preparing for meetings with potential investors and broker-dealers; and (vi) providing such other general advice and assistance regarding financial and marketing aspects of the conversion. For these services, Sandler O’Neill will receive a fee of 1.00% of the aggregate dollar amount of the common stock sold in the offering, excluding shares sold to the Partners Trust Financial Group employee stock ownership plan, and to Partners Trust Financial Group’s officers, employees and directors, and their immediate families. We have made an advance payment of $25,000 to Sandler O’Neill in this regard. If there is a syndicated community offering, Sandler O’Neill will receive a management fee of 1.00% of the aggregate dollar amount of the common stock sold in the syndicated community offering. The total fees payable to Sandler O’Neill and other NASD member firms in the syndicated community offering will not exceed 5.5% of the aggregate dollar amount of the common stock sold in the syndicated community offering.

Partners Trust Financial Group and SBU Bank also will reimburse Sandler O’Neill for its legal fees and expenses associated with its marketing effort, up to a maximum of $80,000. If the plan of conversion is terminated or if Sandler O’Neill terminates its agreement with us in accordance with the provisions of the agreement, Sandler O’Neill will only receive reimbursement of its reasonable out-of-pocket expenses. We will indemnify Sandler O’Neill against liabilities and expenses (including legal fees) incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the offering material for the common stock, including liabilities under the Securities Act of 1933.

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We also have engaged Sandler O’Neill to act as conversion agent in connection with the offering. In its role as conversion agent, Sandler O’Neill will assist us in the offering as follows: (i) consolidation of accounts and development of a central file; (ii) preparation of proxy, order and request forms; (iii) organization and supervision of the conversion center; (iv) proxy solicitation and special meeting services; and (v) subscription services. For these services, Sandler O’Neill will receive a fee of $65,000 and reimbursement for its reasonable out-of-pocket expenses, up to a maximum of $30,000. We have made an advance payment of $5,000 to Sandler O’Neill in this regard.

In addition, Partners Trust Financial Group engaged Sandler O’Neill as its financial advisor in connection with the merger. Under the terms of the engagement, Partners Trust Financial Group has agreed to pay Sandler O’Neill a cash fee equal to 0.80% of the aggregate purchase price. Twenty-five percent of such fee became payable upon the signing of the merger agreement, with remainder due upon completion of the merger. We also will reimburse Sandler O’Neill for its reasonable out-of-pocket expenses incurred in connection with its engagement and will indemnify Sandler O’Neill against certain liabilities arising out of such engagement, including liabilities under federal securities laws.

Our directors and executive officers may participate in the solicitation of offers to purchase common stock. Other trained employees may participate in the offering in ministerial capacities, providing clerical work in effecting a sales transaction or answering questions of a ministerial nature. Other questions of prospective purchasers will be directed to executive officers or registered representatives. We will rely on Rule 3a4-1 of the Exchange Act, so as to permit officers, directors, and employees to participate in the sale of the common stock. No officer, director, or employee will be compensated for his participation by the payment of commissions or other remuneration based either directly or indirectly on the transactions in the common stock.

Procedure For Purchasing Shares

Expiration Date. The community offering will begin concurrently with the subscription offering and is expected to terminate at the same time as the subscription offering, and must terminate no more than 45 days following the subscription offering. Partners Trust Financial Group may decide to extend the community offering for any reason and is not required to give purchasers notice of any such extension unless such period extends beyond [            ]. If 14,875,000 shares have not been issued by [            ], unless this period is further extended with the consent of the Office of Thrift Supervision, we will provide each person who subscribed for common stock with an amendment to this prospectus indicating that each person who subscribed for common stock may increase, decrease, or rescind their subscription within the time remaining in the extension period. These extensions may not go beyond [            ], which is two years after the special meeting of members of Partners Trust, MHC to vote on the conversion.

If we have not sold the minimum number of shares offered in the offering by the expiration date or any extension thereof, we may terminate the offering and promptly refund all orders for shares of common stock. If the number of shares offered is reduced below the minimum of the offering range, or increased above the adjusted maximum of the offering range, all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to the subscribers with interest at SBU Bank’s passbook savings rate and all deposit account withdrawal authorizations will be canceled. Purchasers will be given an opportunity to resubmit their orders.

In the event that the maximum purchase limitation is increased to 5% of the shares issued in the offering, such limitation may be further increased to 9.99%, provided that orders for new Partners Trust Financial Group common stock exceeding 5% of the shares of new Partners Trust Financial Group common stock issued in the offering may not exceed in the aggregate 10% of the total shares issued. Requests to purchase additional shares in the event that the purchase limitation is so increased will be determined by the board of directors of Partners Trust Financial Group in its sole discretion.

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To ensure that each purchaser receives a prospectus at least 48 hours before the expiration date of the offering in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, no prospectus will be mailed any later than five days prior to this date or hand delivered any later than two days prior to this date. Execution of an order form will confirm receipt of delivery in accordance with Rule 15c2-8. Order forms will be distributed only with a prospectus. Subscription funds will be maintained in a segregated account at SBU Bank and will earn interest at our passbook savings rate from the date of receipt.

We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel any deposit account withdrawal orders and promptly return all funds submitted, with interest at SBU Bank’s passbook savings rate from the date of receipt.

Use of Order Forms. In order to purchase shares of common stock in the subscription offering and community offering, you must complete an order form and remit full payment. Incomplete order forms or order forms that are not signed are not required to be accepted. We will not be required to accept orders submitted on photocopied or facsimiled order forms. All order forms must be received (not postmarked) prior to [            ] New York Time, on [            ]. We are not required to accept order forms that are not received by that time, are executed defectively or are received without full payment or without appropriate withdrawal instructions. We are not required to notify subscribers of incomplete or improperly executed order forms, and we have the right to waive or permit the correction of incomplete or improperly executed order forms. We do not represent, however, that we will do so and we have no affirmative duty to notify any prospective subscriber of any such defects. You may submit your order form and payment by mail using the return envelope provided. Order forms may also be delivered to SBU Bank branches. Once tendered, an order form cannot be modified or revoked without our consent. We reserve the absolute right, in our sole discretion, to reject orders received in the community offering, in whole or in part, at the time of receipt or at any time prior to completion of the offering. If you are ordering shares, you must represent that you are purchasing shares for your own account and that you have no agreement or understanding with any person for the sale or transfer of the shares. Our interpretation of the terms and conditions of the plan of conversion and reorganization and of the acceptability of the order forms will be final.

In order to ensure that Eligible Account Holders, Supplemental Eligible Account Holders and Other Depositors are properly identified as to their stock purchase priority, depositors as of the close of business on the Eligibility Record Date (December 15, 2002) or the Supplemental Eligibility Record Date (March 31, 2004) and depositors as of the close of business on January 30, 2004 must list all accounts on the stock order form giving all names in each account and the account numbers. Failure to list all of your accounts may result in fewer shares being allocated to you than if all of your accounts had been disclosed.

We have the right to reject any order submitted in the offering by a person who we believe is making false representations or who we otherwise believe, either alone or acting in concert with others, is violating, evading, circumventing, or intends to violate, evade or circumvent the terms and conditions of the plan of conversion.

By signing the order form, you will be acknowledging that the common stock is not a deposit or savings account and is not federally insured or otherwise guaranteed by SBU Bank or the federal government, and that you received a copy of this prospectus. However, signing the order form will not result in you waiving your rights under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Payment for Shares. Payment for all shares of common stock will be required to accompany all completed order forms for the purchase to be valid. Payment for shares may be made by:

(1) personal check, bank check or money order, made payable to Partners Trust Financial Group; or

(2) authorization of withdrawal from SBU Bank deposit accounts designated on the stock order form.

Appropriate means for designating withdrawals from deposit accounts at SBU Bank are provided in the order forms. The funds designated must be available in the account(s) at the time the order form is received. A

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hold will be placed on these funds, making them unavailable to the depositor. Funds authorized for withdrawal will continue to earn interest within the account at the contract rate until the offering is completed, at which time the designated withdrawal will be made. Interest penalties for early withdrawal applicable to certificate accounts will not apply to withdrawals authorized for the purchase of shares of common stock; however, if a withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the time of withdrawal without penalty and the remaining balance will earn interest at the current passbook rate subsequent to the withdrawal. In the case of payments made by check or money order, these funds must be available in the account(s) and will be immediately cashed and placed in a segregated account at SBU Bank and will earn interest at SBU Bank’s passbook savings rate from the date payment is received until the offering is completed or terminated.

You may not remit SBU Bank line of credit checks or third party checks. Additionally, you may not designate a direct withdrawal from SBU Bank accounts with check-writing privileges. Please provide a check instead, because we cannot place holds on checking accounts. If you request that we do so, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account. Once we receive your executed order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by the expiration date, in which event purchasers may be given the opportunity to increase, decrease or rescind their orders for a specified period of time.

If you are interested in using your individual retirement account funds to purchase shares of common stock, you must do so through a self-directed individual retirement account such as a brokerage firm individual retirement account or those offered by SBU Bank’s Investment Management and Trust Departments. By regulation, SBU Bank’s individual retirement accounts that were not established through our Investment Management or Trust Department are not self-directed, so they cannot be invested in our shares of common stock. Therefore, if you wish to use your funds that are currently in a SBU Bank individual retirement account, you may not designate on the order form that you wish funds to be withdrawn from the account for the purchase of common stock. The funds you wish to use for the purchase of common stock will have to be transferred to a brokerage account or SBU Bank’s Investment Management or Trust Department. There will be no early withdrawal or Internal Revenue Service interest penalties for these transfers. Depositors interested in using funds in an individual retirement account or any other retirement account to purchase shares of common stock should contact our conversion center as soon as possible, preferably at least two weeks prior to the end of the offering period, because processing such transactions takes additional time, and whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held. We cannot guarantee that you will be able to use such funds.

We shall have the right, in our sole discretion, to permit institutional investors to submit irrevocable orders together with the legally binding commitment for payment and to thereafter pay for the shares of common stock for which they subscribe in the community offering at any time prior to 48 hours before the completion of the reorganization. This payment may be made by wire transfer.

If our tax qualified employee stock benefit plan purchases shares in the offering, it will not be required to pay for such shares until consummation of the offering, provided there is a loan commitment from an unrelated financial institution or Partners Trust Financial Group to lend to the employee stock ownership plan the necessary amount to fund the purchase.

Regulations prohibit SBU Bank from lending funds or extending credit to any persons to purchase shares of common stock in the offering.

Delivery of Stock Certificates. Certificates representing shares of common stock issued in the offering and SBU Bank checks representing any applicable refund or interest paid on subscriptions made by check or money order will be mailed to the persons entitled thereto at the certificate registration address noted on the order form,

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as soon as practicable following consummation of the offering and receipt of all necessary regulatory approvals. Any certificates returned as undeliverable will be held by the transfer agent until claimed by persons legally entitled thereto or otherwise disposed of in accordance with applicable law.

UNTIL CERTIFICATES FOR THE COMMON STOCK ARE AVAILABLE AND DELIVERED TO PURCHASERS, PURCHASERS MAY NOT BE ABLE TO SELL THE SHARES OF COMMON STOCK WHICH THEY ORDERED, EVEN THOUGH THE COMMON STOCK WILL HAVE BEGUN TRADING.

Other Restrictions. Notwithstanding any other provision of the plan of conversion and reorganization, no person is entitled to purchase any shares of common stock to the extent the purchase would be illegal under any federal or state law or regulation, including state “blue sky” registrations, or would violate regulations or policies of the National Association of Securities Dealers, Inc., particularly those regarding free riding and withholding. We may ask for an acceptable legal opinion from any purchaser as to the legality of his or her purchase and we may refuse to honor any purchase order if an opinion is not timely furnished. In addition, we are not required to offer shares of common stock to any person who resides in a foreign country.

Restrictions on Transfer of Subscription Rights and Shares

Office of Thrift Supervision regulations prohibit any person with subscription rights, including the eligible account holders, supplemental eligible account holders and other depositors, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the plan of conversion and reorganization or the shares of common stock to be issued upon their exercise. These rights may be exercised only by the person to whom they are granted and only for his or her account. Each person exercising subscription rights will be required to certify that he or she is purchasing shares solely for his or her own account and that he or she has no agreement or understanding regarding the sale or transfer of such shares. Federal regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase subscription rights or shares of common stock to be issued upon their exercise prior to completion of the offering.

We will pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights, and we will not honor orders that we believe involve the transfer of subscription rights.

Conversion Center

If you have any questions regarding the offering, please call our conversion center, toll free, at [            ], from 10:00 a.m. to 4:00 p.m., New York Time, Monday through Friday. The conversion center is located at our corporate headquarters at 233 Genesee Street, Utica, New York. The conversion center will be closed weekends and bank holidays.

Annual Meeting

The bylaws for Partners Trust Financial Group and Partners Trust, MHC provide that an annual meeting of stockholders or members, as applicable, for the election of directors shall be held within 150 days of the end of the fiscal year (May 29, 2004). In light of the pending conversion, Partners Trust Financial Group and Partners Trust, MHC have amended their bylaws, subject to Office of Thrift Supervision approval, to increase the time period for holding an annual meeting by an additional 45 days (to July 13, 2004). We expect that the conversion will be completed by mid-2004 and, therefore, Partners Trust Financial Group and Partners Trust, MHC do not anticipate holding annual meetings in 2004. However, if the conversion is terminated for any reason, an annual meeting of stockholders and members, as applicable, will be called as promptly as practicable thereafter. New Partners Trust Financial Group will hold an annual meeting of stockholders for the election of directors in 2005.

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Liquidation Rights

In the unlikely event of a complete liquidation of Partners Trust Financial Group prior to the conversion, all claims of creditors of Partners Trust Financial Group, including those of depositors of SBU Bank (to the extent of their deposit balances), would be paid first. Thereafter, if there were any assets of Partners Trust Financial Group remaining, these assets would be distributed to stockholders, including Partners Trust, MHC. In the unlikely event that Partners Trust, MHC and Partners Trust Financial Group liquidated prior to the conversion, all claims of creditors would be paid first. Then, if there were any assets of Partners Trust, MHC remaining, members of Partners Trust, MHC would receive those remaining assets, pro rata, based upon the deposit balances in their deposit account in SBU Bank immediately prior to liquidation. In the unlikely event that SBU Bank were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by distribution of the “liquidation account” to certain depositors, with any assets remaining thereafter distributed to Partners Trust Financial Group as the holder of SBU Bank capital stock. Pursuant to the rules and regulations of the Office of Thrift Supervision, a post-conversion merger, consolidation, sale of bulk assets or similar combination or transaction with another insured savings institution would not be considered a liquidation and, in these types of transactions, the liquidation account would be assumed by the surviving institution.

The plan of conversion and reorganization provides for the establishment, at the time of the conversion, of a special “liquidation account” for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to the greater of:

(1) Partners Trust, MHC’s ownership interest in the stockholders’ equity of Partners Trust Financial Group as of the date of its latest balance sheet contained in this prospectus; or

(2) the stockholders’ equity of SBU Bank as of the latest financial statements set forth in the prospectus used at the time that SBU Bank reorganized into Partners Trust, MHC in April, 2002.

The purpose of the liquidation account is to provide Eligible Account Holders and Supplemental Eligible Account Holders who maintain their deposit accounts with SBU Bank after the conversion with a liquidation interest in the unlikely event of the complete liquidation of SBU Bank after the conversion. Each Eligible Account Holder and Supplemental Eligible Account Holder that continues to maintain his or her deposit account at SBU Bank, would be entitled, on a complete liquidation of SBU Bank after the conversion, to an interest in the liquidation account prior to any payment to the stockholders of Partners Trust Financial Group. Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial interest in the liquidation account for each deposit account, including savings accounts, transaction accounts such as negotiable order of withdrawal accounts, money market deposit accounts, and certificates of deposit, with a balance of $50 or more held in SBU Bank on December 15, 2002, or March 31, 2004. Each Eligible Account Holder and Supplemental Eligible Account Holder would have a pro rata interest in the total liquidation account for each such deposit account, based on the proportion that the balance of each such deposit account on December 15, 2002, or March 31, 2004, bears to the balance of all deposit accounts in SBU Bank on such dates.

If, however, on any December 31 annual closing date commencing after the effective date of the conversion, the amount in any such deposit account is less than the amount in the deposit account on December 15, 2002 or March 31, 2004, or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be reduced from time to time by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Payment pursuant to liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders would be separate and apart from the payment of any insured deposit accounts to such depositor. Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied would be distributed to Partners Trust Financial Group as the sole stockholder of SBU Bank.

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Tax Aspects

Consummation of the conversion is conditioned upon the prior receipt by Partners Trust, MHC, Partners Trust Financial Group and SBU Bank of an opinion of counsel with respect to federal and New York State income tax laws, to the effect that consummation of the transactions contemplated by the conversion will qualify as a tax-free reorganization under the provisions of the applicable codes and will not otherwise result in any material adverse tax consequences to Partners Trust, MHC, Partners Trust Financial Group, the Holding Company (as defined herein) or SBU Bank, or the account holders receiving subscription rights before or after the conversion, except in each case to the extent, if any, that subscription rights or interests in the Liquidation Account are deemed to have value on the date such rights are issued.

In the view of RP Financial, LC, the subscription rights do not have any value, based on the fact that these rights are acquired by the recipients without cost, are nontransferable and of short duration, and afford the recipients the right only to purchase the common stock at a price equal to its estimated fair market value, which will be the same price as the subscription price for the unsubscribed shares of common stock. Eligible Account Holders and Supplemental Eligible Account Holders are encouraged to consult with their own tax advisors as to the tax consequences in the event that subscription rights are deemed to have an ascertainable value. Unlike private rulings, an opinion of RP Financial is not binding on the Internal Revenue Service and the Internal Revenue Service could disagree with the conclusions reached therein.

Based on the Supreme Court’s analysis in Paulsen v. Commissioner, the interests in the Liquidation Account in SBU Bank should have nominal, if any, fair market value. This conclusion is due in part to the fact that such interests may only be realized in the event of a complete liquidation of SBU Bank, which according to the rules and regulations of the Office of Thrift Supervision does not include a merger, consolidation or sale of assets or similar transaction of SBU Bank.

A private letter ruling will not be requested in connection with the conversion. Unlike private letter rulings, opinions of counsel are not binding on the Internal Revenue Service or any state tax authority, and such authorities may disagree with such opinions. In the event of such disagreement, there can be no assurance that the Holding Company, which term we use in this discussion to specifically refer to the new Delaware corporation named “Partners Trust Financial Group, Inc.,” or SBU Bank would prevail in a judicial proceeding.

Partners Trust, MHC, Partners Trust Financial Group, and SBU Bank have received an opinion of counsel, Hogan & Hartson L.L.P., regarding the material federal income tax consequences of the conversion, which includes the following:

1.  The conversion of Partners Trust Financial Group to an interim federal stock savings bank, still referred to as Partners Trust Financial Group, will constitute a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Code.

2.  The merger of Partners Trust Financial Group with and into SBU Bank (the “Mid-Tier Merger”) will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Code.

3.  Partners Trust Financial Group will not recognize any gain or loss in the Mid-Tier Merger.

4.  SBU Bank will not recognize any gain or loss in the Mid-Tier Merger.

5.  The basis of the assets of Partners Trust Financial Group to be received by SBU Bank in the Mid-Tier Merger will be the same as the basis of such assets in the hands of Partners Trust Financial Group immediately prior to the Mid-Tier Merger.

6.  The holding period of the assets of Partners Trust Financial Group to be received by SBU Bank in the Mid-Tier Merger will include the holding period of such assets in the hands of Partners Trust Financial Group immediately prior to the Mid-Tier Merger.

7.  Partners Trust Financial Group stockholders will not recognize any gain or loss upon their constructive exchange of Partners Trust Financial Group common stock in the Mid-Tier Merger.

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8.  The conversion of Partners Trust, MHC to an interim federal stock savings bank, still referred to as Partners Trust, MHC, will constitute a mere change in identity, form or place of organization within the meaning of Section 368(a)(1)(F) of the Code.

9.  The merger of Partners Trust, MHC with and into SBU Bank (the “MHC Merger”) will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Code.

10.  The exchange in the MHC Merger of Eligible Account Holders’ and Supplemental Account Holders’ interests in Partners Trust, MHC for interests in a Liquidation Account established in SBU Bank will satisfy the continuity of interest requirement of Section 1.368-1(e) of the Treasury Regulations.

11.  In the MHC Merger, Partners Trust, MHC will not recognize any gain or loss on the transfer of its assets to SBU Bank, SBU Bank’s assumption of its liabilities, and the cancellation of shares of common stock of SBU Bank that Partners Trust, MHC received in the Mid-Tier Merger, except to the extent the fair market value of the interests in the Liquidation Account, if any, plus the amount of liabilities assumed exceeds Partners Trust, MHC’s basis in the assets transferred.

12.  SBU Bank will not recognize any gain or loss in the MHC Merger.

13.  The basis of the assets of Partners Trust, MHC to be received by SBU Bank in the MHC Merger will be the same as the basis of such assets in the hands of Partners Trust, MHC immediately prior to the MHC Merger.

14.  The holding period of the assets of Partners Trust, MHC to be received by SBU Bank in the MHC Merger will include the holding period of such assets in the hands of Partners Trust, MHC immediately prior to the MHC Merger.

15.  Eligible Account Holders and Supplemental Account Holders will recognize gain, if any, upon the issuance to them of an interest in the Liquidation Account in SBU Bank and the non-transferable subscription rights to purchase Holding Company common stock, but only to the extent of the fair market value, if any, of the non-transferable subscription rights and the interest in the Liquidation Account.

16.  The merger of SBU Interim Savings Bank, an interim federal savings bank subsidiary of the Holding Company (“Interim”) into SBU Bank, with SBU Bank surviving the merger (the “SBU Bank Merger”), will qualify as a reorganization within the meaning of Section 368(a)(1)(A) of the Code pursuant to Section 368(a)(2)(E) of the Code.

17.  In the SBU Bank Merger, Interim will not recognize any gain or loss on the transfer of its assets to SBU Bank in exchange for SBU Bank common stock and the assumption by SBU Bank of the liabilities, if any, of Interim.

18.  SBU Bank will not recognize any gain or loss upon the receipt of the assets of Interim in the SBU Bank Merger.

19.  The Holding Company will not recognize any gain or loss upon its receipt of SBU Bank common stock in exchange for Interim common stock in the SBU Bank Merger.

20.  Partners Trust Financial Group stockholders other than Partners Trust, MHC (who by virtue of the Mid-Tier Merger will be considered SBU Bank stockholders) (the “Minority Stockholders”) will not recognize any gain or loss upon the exchange of their common stock solely for shares of Holding Company common stock in the Bank Merger.

21.  The payment of cash in lieu of fractional shares of the Holding Company to Minority Stockholders will be treated as though the fractional shares were distributed as part of the SBU Bank Merger and then redeemed by the Holding Company. The cash payments will be treated as distributions in full payment for the fractional shares deemed redeemed under Section 302(a) of the Code, with the result that such stockholders will have short-term or long-term capital gain or loss to the extent that the cash they receive differs from the basis allocable to such fractional shares.

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22.  Each Minority Stockholder’s aggregate basis in his or her Holding Company common stock received in the SBU Bank Merger will be the same as the aggregate basis of the common stock surrendered in exchange therefor. It is more likely than not that the basis of the Holding Company common stock purchased in the Offering by the exercise of the nontransferable subscription rights will be the purchase price thereof.

23.  Each Minority Stockholder’s holding period in his or her Holding Company common stock received in the SBU Bank Merger will include the period during which the common stock surrendered was held (which would include the holding period of such stockholder’s Partners Trust Financial Group common stock prior to the Mid-Tier Merger), provided that the common stock surrendered (or the Mid-Tier Holding Company common stock surrendered in the Mid-Tier Merger) was a capital asset in the hands of the stockholder on the date of the exchange. The holding period of the Holding Company common stock purchased pursuant to the exercise of a subscription right shall commence on the date on which the right was exercised.

24.  No gain or loss will be recognized by the Holding Company on the receipt of money in exchange for Holding Company common stock sold in the offering.

The federal tax opinion of Hogan & Hartson L.L.P. has been filed with the Securities and Exchange Commission as an exhibit to the registration statement. An opinion regarding New York state income tax consequences consistent with the federal tax opinion is being issued by Hogan & Hartson L.L.P., counsel to Partners Trust, MHC, Partners Trust Financial Group and SBU Bank.

Certain Restrictions on Purchase or Transfer of Our Shares After Conversion

All shares of common stock purchased in the offering by our directors or executive officers generally may not be sold for a period of one year following the closing of the conversion, except in the event of the death of the director or executive officer. Shares purchased by these persons after the conversion will be free of this restriction. Each certificate for restricted shares will bear a legend giving notice of this restriction on transfer, and instructions will be issued to the effect that any transfer within this time period of any certificate or record ownership of the shares other than as provided above is a violation of the restriction. Any shares of common stock issued at a later date as a stock dividend, stock split, or otherwise, with respect to the restricted stock will be similarly restricted. Our directors and executive officers also will be restricted by the insider trading rules promulgated pursuant to the Securities Exchange Act of 1934.

Purchases of shares of our common stock by any of our directors, executive officers and their associates, during the three-year period following the closing of the conversion may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Office of Thrift Supervision. This restriction does not apply, however, to negotiated transactions involving more than 1% of our outstanding common stock or to purchases of our common stock by our stock option plan or any of our tax-qualified employee stock benefit plans or nontax-qualified employee stock benefit plans, including any recognition and retention plans or restricted stock plans.

We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the registration of the common stock to be issued in the conversion. This registration does not cover the resale of the shares. Shares of common stock purchased by persons who are not affiliates of Partners Trust Financial Group may be resold without registration. Shares purchased by an affiliate of Partners Trust Financial Group will have resale restrictions under Rule 144 of the Securities Act. If we meet the current public information requirements of Rule 144, each of our affiliates who complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of certain other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares or the average weekly volume of trading in the shares during the preceding four calendar weeks. Provision may be made in the future to permit our affiliates to have their shares registered for sale under the Securities Act under certain circumstances.

Office of Thrift Supervision regulations prohibits us from repurchasing our common stock during the first year following conversion unless compelling business reasons exist for such repurchases. After one year, the Office of Thrift Supervision does not impose any repurchase restrictions.

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Interpretation, Amendment and Termination

To the extent permitted by law, all interpretations by us of the plan of conversion will be final; however, such interpretations have no binding effect on the Office of Thrift Supervision. The plan of conversion provides that, if deemed necessary or desirable, we may substantively amend the plan of conversion as a result of comments from regulatory authorities or otherwise, without the further approval of Partners Trust, MHC’s members or Partners Trust Financial Group’s stockholders.

Completion of the conversion requires the sale of all shares of the common stock within 24 months following approval of the plan of conversion by Partners Trust, MHC’s members and Partners Trust Financial Group’s stockholders. If this condition is not satisfied, the plan of conversion will be terminated and Partners Trust Financial Group will continue its business in the mutual holding company form of organization. We may terminate the plan of conversion at any time.

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RESTRICTIONS ON ACQUISITION OF NEW PARTNERS TRUST FINANCIAL GROUP

Although the board of directors is not aware of any effort that might be made to obtain control of new Partners Trust Financial Group after the conversion, the board of directors believes that it is appropriate to include certain provisions as part of new Partners Trust Financial Group’s certificate of incorporation to protect the interests of new Partners Trust Financial Group and its stockholders from takeovers which the board of directors might conclude are not in the best interests of SBU Bank, new Partners Trust Financial Group or new Partners Trust Financial Group’s stockholders.

The following discussion is a general summary of the material provisions of new Partners Trust Financial Group’s certificate of incorporation and bylaws and certain other regulatory provisions that may be deemed to have an “anti-takeover” effect. The following description of certain of these provisions is necessarily general and, with respect to provisions contained in new Partners Trust Financial Group’s certificate of incorporation and bylaws, reference should be made in each case to the document in question, each of which is part of Partners Trust, MHC’s application for conversion with the Office of Thrift Supervision and Partners Trust Financial Group’s registration statement filed with the Securities and Exchange Commission. See “Where You Can Find Additional Information.”

New Partners Trust Financial Group’s Certificate of Incorporation and Bylaws

New Partners Trust Financial Group’s Delaware certificate of incorporation and bylaws contain a number of provisions relating to corporate governance and rights of stockholders that might discourage future takeover attempts. As a result, stockholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of the board of directors or management of new Partners Trust Financial Group more difficult.

The following description is a summary of the provisions of the certificate of incorporation and bylaws. See “Where You Can Find Additional Information” as to how to review a copy of these documents.

Directors. The board of directors will be divided into three classes. The members of each class will be elected for a term of three years and only one class of directors will be elected annually for a term of three years. Thus, it would take at least two annual elections to replace a majority of the board of directors. Further, the bylaws impose notice and information requirements in connection with the nomination by stockholders of candidates for election to the board of directors or the proposal by stockholders of business to be acted upon at an annual meeting of stockholders.

Restrictions On Call Of Special Meetings. The certificate of incorporation and bylaws provide that special meetings of stockholders can be called only by (a) a majority of the directors in office, although less than a quorum; or (b) the holders of not less than 66 2/3 percent of the then outstanding shares of capital stock of new Partners Trust Financial Group entitled to vote generally in the election of directors.

Prohibition Of Cumulative Voting. The certificate of incorporation prohibits cumulative voting for the election of Directors.

Limitation Of Voting Rights. The certificate of incorporation provides that in no event will any person who beneficially owns more than 10% of the then-outstanding shares of common stock, be entitled or permitted to vote any of the shares of common stock held in excess of the 10% limit. This limitation is perpetual.

Restrictions On Removing Directors From Office. The certificate of incorporation provides that directors may only be removed for cause, and only by the affirmative vote of the holders of at least 66 2/3% of the voting power of all of our then-outstanding common stock entitled to vote.

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Authorized But Unissued Shares. After the conversion, new Partners Trust Financial Group will have authorized but unissued shares of common and preferred stock. See “Description of Capital Stock of Partners Trust Financial Group Following the Conversion.” The certificate of incorporation authorizes the issuance of 10,000,000 shares of serial preferred stock. New Partners Trust Financial Group is authorized to issue preferred stock from time to time in one or more series subject to applicable provisions of law, and the board of directors is authorized to fix the designations, and relative preferences, limitations, voting rights, if any, and other rights of such shares (which could be multiple or as a separate class). In the event of a proposed merger, tender offer or other attempt to gain control of new Partners Trust Financial Group that the board of directors does not approve, it might be possible for the board of directors to authorize the issuance of a series of preferred stock with rights and preferences that would impede the completion of the transaction. An effect of the possible issuance of preferred stock, therefore may be to deter a future attempt to gain control of new Partners Trust Financial Group. The board of directors has no present plan or understanding to issue any preferred stock.

Approvals for Acquisitions of Control and Offers to Acquire Control. The certificate of incorporation prohibits any person, whether an individual, company or group acting in concert, from acquiring beneficial ownership of 25% or more of the then outstanding shares of new Partners Trust Financial Group’s stock entitled to vote generally in the election of directors, unless the acquisition has been approved by holders of at least two-thirds of the outstanding shares of new Partners Trust Financial Group’s stock entitled to vote generally in the election of directors and of all required federal and state regulatory authorities. Shares acquired in excess of the 25% limitation are not entitled to vote or take other stockholder action or be counted in determining the total number of outstanding shares in connection with any matter involving stockholder action.

Control Share Acquisitions. The certificate of incorporation requires that any acquisition of “control shares” must be approved by holders of a majority of the then outstanding shares of stock of new Partners Trust Financial Group entitled to vote generally in the election of directors (other than shares held by the acquiring person or member of a group proposing to make the control share acquisition and shares held by officers or employee directors of new Partners Trust Financial Group) in order for the control shares to be voted. “Control shares” are those shares that would have voting power that, when added to all the other shares of new Partners Trust Financial Group owned by a person or which that person may exercise or direct the exercise of voting power, would entitle that person, immediately after acquisition of the shares, directly or indirectly, alone or as part of a group, to exercise or direct the exercise of the voting power of new Partners Trust Financial Group in the election of directors within any of the following ranges of voting power: (a) one-fifth or more but less than a third of all voting power; (b) one-third or more but less than a majority of all voting power; or (c) a majority or more of all voting power.

Mergers, Consolidations and Sales of Assets. The certificate of incorporation requires the approval of the holders of at least (a) 80% of the outstanding shares of stock entitled to vote generally in the election of directors and (b) two-thirds of the voting power of the outstanding shares entitled to vote generally in the election of directors excluding shares held by the interested stockholder and any associates or affiliates of the interested stockholder to approve certain business combinations involving an interested stockholder except where:

• the proposed transaction has been approved by two-thirds of the members of the board of directors who are unaffiliated with the interested stockholder and who were directors prior to the time when the interested stockholder became an interested stockholder; or

• certain “fair price” provisions are complied with.

The term “interested stockholder” includes any individual, corporation, partnership or other entity, other than new Partners Trust Financial Group, any subsidiary of new Partners Trust Financial Group or any employee stock purchase plan, pension plan, profit sharing plan or other employee benefit plan of Partners Trust Financial Group or any subsidiary, which owns beneficially or controls, directly or indirectly, 5% or more of the then outstanding shares of stock entitled to vote generally in the election of directors of Partners Trust Financial Group, or an affiliate of such person or entity. This provision applies to any business combination, which is broadly defined.

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Amendment To Certificate of Incorporation and Bylaws. Amendments to the certificate of incorporation must first be proposed by at least two-thirds of the directors and thereafter must be approved by the vote of the holders of a majority of the outstanding shares of stock entitled to vote generally in the election of directors, except that:

• the provisions governing the number and staggered three-year terms of directors, vacancies on the board of directors and removal of directors, limitation of director liability, the calling of special meetings of stockholders, action by unanimous written consent of stockholders, limitations on voting rights of greater than 10% stockholders, approval for acquisitions of control and offers to acquire control, control share acquisitions, criteria for evaluating offers, indemnification of officers and directors and the manner of amending the certificate of incorporation and bylaws may not be repealed, altered, amended or rescinded except if proposed by a vote of two-thirds of the directors and thereafter approved by the holders of at least two-thirds of the outstanding shares of stock entitled to vote thereon; and

• the provisions governing the approval of specified business combinations involving interested stockholders may not be repealed, altered, amended or rescinded except if proposed by a vote of two-thirds of the directors and thereafter approved by the holders of at least 80% of the outstanding shares of stock entitled to vote thereon.

The bylaws may only be amended by a majority vote of the board of directors or by the holders of at least 80% of the outstanding stock entitled to vote generally in the election of directors.

Purpose and Anti-Takeover Effects of New Partners Trust Financial Group’s Certificate of Incorporation and Bylaws

Our board of directors believes that the provisions described above are prudent and will reduce our vulnerability to takeover attempts and certain other transactions that have not been negotiated with and approved by our board of directors. These provisions also will assist us in the orderly deployment of the conversion proceeds into productive assets during the initial period after the conversion. Our board of directors believes these provisions are in the best interests of new Partners Trust Financial Group and its stockholders. Our board of directors believes that it will be in the best position to determine the true value of new Partners Trust Financial Group and to negotiate more effectively for what may be in the best interests of its stockholders. Accordingly, our board of directors believes that it is in the best interests of new Partners Trust Financial Group and its stockholders to encourage potential acquirers to negotiate directly with the board of directors of new Partners Trust Financial Group and that these provisions will encourage such negotiations and discourage hostile takeover attempts. It is also the view of our board of directors that these provisions should not discourage persons from proposing a merger or other transaction at a price reflective of the true value of new Partners Trust Financial Group and that is in the best interests of all stockholders.

Conversion Regulations

Office of Thrift Supervision regulations prohibit any person from making an offer, announcing an intent to make an offer or participating in any other arrangement to purchase stock or acquiring stock or subscription rights in a converting institution or its holding company from another person prior to completion of its conversion. Further, without the prior written approval of the Office of Thrift Supervision, no person may make such an offer or announcement of an offer to purchase shares or actually acquire shares in the converting institution or its holding company for a period of three years from the date of the completion of the conversion if, upon the completion of such offer, announcement or acquisition, that person would become the beneficial owner of more than 10% of the outstanding stock of the institution or its holding company. The Office of Thrift Supervision has defined “person” to include any individual, group acting in concert, corporation, partnership, association, joint stock company, trust, unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities of an insured institution. However, offers made exclusively to a bank or its holding company, or an underwriter or member of a selling group acting

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on the converting institution’s or its holding company’s behalf for resale to the general public are excepted. The regulation also provides civil as well as criminal penalties for certain violations.

Change Of Control Regulations

Under the Change in Bank Control Act, no person may acquire control of an insured federal savings bank or its parent holding company unless the Office of Thrift Supervision has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition. In addition, Office of Thrift Supervision regulations provide that no company may acquire control of a savings bank without the prior written approval of the Office of Thrift Supervision. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the Office of Thrift Supervision.

Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the savings bank’s directors, or a determination by the Office of Thrift Supervision that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings bank’s voting stock, if the acquiror is also subject to any one of eight “control factors,” constitutes a rebuttable determination of control under the regulations. Such control factors include the acquiror being one of the two largest stockholders. The determination of control may be rebutted by submission to the Office of Thrift Supervision, prior to the acquisition of stock or the occurrence of any other circumstances giving rise to such determination, of a statement setting forth facts and circumstances which would support a finding that no control relationship will exist and containing certain undertakings. The regulations provide that persons or companies which acquire beneficial ownership exceeding 10% or more of any class of a savings bank’s stock who do not intend to participate in or seek to exercise control over a savings bank’s management or policies may qualify for a safe harbor by filing with the Office of Thrift Supervision a certification form that states, among other things, that the holder is not in control of such institution, is not subject to a rebuttable determination of control and will take no action which would result in a determination or rebuttable determination of control without prior notice to or approval of the Office of Thrift Supervision, as applicable. There are also rebuttable presumptions in the regulations concerning whether a group “acting in concert” exists, including presumed action in concert among members of an “immediate family.”

The Office of Thrift Supervision may prohibit an acquisition of control if it finds, among other things, that:

• the acquisition would result in a monopoly or substantially lessen competition;

• the financial condition of the acquiring person might jeopardize the financial stability of the institution; or

• the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person.

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DESCRIPTION OF CAPITAL STOCK OF NEW PARTNERS TRUST FINANCIAL GROUP

FOLLOWING THE OFFERING

The following description of our capital stock summarizes certain provisions of the certificate of incorporation and bylaws of new Partners Trust Financial Group. Copies of our certificate of incorporation and bylaws are incorporated by reference into the registration statement of which this prospectus is a part.

General

After the conversion, new Partners Trust Financial Group will be authorized to issue 190,000,000 shares of common stock, $0.0001 par value per share, and 10,000,000 shares of preferred stock, par value $0.0001 per share. Partners Trust Financial Group currently expects to issue in the offering up to 19,936,181 shares of common stock, subject to adjustment, in exchange for the publicly held shares of Partners Trust Financial Group. New Partners Trust Financial Group will not issue shares of preferred stock in the conversion.

Each share of common stock of new Partners Trust Financial Group will have the same relative rights and will be identical in all respects to each other share of new Partner Trust Financial Group common stock.

Upon payment of the subscription price for the common stock in accordance with the plan of conversion and reorganization, all of the shares of common stock will be duly authorized, fully paid and nonassessable.

The capital stock of new Partners Trust Financial Group will be non-withdrawable capital, will not be of an insurable type and will not be insured by the Federal Deposit Insurance Corporation or any other governmental entity.

Common Stock

Dividends. Holders of new Partners Trust Financial Group common stock and any class or series of stock entitled to participate with it are entitled to receive dividends declared by the board of directors out of any assets legally available for distribution. No dividends or other distributions may be declared or paid, however, unless all accumulated dividends and any sinking fund, retirement fund or other retirement payments have been paid, declared or set aside on any class of stock having preference as to payments of dividends over new Partners Trust Financial Group common stock.

Voting Rights. Except as described under “Restrictions on Acquisition of Partners Trust Financial Group—New Partners Trust Financial Group’s Certificate of Incorporation and Bylaws—Limitations on Voting Rights,” “Restrictions on Acquisition of Partners Trust Financial Group—New Partners Trust Financial Group’s Certificate of Incorporation and Bylaws—Approvals for Acquisitions of Control and Offers to Acquire Control” and “Restrictions on Acquisition of Partners Trust Financial Group—New Partners Trust Financial Group’s Certificate of Incorporation and Bylaws—Control Share Acquisitions”, holders of common stock of new Partners Trust Financial Group will be entitled to one vote per share on each matter properly submitted to stockholders for their vote, including the election of directors.

Liquidation. In the event of any liquidation, dissolution or winding up of Partners Trust Financial Group, the holders of new Partners Trust Financial Group common stock and any class or series of stock entitled to participate with it would be entitled to receive all remaining assets of new Partners Trust Financial Group available for distribution, in cash or in kind, after payment or provision for payment of all debts and liabilities of new Partners Trust Financial Group and after the liquidation preferences of all outstanding shares of any class of stock having preference over new Partners Trust Financial Group common stock have been fully paid or set aside.

Redemption. Except as described under “Restrictions on Acquisition of Parnters Trust Financial Group – Control Share Acquisitions,” the common stock is not subject to redemption.

168

Preemptive Rights. Holders of common stock of new Partners Trust Financial Group will not be entitled to preemptive rights with respect to any shares that may be issued.

Preferred Stock

None of the shares of new Partners Trust Financial Group’s authorized preferred stock will be issued as part of the conversion. Preferred stock may be issued with preferences and designations as our board of directors may from time to time determine. Our board of directors may, without stockholder approval, issue shares of preferred stock with voting, dividend, liquidation and conversion rights that may dilute the voting strength of the holders of common stock and may assist management in impeding an unfriendly takeover or attempted change in control.

169

TRANSFER AGENT

Our registrar and transfer agent for the common stock is Registrar & Transfer Company.

EXPERTS

The consolidated financial statements of Partners Trust Financial Group and subsidiary as of December 31, 2003 and 2002, and for each of the years in the three-year period ended December 31, 2003, have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

The consolidated financial statements of BSB Bancorp as of December 31, 2003 and 2002, and for each of the years in the two-year period ended December 31, 2003, have been included herein and in the registration statement in reliance upon the reports of KPMG LLP, independent accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.

The consolidated statements of income, changes in shareholders’ equity and cash flows of BSB Bancorp for the year ended December 31, 2001 included in this prospectus and registration statement have been so included in reliance on the report of PricewatehouseCoopers LLP, independent accountants, given on authority of said firm as experts in auditing and accounting.

LEGAL MATTERS

Certain matters as to U.S. law in connection with this offering will be passed upon for us by Hogan & Hartson L.L.P., Washington, D.C. Certain legal matters in connection with this offering will be passed upon for the underwriters by Muldoon Murphy Faucette & Aguggia LLP, Washington, D.C.

WHERE YOU CAN FIND ADDITIONAL INFORMATION

We have filed with the SEC a registration statement on Form S-1 under the Securities Act registering the common shares to be sold in this offering. As permitted by the rules and regulations of the SEC, this prospectus does not contain all of the information included in the registration statement and the exhibits and schedules filed as a part of the registration statement. For further information concerning us and the common shares to be sold in this offering, you should refer to the registration statement and to the exhibits and schedules filed as part of the registration statement. Statements contained in this prospectus regarding the contents of any agreement or other document filed as an exhibit to the registration statement are not necessarily complete, and in each instance reference is made to the copy of the agreement filed as an exhibit to the registration statement each statement being qualified by this reference. The registration statement, including the exhibits and schedules filed as a part of the registration statement, may be inspected at the public reference facility maintained by the SEC at its public reference room at 450 Fifth Street, NW, Washington, DC 20549 and copies of all or any part thereof may be obtained from that office upon payment of the prescribed fees. You may call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference room and you can request copies of the documents upon payment of a duplicating fee, by writing to the SEC. In addition, the SEC maintains a web site that contains reports, proxy and information statements and other information regarding registrants, including us, that file electronically with the SEC which can be accessed at http://www.sec.gov.

170

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

PARTNERS TRUST FINANCIAL GROUP, INC. AND SUBSIDIARY

Index to Consolidated Financial Statements

	Page
Independent Auditors’ Report	F-2
Consolidated Balance Sheets at December 31, 2003 and 2002	F-3
Consolidated Statements of Income for the years ended December 31, 2003, 2002, and 2001	F-4
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2003, 2002, and 2001	F-5
Consolidated Statements of Cash Flow for the years ended December 31, 2003, 2002, and 2001	F-6
Consolidated Statements of Comprehensive Income for the years ended December 31, 2003, 2002 and 2001	F-8
Notes to Consolidated Financial Statements	F-9

BSB BANCORP, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements

	Page
Independent Auditors’ Reports	F-37
Report of Independent Auditors	F-38
Consolidated Statements of Condition at December 31, 2003 and 2002	F-39
Consolidated Statements of Income for the years ended December 31, 2003, 2002, and 2001	F-40
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2003, 2002, and 2001	F-41
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002, and 2001	F-42
Notes to Consolidated Financial Statements	F-44

F-1

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders

Partners Trust Financial Group, Inc.:

We have audited the accompanying consolidated balance sheets of Partners Trust Financial Group, Inc. and subsidiary (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in stockholders’ equity, cash flows, and comprehensive income for each of the years in the three-year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

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

/s/    KPMG LLP

Albany, New York

February 2, 2004

F-2

PARTNERS TRUST FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

	At December 31,
	2003			2002
	(In thousands except share data)
Assets
Cash and due from banks	$	27,607		$	45,868
Federal funds sold		12,900			39,111
Cash and cash equivalents		40,507			84,979
Securities available-for-sale, at fair value		343,714			344,133
Securities held-to-maturity (fair value of $1,241 at December 31, 2003 and $1,567 at December 31, 2002)		1,240			1,567
Federal Home Loan Bank of New York (“FHLB”) stock		13,225			12,350
Loans held for sale		1,390			5,054
Loans receivable		804,804			804,556
Less: Allowance for loan losses		(8,608	)		(10,989	)
Net loans receivable		796,196			793,567
Premises and equipment, net		13,623			14,511
Land and buildings held for sale		3,182			3,397
Accrued interest receivable		5,236			5,973
Bank-owned life insurance		24,099			22,826
Other real estate owned		121			3,092
Goodwill		34,523			34,523
Other intangible assets, net		3,288			4,461
Other assets		4,771			3,070
Total Assets	$	1,285,115		$	1,333,503
Liabilities and Stockholders’ Equity
Liabilities:
Deposits:
Non-interest bearing	$	98,942		$	103,935
Interest bearing		697,136			751,276
Total deposits		796,078			855,211
Borrowings		290,569			291,971
Mortgagors’ escrow funds		6,056			5,624
Other liabilities		17,077			15,260
Total liabilities		1,109,780			1,168,066
Stockholders’ Equity:
Preferred stock, $0.10 par value, 5,000,000 shares authorized, none issued		—			—
Common stock, $0.10 par value, 35,000,000 shares authorized, 14,216,875 shares issued at December 31, 2003 and December 31, 2002		1,422			1,422
Additional paid-in capital		63,410			62,683
Retained earnings		115,561			103,593
Accumulated other comprehensive income		1,902			5,575
Treasury stock (23,069 shares at December 31, 2003 and 12,796 shares at December 31, 2002)		(450	)		(170	)
Unallocated ESOP shares (409,446 shares at December 31, 2003 and 460,627 shares at December 31, 2002)		(4,094	)		(4,606	)
Unearned restricted stock awards		(2,416	)		(3,060	)
Total stockholders’ equity		175,335			165,437
Total Liabilities and Stockholders’ Equity	$	1,285,115		$	1,333,503

See accompanying notes to consolidated financial statements.

F-3

PARTNERS TRUST FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME

	Years Ended December 31,
	2003		2002			2001
	(In thousands, except share data)
Interest income:
Loans, including fees	$	53,986	$	44,037		$	47,904
Federal funds sold and interest bearing deposits		348		534			274
Securities		14,855		18,319			20,351
Total interest income		69,189		62,890			68,529
Interest expense:
Deposits:
Savings accounts		839		1,147			1,988
Money market accounts		1,335		1,832			3,618
Time accounts		9,563		12,054			17,921
NOW accounts		199		326			549
		11,936		15,359			24,076
Borrowings:
Repurchase agreements		443		639			2,862
FHLB advances		10,109		11,471			11,771
Mortgagors’ escrow funds		94		157			153
		10,646		12,267			14,786
Total interest expense		22,582		27,626			38,862
Net interest income		46,607		35,264			29,667
Provision for loan losses		1,100		1,150			1,672
Net interest income after provision for loan losses		45,507		34,114			27,995
Non-interest income:
Service fees		7,137		4,066			3,977
Trust and investment services		1,768		623			551
Income from bank-owned life insurance		1,273		1,292			2,030
Net (loss) gain on sale of securities available-for-sale		—		(19	)		266
Net gain on sale of loans		666		467			262
Other income		294		418			47
Total non-interest income		11,138		6,847			7,133
Non-interest expense:
Salaries and employee benefits		18,655		13,231			12,537
Occupancy and equipment expense		3,720		2,699			3,020
Writedown of land and buildings held for sale		32		34			1,539
Marketing expense		938		1,064			918
Professional services		1,483		1,088			1,118
Technology expense		3,640		2,648			2,983
Contribution expense		152		2,268			225
Amortization of intangible assets		1,189		—			—
Merger expenses		—		1,716			—
Other expense		5,522		3,983			3,818
Total non-interest expense		35,331		28,731			26,158
Income before income tax expense		21,314		12,230			8,970
Income tax expense		7,268		3,818			2,329
Net income	$	14,046	$	8,412		$	6,641
Basic earnings per share	$	1.04	$	0.45			N/A
Diluted earnings per share	$	1.02	$	0.45			N/A

See accompanying notes to consolidated financial statements.

F-4

PARTNERS TRUST FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

	Common Stock		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Unallocated ESOP Shares			Unearned Restricted Stock Awards			Total
	(In thousands, except share data)
Balance at December 31, 2000	$	—	$	—		$	89,732		$	179		$	—		$	—		$	—		$	89,911
Net income		—		—			6,641			—			—			—			—			6,641
Other comprehensive income, net of tax		—		—			—			3,596			—			—			—			3,596
Balance at December 31, 2001		—		—			96,373			3,775			—			—			—			100,148
Net income		—		—			8,412			—			—			—			—			8,412
Other comprehensive income, net of tax		—		—			—			1,800			—			—			—			1,800
Cash dividends ($0.10 per minority share)		—		—			(608	)		—			—			—			—			(608	)
Net proceeds from sale of common stock in initial public offering (6,397,594 shares), net of offering costs of $2,043		640		61,293			—			—			—			—			—			61,933
Initial capital contribution and issuance of shares to Partners Trust, MHC (7,627,353 shares)		763		(763	)		(100	)		—			—			—			—			(100	)
Charitable contribution of common stock to the SBU Bank Charitable Foundation (191,928 shares)		19		1,900			—			—			—			—			—			1,919
Common stock acquired by ESOP (511,808 shares)		—		—			—			—			—			(5,118	)		—			(5,118	)
ESOP shares allocated (51,181 shares)		—		253			—			—			—			512			—			765
Purchase of treasury stock (255,904 shares)		—		—			—			—			(3,875	)		—			—			(3,875	)
Stock awarded under the Management Recognition Plan (255,903 shares)		—		—			(484	)		—			3,875			—			(3,391	)		—
Stock forfeited under the Management Recognition Plan (12,795 shares)		—		—			—			—			(170	)		—			170			—
Amortization of unearned restricted stock awards		—		—			—			—			—			—			161			161
Balance at December 31, 2002		1,422		62,683			103,593			5,575			(170	)		(4,606	)		(3,060	)		165,437
Net income		—		—			14,046			—			—			—			—			14,046
Other comprehensive loss, net of tax		—		—			—			(3,673	)		—			—			—			(3,673	)
Cash dividends ($0.34 per minority share)		—		—			(2,078	)		—			—			—			—			(2,078	)
ESOP shares allocated (51,181 shares)		—		569			—			—			—			512			—			1,081
Amortization of unearned restricted stock awards		—		—			—			—			—			—			644			644
Tax benefit of MRP vesting		—		158			—			—			—			—			—			158
Purchase of treasury stock (13,273 shares)		—		—			—			—			(320	)		—			—			(320	)
Stock options exercised (3,000 shares)		—		—			—			—			40			—			—			40
	$	1,422	$	63,410		$	115,561		$	1,902		$	(450	)	$	(4,094	)	$	(2,416	)	$	175,335

See accompanying notes to consolidated financial statements.

F-5

PARTNERS TRUST FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOW

	Years Ended December 31,
	2003			2002			2001
	(In thousands)
Operating activities
Net income	$	14,046		$	8,412		$	6,641
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,100			1,150			1,672
Depreciation and amortization		1,911			2,028			2,512
Income from bank-owned life insurance		(1,273	)		(1,292	)		(2,030	)
Deferred tax expense (benefit)		456			301			(1,373	)
Net premium amortization (discount accretion) on securities		2,230			(884	)		(504	)
Loss (gain) on sale of other real estate owned, net		88			(42	)		(151	)
Proceeds from sales of loans held for sale		32,918			28,784			21,118
Loans originated for sale		(27,787	)		(27,908	)		(20,856	)
Gain on sale of loans, net		(666	)		(467	)		(262	)
Writedown of land and buildings held for sale, net		32			34			1,539
Gain on sale of land and buildings held for sale		(11	)		—			—
(Gain) loss on disposal of equipment, net		(41	)		47			71
Net loss (gain) on sale of securities available-for-sale		—			19			(266	)
Contribution of stock to SBU Bank Charitable Foundation		—			1,919			—
ESOP expense		1,081			765			—
Management Recognition Plan expense		644			161			—
Amortization of intangible assets		1,189			—			—
Decrease in accrued interest receivable		737			312			1,248
Net change in other assets and other liabilities		1,424			10,950			3,608
Net cash provided by operating activities		28,078			24,289			12,967
Investing activities:
Net cash used in acquisition activities		—			(27,272	)		—
Purchases of securities held-to-maturity		(458	)		(298	)		(556	)
Proceeds from redemptions, maturities and principal collected on securities held-to-maturity		785			256			455
Purchases of securities available-for-sale		(179,906	)		(87,900	)		(41,527	)
Proceeds from redemptions, maturities and principal collected on securities available-for-sale		172,800			121,059			59,186
Proceeds from sales of securities available-for-sale		—			1,301			28,001
Purchases of FHLB stock		(2,175	)		(1,000	)		(5,020	)
Redemptions of FHLB stock		1,300			—			1,410
Proceeds from bank-owned life insurance		—			—			1,951
Net loans (made to) repaid by customers		(4,675	)		(16,158	)		5,937
Purchases of premises and equipment		(1,043	)		(932	)		(2,477	)
Proceeds from sale of equipment		61			61			—
Proceeds from sale of land and buildings held for sale		194			472			—
Proceeds from sales of other real estate owned		3,028			502			488
Net cash (used in) provided by investing activities		(10,089	)		(9,909	)		47,848

(Continued)

F-6

	Years Ended December 31,
	2003			2002			2001
	(In thousands)
Financing activities:
Net decrease in deposits	$	(59,133	)	$	(29,943	)	$	(35,997	)
Net (decrease) increase in mortgagors’ escrow funds		432			(721	)		(40	)
Net increase in short-term borrowings		1,000			—			—
Proceeds from FHLB advances		115,000			108,500			147,000
Repayment of FHLB advances		(98,500	)		(88,500	)		(65,000	)
Net decrease in repurchase agreements		(18,902	)		(3,026	)		(91,666	)
Cash dividends		(2,078	)		(608	)		—
Net proceeds from sale of common stock		—			61,933			—
Loan to ESOP for the purchase of common stock		—			(5,118	)		—
Capitalization of Partners Trust, MHC		—			(100	)		—
Purchase of treasury stock		(320	)		(3,875	)		—
Proceeds from exercise of stock options		40			—			—
Net cash (used in) provided by financing activities		(62,461	)		38,542			(45,703	)
Net (decrease) increase in cash and cash equivalents		(44,472	)		52,922			15,112
Cash and cash equivalents at beginning of year		84,979			32,057			16,945
Cash and cash equivalents at end of year	$	40,507		$	84,979		$	32,057
Supplemental disclosures:
Cash paid during the year for:
Interest on deposits and borrowings	$	23,122		$	28,604		$	40,013
Income taxes		4,800			5,772			2,520
Non-cash investing and financing activity:
Transfer of loans to other real estate owned		145			3,380			330
Transfer of securities from held-to-maturity to available-for-sale upon adoption of SFAS No. 133 (fair value of $168,156 on date of transfer)		—			—			166,490
Transfer of premises and equipment to land and buildings held for sale		—			224			5,218
Acquisition activity:
Fair value of non-cash assets acquired		—			328,468			—
Fair value of liabilities assumed		—			301,196			—

See accompanying notes to consolidated financial statements.

F-7

PARTNERS TRUST FINANCIAL GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Years Ended December 31,
	2003			2002		2001
	(In thousands)
Net income	$	14,046		$	8,412	$	6,641
Other comprehensive (loss) income, net of tax:
(Decrease) increase in unrealized holding gains on securities available-for-sale (pre-tax, ($5,295), $2,982, and $6,259)		(3,177	)		1,789		3,755
Reclassification adjustment for net (gain)/loss on sales of available-for-sale securities realized in net income (pre-tax amounts of $ -, $19 and ($266))		—			11		(159	)
Minimum pension liability arising during the year (pre-tax, ($826))		(496	)		—		—
Total other comprehensive (loss) income		(3,673	)		1,800		3,596
Comprehensive income	$	10,373		$	10,212	$	10,237

See accompanying notes to consolidated financial statements.

F-8

PARTNERS TRUST FINANCIAL GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Summary of Significant Accounting Policies

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

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

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

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

Management’s Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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

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

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

F-9

Note 1: Summary of Significant Account Policies—(Continued)

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

Repurchase Agreements. The Company enters into sales of securities under agreements to repurchase (“repurchase agreements”). The Company transfers the underlying securities to a third party custodian’s account that explicitly recognizes the Company’s interest in the securities. Provided the Company maintains effective control over the transferred securities, repurchase agreements are accounted for as borrowings, and the obligations to repurchase securities sold are reflected as a liability in the balance sheet. The securities underlying the agreements continue to be carried in the Company’s securities portfolio.

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

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

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

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

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

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

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

Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained

F-10

Note 1: Summary of Significant Account Policies—(Continued)

period of repayment performance (generally a minimum of six months) by the borrower, in accordance with the contractual terms of the loan.

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

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

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

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

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

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

Other Real Estate Owned. Other real estate owned, representing properties acquired in settlement of loans, is recorded on an individual asset basis at the lower of the recorded investment in the loan or the fair value of the asset acquired less an estimate of the costs to sell the property. At the time of foreclosure, the excess, if any, of

F-11

Note 1: Summary of Significant Account Policies—(Continued)

the recorded investment in the loan over the fair value of the property received is charged to the allowance for loan losses. Subsequent declines in the value of such property and net operating expenses of such properties are charged directly to non-interest expenses.

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

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

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

Deferred tax assets are recognized subject to management’s judgment that those assets will more likely than not be realized. A valuation allowance is recognized if, based on an analysis of available evidence, management believes that all or a portion of the deferred tax assets will not be realized. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense.

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

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

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

F-12

Note 1: Summary of Significant Account Policies—(Continued)

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

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

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

The Company’s stock options have characteristics significantly different from those of traded options for which the Black-Scholes model was developed. Since changes in the subjective input assumptions can materially affect the fair value estimates, the existing model, in management’s opinion, does not necessarily provide a single reliable measure of the fair value of its stock options. In addition, the pro forma effect on reported net income and earnings per share for the years ended December 31, 2003 and 2002 should not be considered representative of the pro forma effects on reported net income and earnings per share for future years. Additional information regarding the Company’s stock options is located in note 11.

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

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

The Company adopted the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” effective January 1, 2001. SFAS No. 133 has since been amended by SFAS No. 138 and SFAS No. 149. SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It

F-13

Note 1: Summary of Significant Account Policies—(Continued)

requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. Changes in the fair value of the derivative financial instruments are reported in either net income or as a component of other comprehensive income, depending on the use of the derivative and whether or not it qualifies for hedge accounting.

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

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

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

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

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

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

Note 2: Business Combination

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

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

F-14

Note 2: Business Combination—(Continued)

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

	December 31, 2003
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Core deposit intangible	$	3,839	$	960	$	2,879
Mortgage servicing rights		593		339		254
Other intangible assets		384		229		155
Total	$	4,816	$	1,528	$	3,288
	December 31, 2002
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Core deposit intangible	$	3,839	$	—	$	3,839
Mortgage servicing rights		3,960		3,722		238
Other intangible assets		384		—		384
Total	$	8,183	$	3,722	$	4,461

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

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

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

	(In thousands)
At December 27, 2002
Cash and cash equivalents	$	37,781
Securities available-for-sale		78,425
Loans receivable, net of allowance for loan losses and loans held for sale		191,131
Premises and equipment		4,316
Goodwill		34,523
Core deposit intangible		3,839
Trust relationship intangible		207
Other assets		16,027
Total assets acquired		366,249
Deposits and escrow accounts		280,789
Borrowings		18,545
Other liabilities		1,862
Total liabilities assumed		301,196
Net assets acquired	$	65,053

F-15

Note 2: Business Combination—(Continued)

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

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

	For the Years Ended December 31,
	2002			2001
	(In thousands, except per share data)
Net interest income	$	47,741		$	41,141
Provision for loan losses		(3,418	)		(2,512	)
Non-interest income		9,778			10,070
Non-interest expense		(43,597	)		(40,101	)
Income tax expense		(3,120	)		(1,656	)
Net income	$	7,384		$	6,942
Basic and diluted earnings per share	$	0.37			N/A

Earnings per share are not applicable prior to the conversion to a stock bank on April 3, 2002.

Note 3: Securities

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

	Amortized Cost		Gross Unrealized				Estimated Fair Value
December 31, 2003			Gains		Losses
Available-for-sale:
U.S. Treasury and obligations of U.S. government corporations and agencies	$	101,905	$	1,257	$	107	$	103,055
Municipal obligations		31,729		581		31		32,279
Corporate debt securities		15,481		448		14		15,915
Fannie Mae preferred stock		10,000		—		1,807		8,193
Collateralized mortgage obligations		42,209		366		30		42,545
Other mortgage-backed securities		138,393		3,614		280		141,727
Total available-for-sale	$	339,717	$	6,266	$	2,269	$	343,714
Held-to-maturity:
Other securities	$	1,240	$	1	$	—	$	1,241
Total held-to-maturity	$	1,240	$	1	$	—	$	1,241

F-16

Note 3: Securities—(Continued)

	Amortized Cost		Gross Unrealized				Estimated Fair Value
December 31, 2002			Gains		Losses
Available-for-sale:
U.S. Treasury and obligations of U.S. government corporations and agencies	$	79,703	$	2,167	$	—	$	81,870
Municipal obligations		28,462		3		—		28,465
Corporate debt securities		15,915		262		—		16,177
Fannie Mae preferred stock		10,000		—		534		9,466
Collateralized mortgage obligations		73,159		1,210		—		74,369
Other mortgage-backed securities		127,602		6,184		—		133,786
Total available-for-sale	$	334,841	$	9,826	$	534	$	344,133
Held-to-maturity:
Other securities	$	1,567	$	—	$	—	$	1,567
Total held-to-maturity	$	1,567	$	—	$	—	$	1,567

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

	Less than 12 months				12 Months or longer				Total
	Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
U.S. Treasury and obligations of U.S. government corporations and agencies	$	23,691	$	107	$	—	$	—	$	23,691	$	107
Municipal obligations		1,001		31		—		—		1,001		31
Corporate debt securities		1,690		14		—		—		1,690		14
Fannie Mae preferred stock		—		—		8,193		1,807		8,193		1,807
Collateralized mortgage obligations		10,646		30		—		—		10,646		30
Other mortgage-backed securities		45,421		280		—		—		45,421		280
Total temporarily impaired securities	$	82,449	$	462	$	8,193	$	1,807	$	90,642	$	2,269

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

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

F-17

Note 3: Securities—(Continued)

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

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

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

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

Note 4: Loans Receivable

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

	December 31,
	2003		2002
Residential	$	481,929	$	434,312
Commercial real estate		139,555		170,430
Commercial		58,936		56,785
Consumer, including home equity loans		124,830		143,471
Total loans receivable		805,250		804,998
Less:
Net deferred loan fees and costs		446		442
Allowance for loan losses		8,608		10,989
Net loans receivable	$	796,196	$	793,567

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

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

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

At December 31, 2003, 2002 and 2001, impaired loans totaled approximately $1.9 million, $2.0 million and $4.9 million, respectively. There was no allowance for loan losses on impaired loans at December 31, 2003. The

F-18

Note 4: Loans Receivable—(Continued)

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

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

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

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

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

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

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

Note 5: Premises and Equipment

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

	December 31,
	2003			2002
Land	$	3,073		$	3,073
Buildings		13,754			14,167
Leasehold improvements		2,112			2,108
Furniture, fixtures and equipment		7,341			9,443
Computer software purchased		2,434			2,348
Construction in progress		205			47
Total cost		28,919			31,186
Less: Accumulated depreciation and amortization		(15,296	)		(16,675	)
	$	13,623		$	14,511

F-19

Note 6: Land and Buildings Held for Sale

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

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

Note 7: Accrued Interest Receivable

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

	December 31,
	2003		2002
Loans	$	2,734	$	3,338
Securities		2,502		2,635
Total accrued interest receivable	$	5,236	$	5,973

Note 8: Deposits

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

	December 31,
	2003		2002
Savings accounts	$	156,469	$	169,902
Money market accounts		153,320		164,435
Time accounts		297,273		328,806
Demand deposits and NOW accounts		189,016		192,068
Total deposits	$	796,078	$	855,211

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

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

F-20

Note 8: Deposits—(Continued)

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

Note 9: Borrowings

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

	December 31,
	2003		2002
Repurchase agreements	$	26,069	$	44,971
Federal Home Loan Bank term advances		263,500		247,000
Federal Home Loan Bank overnight line of credit		1,000		—
Total borrowings	$	290,569	$	291,971

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

	December 31,
	2003			2002			2001
FHLB Overnight Line of Credit:
Maximum month-end balance	$	13,000		$	—		$	19,000
Balance at end of year		1,000			—			—
Average balance during year		1,058			—			2,444
Weighted average interest rate at end of year		1.04	%		—			—
Weighted average interest rate during year		1.16	%		—			5.39	%
Repurchase agreements:
Maximum month-end balance	$	44,294		$	44,971		$	62,657
Balance at end of year		26,069			44,971			29,452
Average balance during year		34,668			28,028			49,835
Weighted average interest rate at end of year		1.04	%		1.73	%		2.63	%
Weighted average interest rate during year		1.21	%		2.28	%		5.74	%

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

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

	December 31, 2003				December 31, 2002
Maturing	Weighted Average Rate		Amount		Weighted Average Rate		Amount
2003					5.32	%	$	98,500
2004	2.91	%		33,500	2.91	%		33,500
2005	4.21	%		70,000	5.03	%		50,000
2006	3.63	%		90,000	4.50	%		40,000
2007	3.31	%		55,000	3.76	%		25,000
2008	2.79	%		15,000				—
Total FHLB term advances	3.58	%	$	263,500	4.64	%	$	247,000

F-21

Note 9: Borrowings—(Continued)

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

The Company had available $351.5 million and $277.0 million in borrowing capacity with the FHLB (subject to limitations) at December 31, 2003 and 2002, respectively, of which approximately $263.5 million and $247.0 million, respectively, was outstanding. FHLB advances are collateralized by certain mortgage loans, mortgage-backed securities, and other securities under a blanket pledge agreement with the FHLB.

Note 10: Employee Benefits Plan

Defined Benefit Plan and Postretirement Benefits. The Company has a noncontributory pension plan covering substantially all employees. Effective November 1, 2002, the Company froze all pension benefit accruals and participation in the Plan. Under the Plan, retirement benefits are primarily a function of both the years of service and the level of compensation. The amounts contributed to the plan are determined annually on the basis of (a) the maximum amount that can be deducted for Federal income tax purposes, or (b) the amount certified by an actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974. The Company also provides postretirement medical and life insurance benefits to eligible retirees. The costs of these benefits are accrued over the employment period of the active employees. The postretirement benefit plan is unfunded. Participation in this plan is limited to personnel meeting eligibility requirements prior to November 1, 2002. No additional employees are eligible for benefits subsequent to that date.

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

	Pension Benefits						Postretirement Benefits
	2003			2002			2003			2002
Change in benefit obligation:
Benefit obligation at beginning of year	$	9,962		$	9,636		$	3,160		$	3,400
Service cost		26			272			58			44
Interest cost		586			665			205			202
Actuarial loss (gain)		748			181			(597	)		(253	)
Benefits paid		(529	)		(792	)		(122	)		(233	)
Curtailment		(1,343	)		—			—			—
Benefit obligation at end of year	$	9,450		$	9,962		$	2,704		$	3,160
Change in plan assets:
Fair value of plan assets at beginning of year	$	8,795		$	10,870		$	—		$	—
Actual return (loss) on plan assets		1,003			(1,283	)		—			—
Employer contributions		—			—			122			233
Benefits paid		(529	)		(792	)		(122	)		(233	)
Fair value of plan assets at end of year	$	9,269		$	8,795		$	—		$	—
Reconciliation of funded status to net amount recognized:
Funded status	$	(181	)	$	(1,167	)	$	(2,704	)	$	(3,160	)
Unrecognized prior service cost		—			54			263			285
Unrecognized actuarial loss (gain)		826			1,405			(1,879	)		(1,350	)
Net amount recognized	$	645		$	292		$	(4,320	)	$	(4,225	)

F-22

Note 10: Employee Benefits Plan—(Continued)

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

	Pension Benefits					Postretirement Benefits
	2003			2002		2003			2002
Prepaid benefit cost	$	—		$	292	$	—		$	—
Accrued benefit cost		(181	)		—		(4,320	)		(4,225	)
Additional minimum liability		826			—		—			—
Net amount recognized	$	645		$	292	$	(4,320	)	$	(4,225	)

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

	Pension Benefits				Postretirement Benefits
	2003		2002		2003		2002
Projected benefit obligation	$	9,450	$	9,962
Accumulated benefit obligation		9,450		8,625	$	2,704	$	3,160
Fair value of plan assets		9,269		8,795		—		—

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

	Pension Benefits									Postretirement Benefits
	2003			2002			2001			2003			2002			2001
Service cost	$	26		$	272		$	306		$	58		$	44		$	60
Interest cost		586			665			715			205			202			234
Amortization of unrecognized actuarial gain		—			(151	)		(247	)		(67	)		(88	)		(60	)
Amortization of unrecognized prior service cost		1			7			7			21			21			21
Expected return on plan assets		(879	)		(1,093	)		(1,149	)		—			—			—
Curtailment credit		(87	)		—			—			—			—			—
Net periodic benefit plan (credit) cost	$	(353	)	$	(300	)	$	(368	)	$	217		$	179		$	255

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

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

	Pension Benefits						Postretirement Benefits
	2003		2002		2001		2003		2002		2001
Discount rate	6.25	%	6.75	%	7.25	%	6.25	%	6.75	%	7.25	%
Rate of compensation increase	N/A		4.00	%	4.50	%

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

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

	Pension Benefits						Postretirement Benefits
	2003		2002		2001		2003		2002		2001
Discount rate	6.75	%	7.25	%	8.00	%	6.75	%	7.25	%	7.50	%
Expected return on plan assets	9.00	%	9.00	%	9.00	%
Rate of compensation increase	4.00	%	4.50	%	5.50	%

F-23

Note 10: Employee Benefits Plan—(Continued)

The long-term rate of return on assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn real rates of return in the ranges of 5-9% and 2-6%, respectively. The long-term inflation rate was estimated to be 3%. When these overall return expectations are applied to the plan’s target allocation, the expected rate of return is determined to be 9.0% which is approximately the midpoint of the range of expected returns.

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

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

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

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

Plan assets are invested in six diversified investment funds of the RSI Retirement Trust (the “Trust”), a no load series open-ended mutual fund. In addition, a small portion of the assets (less than 1%) is invested in RS Group common stock. The investment funds include four equity mutual funds and two bond mutual funds, each with its own investment objectives, investment strategies and risks, as detailed in the Trust’s prospectus. The Trust has been given discretion by the Plan Sponsor to determine the appropriate strategic asset allocation versus plan liabilities, as governed by the Trust’s Statement of Investment Objectives and Guidelines (the “Guidelines”).

The long-term investment objective is to be invested 65% in equity securities (equity mutual funds) and 35% in debt securities (bond mutual funds). If the plan is underfunded under the Guidelines, the bond fund portion will be temporarily increased to 50% in order to lessen asset value volatility. When the plan is no longer underfunded, the bond fund portion will be decreased back to 35%. Asset rebalancing is performed at least annually, with interim adjustments made when the investment mix varies more than 5% from the target (i.e., a 10% target range).

The investment goal is to achieve investment results that will contribute to the proper funding of the pension plan by exceeding the rate of inflation over the long-term. Performance volatility is also monitored. Risk and volatility are further managed by the distinct investment objectives of each of the Trust funds and the diversification within each fund.

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

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

F-24

Note 10: Employee Benefits Plan—(Continued)

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

Note 11: Stock-Based Compensation Plans

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

The ESOP shares as of December 31 were as follows:

	2003		2002
Allocated shares		102,362		51,181
Unallocated shares		409,446		460,627
Total ESOP shares		511,808		511,808
Market value of unallocated shares at December 31 (in thousands)	$	13,921	$	7,333

Long-Term Equity Compensation Plan. On October 10, 2002, the Company’s stockholders approved the Partners Trust Financial Group, Inc. Long-Term Equity Compensation Plan (the “LTECP”).

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

Under the LTECP, 639,759 shares of authorized but unissued common stock are reserved for issuance upon option exercises. The Company also has the alternative to fund option exercises with treasury stock. Options

F-25

Note 11: Stock-Based Compensation Plans—(Continued)

under the LTECP may be either nonqualified stock options or incentive stock options. Each option entitles the holder to purchase one share of common stock at an exercise price equal to the fair market value of the stock on the grant date. Options expire no later than ten years following the grant date and vest at a rate of 20% per year.

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

	2003				2002
	Shares		Weighted Average Exercise Price		Shares		Weighted Average Exercise Price
Outstanding at beginning of year	546,000		$	13.25	—		$	—
Granted	24,000			17.67	571,000			13.25
Exercised	(3,000	)		13.25	—			—
Forfeited	—			—	(25,000	)		13.25
Outstanding at end of year	567,000		$	13.44	546,000		$	13.25
Exercisable at end of year	106,200		$	13.25	—		$	—

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

	2003
	Options Outstanding				Options Exercisable
Range of Exercise Prices	Options Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Life (Years)	Options Exercisable	Weighted Average Exercise Price
$13.25 - 22.65	567,000	$	13.44	8.8	106,200	$	13.25
	2002
	Options Outstanding				Options Exercisable
Range of Exercise Prices	Options Outstanding	Weighted Average Exercise Price		Weighted Average Remaining Life (Years)	Options Exercisable	Weighted Average Exercise Price
$13.25	546,000	$	13.25	9.8	—	$	—

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

	2003				2002
	Shares		Weighted Average Grant Price		Shares		Weighted Average Grant Price
Beginning of year	243,108		$	13.25	—		$	—
Granted	—			—	255,903			13.25
Forfeited	—			—	(12,795	)		13.25
Vested	(36,679	)		13.25	—			—
End of year	206,429		$	13.25	243,108		$	13.25

F-26

Note 12: Income Taxes

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

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

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

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

F-27

Note 12: Income Taxes—(Continued)

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

	December 31,
	2003			2002
Deferred tax assets:
Allowance for loan losses	$	2,894		$	3,686
Accrued postretirement benefits		1,737			1,701
Depreciation		208			356
Deferred compensation		504			589
Interest on non-accrual loans		319			478
Writedown of land and buildings held for sale		519			495
Charitable contribution carryforward		126			455
Minimum pension liability adjustment		330			—
Other		623			601
Total deferred tax assets		7,260			8,361
Deferred tax liabilities:
Bond discount accretion		(167	)		(184	)
Purchase accounting adjustments, net		(3,103	)		(4,061	)
Net unrealized gain on securities available-for-sale		(1,599	)		(3,717	)
Total deferred tax liabilities		(4,869	)		(7,962	)
Net deferred tax assets at end of year		2,391			399
Net deferred tax assets at beginning of year		399			3,912
Change in net deferred tax asset		1,992			(3,513	)
Less: Change in deferred tax liability on net unrealized gain on securities available-for-sale		2,118			(1,201	)
Change in deferred tax asset on minimum pension liability		330			—
Net deferred tax liabilities recorded at purchase acquisition date		—			(2,011	)
Deferred tax expense	$	(456	)	$	(301	)

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

Deferred tax assets are recognized subject to management’s judgment that these tax benefits will more likely than not be realized. Based on the sufficiency of taxable temporary items, historical taxable income, as well as anticipated future taxable income, the Company believes it is more likely than not that the gross deferred tax assets at December 31, 2003 and 2002 will be realized.

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

F-28

Note 12: Income Taxes—(Continued)

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

Note 13: Earnings Per Share

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

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

Note 14: Commitments and Contingencies

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheet. The contract amount of those commitments and letters of credit reflects the extent of involvement the Company has in those particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the counterparty to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of the instruments. The Company uses the same credit policies in making commitments and letters of credit as it does for on-balance sheet instruments.

F-29

Note 14: Commitments and Contingencies—(Continued)

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

	Contract Amount at December 31,
	2003		2002
Commitments to extend credit	$	84,216	$	106,455
Letters of credit		1,018		2,000

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitment amounts are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

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

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Typically, these instruments have terms of 12 months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements.

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

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

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

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

Year ending December 31 (in thousands):
2004	$	447
2005		448
2006		339
2007		287
2008		208
Thereafter		153
Total minimum lease payments	$	1,882

F-30

Note 14: Commitments and Contingencies—(Continued)

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

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

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

Note 15: Disclosures about Fair Values of Financial Instruments

SFAS No. 107, “Disclosures about Fair Value of Financial Instruments”, requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all nonfinancial assets and liabilities from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

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

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

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

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

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

Deposits. The fair values disclosed for non-interest bearing accounts and accounts with no stated maturities are, by definition, equal to the amount payable on demand at the reporting date. The fair value of time deposits was estimated by discounting expected monthly maturities at interest rates approximating those currently being offered on time deposits of similar terms. The fair value of accrued interest approximates carrying value.

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

F-31

Note 15: Disclosures about Fair Values of Financial Instruments—(Continued)

Mortgagors’ Escrow Funds. The fair value for mortgagors’ escrow funds approximates carrying value. The fair value of accrued interest approximates carrying value.

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

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

	December 31,
	2003					2002
	Carrying Amount			Fair Value		Carrying Amount			Fair Value
Financial assets:
Cash and cash equivalents	$	40,507		$	40,507	$	84,979		$	84,979
Securities		344,954			344,955		345,700			345,700
FHLB stock		13,225			13,225		12,350			12,350
Loans held for sale		1,390			1,390		5,054			5,054
Loans receivable		804,804			830,726		804,556			824,929
Allowance for loan losses		(8,608	)		—		(10,989	)		—
Net loans receivable		796,196			830,726		793,567			824,929
Accrued interest receivable		5,236			5,236		5,973			5,973
Financial liabilities:
Deposits	$	796,078		$	801,092	$	855,211		$	859,415
Borrowings		290,569			292,176		291,971			305,551
Mortgagors’ escrow funds		6,056			6,056		5,624			5,624
Accrued interest payable		785			785		1,324			1,324

Note 16: Regulatory Matters

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

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

As of December 31, 2003, the most recent notification from the Office of Thrift Supervision categorized the Bank and as well capitalized under the regulatory framework of prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios. There are no conditions or events since that notification that management believes have changed the Bank’s category. Although the Office of Thrift Supervision does not impose minimum capital requirements on thrift

F-32

Note 16: Regulatory Matters—(Continued)

holding companies, the Company’s consolidated regulatory capital amounts and ratios for capital adequacy purposes as of December 31, 2003 and 2002 are also presented in the following table (dollars in thousands):

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2003:
Total Capital (to Risk-Weighted Assets)
Company	$	143,963	19.7	%	$	58,619	8	%	$	—	N/A
Bank		123,415	16.9	%		58,569	8	%		73,211	10	%
Tier I Capital (to Risk-Weighted Assets)
Company		135,355	18.5	%		29,310	4	%		—	N/A
Bank		114,807	15.7	%		29,284	4	%		43,927	6	%
Tier I Capital (to Assets)
Company		135,355	10.8	%		37,460	3	%		—	N/A
Bank		114,807	9.2	%		37,365	3	%		62,275	5	%
Tangible Capital (to Tangible Assets)
Company		135,355	10.8	%		18,730	1.5	%		—	N/A
Bank		114,807	9.2	%		18,682	1.5	%		—	N/A
As of December 31, 2002:
Total Capital (to Risk-Weighted Assets)
Company	$	131,214	16.2	%	$	64,710	8	%	$	—	N/A
Bank		108,919	13.5	%		64,710	8	%		80,887	10	%
Tier I Capital (to Risk-Weighted Assets)
Company		121,092	15.0	%		32,355	4	%		—	N/A
Bank		98,797	12.2	%		32,355	4	%		48,532	6	%
Tier I Capital (to Assets)
Company		121,092	9.4	%		38,775	3	%		—	N/A
Bank		98,797	7.6	%		38,775	3	%		64,625	5	%
Tangible Capital (to Tangible Assets)
Company		121,092	9.4	%		19,388	1.5	%		—	N/A
Bank		98,797	7.6	%		19,388	1.5	%		—	N/A

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

	December 31,
	2003			2002
GAAP equity	$	175,335		$	165,437
Less:
Disallowed intangible assets		(37,582	)		(38,770	)
Unrealized holding gains on securities available-for-sale, net of tax		(2,398	)		(5,575	)
Tier I capital		135,355			121,092
Plus:
Allowable portion of the allowance for loan losses		8,608			10,122
Total capital	$	143,963		$	131,214

F-33

Note 17: Parent Company Only Financial Statements

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

	2003			2002
Condensed Balance Sheet
Assets:
Cash and due from subsidiary bank	$	20,865		$	23,216
Securities available-for-sale, at fair value		3,132			—
Investment in subsidiary bank		154,804			143,142
Other assets		41			—
Total assets	$	178,842		$	166,358
Total liabilities	$	3,507		$	921
Total stockholders’ equity		175,335			165,437
Total liabilities and stockholders’ equity	$	178,842		$	166,358
Condensed Statement of Income
Interest income	$	257		$	379
Other income		10			—
Total income		267			379
Employee benefits		1,726			926
Contribution of cash and Company common stock to charitable foundation		—			2,100
Other operating expenses		345			188
Total operating expenses		2,071			3,214
Net loss before income taxes and equity in undistributed income of subsidiary bank		(1,804	)		(2,835	)
Income tax benefit		532			1,019
Equity in undistributed income of subsidiary bank		15,318			7,920
Net income	$	14,046		$	6,104

F-34

Note 17: Parent Company Only Financial Statements—(Continued)

	2003			2002
Condensed Statement of Cash Flows
Operating activities:
Net income	$	14,046		$	6,104
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed income of subsidiary bank		(15,318	)		(7,920	)
Net premium amortization on securities		7			—
Increase in other assets		(32	)		—
Increase in other liabilities		2,744			921
Contribution of Company common stock to charitable foundation		—			1,919
ESOP expense		1,081			765
MRP expense		644			161
Net cash provided by operating activities		3,172			1,950
Investing activities:
Purchases of securities available-for-sale		(4,165	)		—
Proceeds from redemptions, maturities and principal collected on securities available-for-sale		1,000			—
Investment in equity of subsidiary bank		—			(30,966	)
Net cash used in investing activities		(3,165	)		(30,966	)
Financing activities:
Cash dividends		(2,078	)		(608	)
Net proceeds from sale of common stock		—			61,933
Loan to ESOP for the purchase of common stock		—			(5,118	)
Capitalization of Partners Trust, MHC		—			(100	)
Purchase of treasury stock		(320	)		(3,875	)
Proceeds from exercise of stock options		40			—
Net cash (used in) provided by financing activities		(2,358	)		52,232
Net (decrease) increase in cash and cash equivalents		(2,351	)		23,216
Cash and cash equivalents at beginning of period		23,216			—
Cash and cash equivalents at end of year	$	20,865		$	23,216
Supplemental disclosure of non-cash investing and financing activities:
Recognition of subsidiary bank’s existing equity on date of investment in equity of subsidiary bank	$	—		$	101,074

Note 18: Adoption of Plan of Conversion and Reorganization and Acquisition (Unaudited)

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

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

F-35

Note 18: Adoption of Plan of Conversion and Reorganization and Acquisition (Unaudited)—(Continued)

On December 23, 2003, the Company also signed a definitive merger agreement to acquire BSB Bancorp, Inc. (“BSB”), the holding company for BSB Bank & Trust Company. Under the agreement, following the conversion, BSB will be merged into the reorganized Partners Trust. The acquisition will only occur if the conversion is completed. The consideration to be paid in the merger will be 40% cash and 60% stock. Stockholders of BSB will be able to elect either $36.00 in cash or shares of common stock of the reorganized Partners Trust, subject to customary proration and allocation procedures. The final exchange ratio for the stock portion will be determined by dividing $36.00 by the price at which shares of Partners Trust common stock are sold in the conversion. The aggregate value of the transaction is approximately $347.0 million. The conversion, offering and acquisition are expected to be completed in mid-2004, subject to regulatory and stockholder approvals. The acquisition is to occur immediately upon completion of the conversion. As of December 31, 2003, BSB has total assets of $2.21 billion, total deposits of $1.59 billion and total stockholders’ equity of $146.3 million.

F-36

INDEPENDENT AUDITORS’ REPORT

The Board of Directors and Shareholders

BSB Bancorp, Inc.:

We have audited the accompanying consolidated statements of condition of BSB Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. The accompanying consolidated statements of income, changes in shareholders’ equity and cash flows for the year ended December 31, 2001, were audited by other auditors whose report thereon dated January 25, 2002, expressed an unqualified opinion on those statements.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the accompanying consolidated statements of condition as of December 31, 2003 and 2002, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the years then ended, present fairly, in all material respects, the financial position of BSB Bancorp, Inc. and subsidiaries as of December 31, 2003 and 2002, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

/s/    KPMG LLP

Albany, New York

February 12, 2004

F-37

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and shareholders

of BSB Bancorp, Inc.:

In our opinion, the consolidated statements of income, changes in shareholders’ equity and cash flows for the year ended December 31, 2001 (appearing on pages F-39 to F-43 in this Form S-1 of Partners Trust Financial Group, Inc.) present fairly, in all material respects, the results of operations and cash flows of BSB Bancorp, Inc. and its subsidiaries for the year ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

/s/    PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Syracuse, New York

January 25, 2002

F-38

BSB BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

	At December 31,
	2003			2002
	(In thousands, except share and per share data)
Assets
Cash and due from banks	$	45,670		$	46,912
Federal funds sold		16,000			—
Cash and cash equivalents		61,670			46,912
Investment securities available for sale, at fair value		623,832			538,545
Investment securities held to maturity (fair value of $56,093 at December 31, 2002)		—			55,373
Federal Home Loan Bank of New York stock		19,541			19,934
Loans held for sale		1,144			4,001
Loans:
Commercial		323,634			492,171
Consumer		367,412			377,961
Residential real estate		558,781			330,344
Commercial real estate		199,417			146,955
Total loans		1,449,244			1,347,431
Net deferred costs		2,953			1,863
Allowance for loan losses		(47,421	)		(63,250	)
Net loans		1,404,776			1,286,044
Bank premises and equipment, net		15,223			14,545
Accrued interest receivable		7,981			9,875
Other real estate owned and repossessed assets		1,231			3,109
Bank owned life insurance		41,054			20,032
Other assets		35,659			36,297
Total assets	$	2,212,111		$	2,034,667
Liabilities and Shareholders’ Equity
Deposits	$	1,589,086		$	1,442,756
Borrowings		410,768			378,118
Other liabilities		17,752			16,867
Junior subordinated obligations issued to unconsolidated subsidiary trusts (Junior subordinated obligations)		48,202			—
Mandatorily redeemable preferred securities issued by consolidated subsidiary trusts (Trust preferred securities)		—			48,000
Total liabilities		2,065,808			1,885,741
Commitments and contingent liabilities (Note 11)
Stockholders’ Equity:
Preferred stock, par value $.01 per share; 2,500,000 shares authorized; none issued		—			—
Common stock, par value $.01 per share; 30,000,000 shares authorized; 11,788,182 and 11,660,726 shares issued		118			117
Additional paid-in capital		44,243			41,704
Retained earnings		142,743			134,903
Accumulated other comprehensive income		3,049			8,970
Treasury stock, at cost; 2,541,668 and 2,223,430 shares		(43,850	)		(36,768	)
Total shareholders’ equity		146,303			148,926
Total liabilities and shareholders’ equity	$	2,212,111		$	2,034,667

See accompanying notes to consolidated financial statements.

F-39

BSB BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	Years Ended December 31,
	2003		2002			2001
	(In thousands, except share and per share data)
Interest income:
Interest and fees on loans	$	87,289	$	96,346		$	137,196
Interest on federal funds sold		80		287			1,101
Interest on investment securities		27,032		32,622			25,008
Interest on loans held for sale		400		233			189
Total interest income		114,801		129,488			163,494
Interest expense:
Interest on savings deposits		1,416		2,551			4,092
Interest on time accounts		18,783		26,401			48,878
Interest on money market deposit accounts		4,773		5,667			11,500
Interest on NOW accounts		264		710			1,522
Interest on borrowings		14,700		13,162			13,738
Interest on trust preferred securities		3,029		2,728			2,437
Total interest expense		42,965		51,219			82,167
Net interest income		71,836		78,269			81,327
Provision for loan losses		10,088		46,170			18,224
Net interest income after provision for loan losses		61,748		32,099			63,103
Non-interest income:
Service charges on deposit accounts		5,190		5,176			5,226
Checkcard interchange fees		1,407		1,422			1,284
Mortgage servicing fees		607		832			1,125
Fees and commissions-brokerage services		855		886			698
Trust fees		1,210		1,308			1,618
Income from bank owned life insurance		1,023		32			—
Gain on sale of securities, net		1,339		292			379
Gain on sale of branch offices, net		—		3,063			299
Gain on sale of credit card portfolio, net		—		1,806			—
Other income		1,909		2,946			2,903
Total non-interest income		13,540		17,763			13,532
Operating expense:
Salaries, pensions and other employee benefits		27,044		24,769			21,828
Building occupancy		4,561		4,259			4,304
Advertising and promotion		1,260		1,293			931
Professional fees		2,374		2,890			2,206
Data processing costs		4,662		5,534			5,213
Services		3,082		2,905			2,951
System conversion expenses		—		387			—
Merger related expenses		325		—			—
Other real estate owned and repossessed asset expenses, net		555		688			211
Other expenses		5,683		5,608			5,959
Total operating expense		49,546		48,333			43,603
Income before income taxes		25,742		1,529			33,032
Income tax expense (benefit)		8,725		(254	)		12,572
Net Income	$	17,017	$	1,783		$	20,460
Earnings per share:
Basic	$	1.85	$	0.19		$	2.05
Diluted	$	1.81	$	0.18		$	2.02

See accompanying notes to consolidated financial statements.

F-40

BSB BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

	Number of Shares Issued	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total
	(In thousands, except share and per share data)
Balance at December 31, 2000	11,503,272	$	115	$	38,789	$	132,277		$	(1,912	)	$	(13,484	)	$	155,785
Net income							20,460									20,460
Other comprehensive income										4,432						4,432
Comprehensive income																24,892
Stock options exercised	32,228				440											440
Tax benefit on stock options					102											102
Cash dividends paid on common stock ($1.00 per share)							(9,989	)								(9,989	)
Treasury stock purchased (732,410 shares)													(15,405	)		(15,405	)
Balance at December 31, 2001	11,535,500		115		39,331		142,748			2,520			(28,889	)		155,825
Net income							1,783									1,783
Other comprehensive income										6,450						6,450
Comprehensive income																8,233
Stock options exercised	125,226		2		2,046											2,048
Tax benefit on stock options					327											327
Cash dividends paid on common stock ($1.00 per share)							(9,628	)								(9,628	)
Treasury stock purchased (315,496 shares)													(7,879	)		(7,879	)
Balance at December 31, 2002	11,660,726		117		41,704		134,903			8,970			(36,768	)		148,926
Net income							17,017									17,017
Other comprehensive loss										(5,921	)					(5,921	)
Comprehensive income																11,096
Stock options exercised	127,456		1		2,223											2,224
Tax benefit on stock options					316											316
Cash dividends paid on common stock ($1.00 per share)							(9,177	)								(9,177	)
Treasury stock purchased (318,238 shares)													(7,082	)		(7,082	)
Balance at December 31, 2003	11,788,182	$	118	$	44,243	$	142,743		$	3,049		$	(43,850	)	$	146,303

See accompanying notes to consolidated financial statements.

F-41

BSB BANCORP INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
	2003			2002			2001
	(In thousands)
Operating activities:
Net income	$	17,017		$	1,783		$	20,460
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax expense (benefit)		7,197			15			(1,174	)
Provision for loan losses		10,088			46,170			18,224
Gain on sale of securities, net		(1,339	)		(292	)		(379	)
Gain on repurchase of trust preferred securities, net		(6	)		(726	)		—
Gain on sale of credit card portfolio		—			(1,806	)		—
Gain on sale of branch offices, net		—			(3,063	)		(299	)
Loss (gain) on sale of loans held for sale, bank premises and equipment, other real estate owned and repossessed assets		250			(56	)		(125	)
Depreciation and amortization		2,264			2,376			2,642
Net amortization of premiums and discounts on investment securities		2,799			1,913			79
Tax benefit from exercise of stock options		316			327			102
Income from bank owned life insurance		(1,022	)		(32	)		—
Proceeds from sale of loans held for sale		55,819			24,726			8,690
Loans originated and held for sale		(53,166	)		(18,830	)		(20,162	)
Writedowns of other real estate owned and repossessed assets		71			1,526			1,089
Net change in other assets and liabilities		1,857			(17,749	)		(4,743	)
Net cash provided by operating activities		42,145			36,282			24,404
Investing activities:
Proceeds from calls of held to maturity investment securities		9,061			8,055			2,069
Purchases of held to maturity investment securities		(1,317	)		(54,011	)		(7,298	)
Principal collected on held to maturity investment securities		889			4,383			1,171
Proceeds from sales and calls of available for sale investment securities		216,619			162,842			167,696
Purchases of available for sale investment securities		(575,206	)		(351,955	)		(323,647	)
Principal collected on available for sale investment securities		308,678			147,284			47,306
Purchases of Federal Home Loan Bank (“FHLB”) stock		(7,974	)		(8,039	)		(4,174	)
Redemptions of FHLB stock		8,367			3,176			9,927
Proceeds from sale of credit card portfolio		—			12,749			—
Net loans (made to) repaid by customers		(158,631	)		71,982			343,002
Proceeds from sale of classified commercial loans		27,248			—			—
Proceeds from sale of other real estate owned and repossessed assets		4,370			6,123			4,243
Investment in bank owned life insurance		(20,000	)		(20,000	)		—
Purchases of bank premises and equipment		(2,942	)		(1,694	)		(2,712	)
Net cash (used in) provided by investing activities		(190,838	)		(19,105	)		237,583

(continued)

F-42

	Years Ended December 31,
	2003			2002			2001
	(In thousands)
Financing activities:
Net increase (decrease) in deposits, exclusive of branch sales		146,330			(10,781	)		(382,065	)
Net payment for sale of branches		—			(37,066	)		(2,224	)
Net decrease in repurchase agreements and FHLB line of credit advances		(21,321	)		(80,034	)		(5,118	)
Proceeds from FHLB term advances		125,000			115,000			192,000
Repayments of FHLB term advances		(71,029	)		(17,099	)		(52,099	)
Net proceeds from issuance of trust preferred securities		—			25,000			—
Repurchase of trust preferred securities		(1,494	)		(6,098	)		—
Proceeds from exercise of stock options		2,224			2,048			440
Purchases of treasury stock		(7,082	)		(7,879	)		(15,405	)
Dividends paid		(9,177	)		(9,628	)		(9,989	)
Net cash provided by (used in) financing activities		163,451			(26,537	)		(274,460	)
Net increase (decrease) in cash and cash equivalents		14,758			(9,360	)		(12,473	)
Cash and cash equivalents at beginning of year		46,912			56,272			68,745
Cash and cash equivalents at end of year	$	61,670		$	46,912		$	56,272
Supplemental disclosures to statements of cash flow information:
Cash paid during the year for:
Interest on deposits and borrowings	$	42,842		$	52,771		$	85,339
Income taxes (refunded) paid	$	(588	)	$	5,737		$	8,553
Non-cash investing activity:
Transfers from loans to other real estate owned and repossessed assets	$	2,563		$	8,712		$	5,480
Transfer of securities from held to maturity to available for sale (amortized cost of $44,926)	$	45,238			—			—
Adjustment of available for sale investment securities to fair value, net of tax	$	(5,921	)	$	6,540		$	4,432
Impact of deconsolidation of subsidiary trusts upon adoption of FIN 46 R as described in Note 1:
Increase in junior subordinated obligations	$	48,202			—			—
Increase in other assets representing investment in subsidiary trusts	$	(1,702	)		—			—
Decrease in trust preferred securities	$	(46,500	)		—			—

See accompanying notes to consolidated financial statements.

F-43

BSB BANCORP INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Summary of Significant Accounting Policies

Nature of Operations. BSB Bancorp, Inc. (the “Company”) is the bank holding company of BSB Bank & Trust Company (the “Bank”). The Bank is a New York-chartered commercial bank and trust company and, at December 31, 2003, operated 20 full-service branches in Broome, Chenango, Onondaga and Tioga Counties of New York State. The Bank is in the business of providing a wide variety of loan and deposit products to its commercial and consumer customers, and also provides mortgage banking, trust, municipal and other related services.

Principles of Consolidation. The consolidated financial statements of the Company include the accounts of the Company and its consolidated wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.

Use of Estimates in the Preparation of Financial Statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of other real estate owned and repossessed assets acquired in connection with foreclosures and repossessions. In connection with the determination of the allowance for loan losses and the valuation of other real estate owned and repossessed assets, management obtains appraisals of related collateral.

Management believes that the allowance for loan losses is adequate and that other real estate owned and repossessed assets are recorded at the lesser of the recorded investment in the loan at the time of foreclosure or repossession, or the fair value less an estimate of the costs to sell the properties or assets. While management uses available information to recognize losses on loans and other real estate owned and repossessed assets, future additions to the allowance for loan losses or writedowns of other real estate owned and repossessed assets may be necessary based on changes in economic conditions. In addition, Federal and state bank regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and other real estate owned and repossessed assets. Such agencies may require the Company to recognize additions to the allowance for loan losses or writedowns of other real estate owned and repossessed assets based on their judgments about information available to them at the time of their examination, which may not be currently available to management.

A substantial portion of the Company’s loans are secured by real estate and business related assets located throughout the New York State counties of Broome, Chenango, Onondaga and Tioga. In addition, a substantial portion of the other real estate owned is located in the same markets. Accordingly, the ultimate collectibility of a substantial portion of the Company’s loan portfolio and the recovery of a substantial portion of the carrying amount of other real estate owned is dependent upon general economic and real estate market conditions in these counties.

Cash and Cash Equivalents. Cash equivalents include cash and due from banks and federal funds sold. Generally, federal funds are sold or purchased for one-day periods.

Investment Securities and Federal Home Loan Bank of New York Stock. Management determines the classification of securities at the time of purchase. In March 2003, the Company sold its entire holdings of $9.1 million in certain corporate securities based upon an internal analysis concerned with anticipated downgrades due

F-44

Note 1: Summary of Significant Account Policies—(Continued)

to deteriorating fundamentals of the issuer. These corporate securities have been classified as held to maturity securities from the time of their initial purchase in 2002. Under the provisions of SFAS No. 115, such sale transactions cast doubt on the Company’s intent to hold other held to maturity securities to maturity. As a result, in March 2003, the Company reclassified its entire remaining held to maturity portfolio as available for sale and recognized the unrealized gain of $312,000 on the transferred securities as a credit to other comprehensive income as of the transfer date. The aggregate amortized cost value of the held to maturity portfolio was $44.9 million with a fair value of $45.2 million at the time of the transfer. In addition, as a result of the sale and transfer, the Company is precluded from classifying any newly purchased securities as held to maturity for the foreseeable future.

Securities that are identified as trading securities for resale over a short period are stated at fair value with unrealized gains and losses reflected in current earnings. All other debt and marketable equity securities are classified as securities available for sale and are reported at fair value, with net unrealized gains or losses reported, net of income taxes, in accumulated other comprehensive income or loss (a separate component of stockholders’ equity). None of the Company’s securities have been classified as trading securities at December 31, 2003 or 2002. Debt securities classified as held to maturity prior to March 2003 were reported at amortized cost.

Purchases and sales of securities are recorded as of the trade date. Premiums and discounts on securities are amortized and accreted, respectively, on a systematic basis over the period to maturity or estimated life of the related security. Gains or losses on securities sold are computed based on the net proceeds received and the amortized cost of the specific security sold. If unrealized losses on securities reflect a decline in value which is other than temporary, they are charged against income.

As a member of the Federal Home Loan Bank of New York (“FHLB”), the Company is required to hold FHLB stock, which is carried at cost since there is no readily available market value.

Loans Held For Sale. Loans held for sale are recorded at the lower of cost or fair value, in the aggregate. It is management’s intention to sell these loans. Loans held for sale, as well as the commitments to sell the loans that are originated for sale, are regularly evaluated. If necessary, a valuation allowance is established with a charge to income for unrealized losses attributable to a change in market rates.

Loans. Loans are reported at the principal amount outstanding, net of deferred loan fees and costs and the allowance for loan losses. Non-refundable loan fees and related direct costs are deferred and amortized over the life of the loan as an adjustment of loan yield.

Income Recognition on Non-accrual and Impaired Loans. Loans are placed on a non-accrual status when, in the judgment of management, the probability of collection of principal or interest is deemed to be insufficient to warrant further accrual. When a loan is placed on non-accrual status, previously accrued but unpaid interest is deducted from interest income. The Company generally does not accrue interest on loans greater than 90 days or more past due for the payment of principal or interest, unless the value of the collateral and active collection efforts indicate that full recovery is probable. Cash receipts on non-accrual loans are generally applied to reduce the unpaid principal balance, however, interest on non-accrual loans may also be recognized as cash is received. Amortization of the related net deferred loan fees and costs is suspended when a loan is placed on non-accrual status. Loans are removed from non-accrual status when they become current as to principal and interest or when, in the opinion of management, the loans are expected to be fully collectible as to principal and interest.

Commercial and commercial real estate loans are considered impaired when it is probable that the borrower will not repay the loan according to the original contractual terms of the loan agreement, or when a loan (of any loan type) is restructured in a troubled debt restructuring. The allowance for loan losses related to impaired loans is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain loans where repayment of the loan is expected to be provided solely by the underlying collateral (collateral dependent loans).

F-45

Note 1: Summary of Significant Account Policies—(Continued)

Allowance for Loan Losses. The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans, or portions thereof, are charged against the allowance for loan losses when management believes that the collectibility of all or a portion of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance for loan losses when received. The allowance is an amount that management believes will be necessary to absorb probable losses on existing loans. Management’s evaluation of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as the historical loan loss experience by loan type, review of specific problem loans, changes in the composition and volume of the loan portfolio, overall portfolio quality and current economic conditions that may affect the borrowers’ ability to pay.

Troubled Debt Restructured Loans. A loan is considered to be a troubled debt restructured loan (“TDR”) when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications at interest rates that are less than the current market rate for new obligations with similar risk. TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after a period of performance.

Bank Premises and Equipment. Bank premises and equipment are recorded at cost, less accumulated depreciation. Depreciation is computed on the straight-line method over the estimated useful life of the asset (15-50 years for bank premises and 3-10 years for furniture and equipment). Maintenance and repairs are charged to operating expense as incurred.

Other Real Estate Owned and Repossessed Assets. Other real estate owned and repossessed assets is comprised of property or assets acquired in the settlement of loans. These assets are initially established at the lesser of the recorded investment in the loan, or at the estimated fair value of the asset reduced by estimated disposal costs. At the time of foreclosure or repossession, the amount, if any, by which the recorded investment in the loan exceeds the fair value of the asset received is charged against the allowance for loan losses. Any subsequent declines in estimated fair value of the property or asset, or expenses incurred to maintain the property or asset, are charged to operating expense. An asset may be considered an in-substance foreclosure or repossession if the Company has taken possession of the asset serving as collateral for the loan, regardless of whether the Company has legal title to the asset. The final disposition of the property or asset is dependent upon many factors and the final disposition price may differ from the recorded value at that time. Any gains or losses upon disposition are recorded in operating expense.

Bank Owned Life Insurance. Bank owned life insurance (“BOLI”) is carried at the cash surrender value of the underlying policies. Income on the investments in the policies, net of insurance costs, is recorded as non-interest income.

Mortgage Servicing Rights. The Company recognizes as separate assets the rights to service mortgage loans for others, regardless of how those servicing rights were acquired. Mortgage servicing rights are amortized in proportion to, and over the period of, estimated net servicing income. Additionally, capitalized mortgage servicing rights are assessed for impairment based on the fair value of those rights, and any impairment is recognized through a valuation allowance by a charge to mortgage servicing fee income.

Securities Sold Under Agreements to Repurchase. Under securities repurchase agreements, the Company transfers the underlying securities to a third party custodian’s account that explicitly recognizes the Company’s interest in the securities. These agreements are accounted for as secured financing transactions provided the Company maintains effective control over the transferred securities and meets other criteria for such accounting as specified in Statement of Financial Account Standards (“SFAS”) No. 140. The Company’s agreements are accounted for as secured financings; accordingly, the transaction proceeds are recorded as borrowed funds and the underlying securities continue to be carried in the Company’s securities available for sale portfolio.

F-46

Note 1: Summary of Significant Account Policies—(Continued)

Income Taxes. The Company accounts for income taxes in accordance with the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized subject to management’s judgment that those assets will more likely than not be realized. A valuation allowance is recognized if, based on an analysis of available evidence, management believes that all or a portion of the deferred tax assets will not be realized. Adjustments to increase or decrease the valuation allowance are charged or credited, respectively, to income tax expense. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date.

Pension and Postretirement Benefits. The Company maintains a non-contributory, tax-qualified defined benefit pension plan covering substantially all employees. The Company also maintains a non-qualified supplemental plan for certain former executives. The costs of these plans, based on actuarial computations of current and future benefits for employees, are charged to current operating expenses. For purposes of computing net periodic pension expense for the qualified plan, the Company uses a market-related value of assets, which distributes asset gains and losses over a two-year period. Asset gains and losses are determined by the difference between the expected return on assets and the actual return.

The Company also provides certain post-retirement life and health insurance benefits to substantially all employees and retirees. The cost of post-retirement benefits other than pensions is recognized on an accrual basis as employees perform services to earn the benefits.

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

	2003			2002			2001
	(In thousands, except per share data)
Net income, as reported:
Deduct:	$	17,017		$	1,783		$	20,460
Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(1,044	)		(918	)		(852	)
Pro forma net income	$	15,973		$	865		$	19,608
Earnings Per Share:
Basic – as reported	$	1.85		$	0.19		$	2.05
Basic – pro forma	$	1.73		$	0.09		$	1.97
Diluted – as reported	$	1.81		$	0.18		$	2.02
Diluted – pro forma	$	1.70		$	0.09		$	1.94

The weighted average fair value of options granted during 2003, 2002 and 2001 was $8.11, $7.13 and $4.91, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 2003, 2002 and 2001, respectively: dividend yield of 3.7%, 3.8% and 3.9% ; expected volatility of 32.5%, 31.7% and 29.1%; risk-free interest rate of 3.40%, 4.71% and 5.09%; and expected life of 7.4 years in each year.

F-47

Note 1: Summary of Significant Account Policies—(Continued)

The Company’s stock options have characteristics significantly different from those of traded options for which the Black-Scholes model was developed. Since changes in the subjective input assumptions can materially affect the fair value estimates, the existing model, in management’s opinion, does not necessarily provide a single reliable measure of the fair value of its stock options. In addition, the pro forma effect on reported net income and earnings per share for the years ended December 31, 2003, 2002 and 2001, may not be representative of the pro forma effects on reported net income and earnings per share for future years.

Trust Department Assets and Fees. Assets held in fiduciary or agency capacities for customers are not included in the accompanying consolidated statements of condition, since such items are not assets of the Company. Fees associated with providing trust management services are recorded on the accrual basis and are included in non-interest income.

Earnings Per Share. Basic earnings per share are calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed in a manner similar to that of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the net additional common shares that would have been outstanding if all potentially dilutive common shares (such as stock options) were issued during the reporting period, computed using the treasury stock method.

Financial Instruments. In the normal course of business, the Company is a party to certain financial instruments with off-balance-sheet risk, such as commitments to extend credit, unused lines of credit and standby letters of credit. The Company’s policy is to record such instruments when funded.

Fair Value of Financial Instruments. The following methods and assumptions were used by the Company in estimating the fair values of its financial instruments for purposes of disclosure:

Cash and cash equivalents and accrued interest receivable/payable: The carrying amounts reported in the consolidated statements of condition for these instruments approximate fair value.

Investment securities and FHLB stock: Fair values for investment securities are based on quoted market prices or dealer quotes. The fair value of FHLB stock is assumed to equal the carrying value since the stock is non-marketable but redeemable at its par value.

Loans and loans held for sale: Fair values for loans are estimated using a discounted cash flow analysis, based on interest rates approximating those currently being offered for loans with similar terms and credit quality. Fair values for loans held for sale are estimated using quoted market values.

Deposits: The fair values disclosed for non-interest-bearing accounts and accounts with no stated maturities are, by definition, equal to the amount payable on demand at the reporting date. The fair value of time deposits was estimated by discounting expected monthly maturities at interest rates approximating those currently being offered on time deposits of similar terms.

Borrowings, junior subordinated obligations and trust preferred securities: The carrying amounts of repurchase agreements and FHLB line of credit advances approximate fair value. Fair values for FHLB term advances, other borrowings, junior subordinated obligations and trust preferred securities are estimated using discounted cash flows, based on current market rates for similar instruments.

Off-balance-sheet instruments: Off-balance-sheet financial instruments consist of letters of credit and commitments to extend credit. Standby letters of credit and commitments to extend credit are fair valued based on fees and interest rates currently charged to enter into agreements with similar terms and credit quality.

Comprehensive Income. Comprehensive income consists of the sum of net income and items of other comprehensive income or loss, which are reported directly in stockholders’ equity, net of tax, such as the change

F-48

Note 1: Summary of Significant Account Policies—(Continued)

in net unrealized gain or loss on securities available for sale. The Company has reported comprehensive income in the consolidated statements of changes in stockholders’ equity. Accumulated other comprehensive income or loss, which is a component of stockholders’ equity, represents the net unrealized gain or loss on securities available for sale, net of tax.

Segment Reporting. The Company operates a single business segment solely in the financial services industry, which includes providing traditional banking services to its customers. The Company operates primarily in the geographical regions of Broome, Chenango, Onondaga and Tioga counties of New York. Management makes operating decisions and assesses performance based on an ongoing review of the Company’s traditional banking operations, which constitute the Company’s only reportable segment.

Reclassifications. Certain data for prior years has been reclassified to conform to the current year’s presentation. These reclassifications had no effect on net income or stockholders’ equity.

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

The FASB issued Statement No. 149, “Amendment of Statement No. 133 on Derivative Instruments and Hedging Activities”. The statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contacts and for hedging activities. This statement amends Statement 133 for decisions made as part of the Derivatives Implementation Group process that effectively required amendments to Statement 133, in connection with other FASB projects dealing with financial instruments and in connection with implementation issues raised in relation to the application of the definition of a derivative. The adoption of this statement did not have a significant impact on the Company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement requires an issuer to classify three types of freestanding financial instruments as liabilities. One type is financial instruments issued in the form of shares requiring the issuer to redeem them by transferring its assets. The second type is financial instruments that embody an obligation to repurchase the issuer’s equity shares by transferring assets. The third type of financial instruments is one that embodies an unconditional obligation that the issuer must or may settle by issuing a variable number of its equity shares if, at inception, the monetary value of the obligation meets certain criteria. The statement also requires disclosures about the terms of the instruments and settlement alternatives. The statement was effective for financial instruments entered into or modified after May 31, 2003, and otherwise

F-49

Note 1: Summary of Significant Account Policies—(Continued)

shall be effective at the beginning of the first interim period beginning after June 15, 2003. The effective date has been deferred indefinitely for certain types of mandatorily redeemable financial instruments. The provisions of this statement did not have a material impact on the Company’s consolidated financial statements.

Note 2: Pending Merger

On December 23, 2003, the Company executed a definitive agreement with Partners Trust Financial Group, Inc. (“Partners”) to acquire all the assets of the Company. The merger is contingent upon the successful conversion and restructuring of Partners and Partners Trust, MHC into a full capital stock corporation. The Company will be merged into the reorganized Partners following the conversion. The conversion, offering and acquisition are expected to be completed in mid-2004, subject to regulatory and stockholder approvals. The consideration to be paid in the merger will be 40% cash and 60% stock. Stockholders of the Company will be able to elect either $36.00 in cash or shares of common stock of the reorganized Partners Trust, subject to customary proration and allocation procedures. The merger is also contingent upon the approval of certain regulatory authorities, as well as the stockholders of the Company and Partners.

Under terms of the definitive agreement, the Company will continue to conduct operations in the normal course of business consistent with past practices and all applicable laws and regulations, except as relates to certain dividends and distributions by the Company. The Company covenants not to change any of its capital stock; not to issue or authorize any additional shares, except as available from the exercise of currently outstanding options under the Company’s current plan; and, not to purchase, redeem or acquire any capital stock, except as authorized under the terms of the Company’s current stock option plan.

Note 3: Investment Securities and Other Comprehensive Income

The amortized cost and fair value of the investment securities portfolios at December 31 are summarized as follows:

2003	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Available for sale portfolio:
U. S. Government and agency securities	$	162,231	$	1,813	$	593	$	163,451
Municipal obligations		22,990		842		59		23,773
Mortgage-backed securities		105,655		2,760		75		108,340
Collateralized mortgage obligations		263,078		1,885		1,128		263,835
Equity securities		23,592		37		446		23,183
Corporate debt securities		41,189		112		51		41,250
	$	618,735	$	7,449	$	2,352	$	623,832

F-50

Note 3: Investment Securities and Other Comprehensive Income—(Continued)

2002	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Available for sale portfolio:
U. S. Government and agency securities	$	101,564	$	2,891	$	2	$	104,453
Municipal obligations		10,934		673		—		11,607
Mortgage-backed securities		213,209		8,053		9		221,253
Collateralized mortgage obligations		172,396		3,436		15		175,817
Equity securities		23,946		25		198		23,773
Corporate debt securities		1,497		145		—		1,642
	$	523,546	$	15,223	$	224	$	538,545
Held to maturity portfolio
Corporate debt securities	$	33,179	$	589	$	66	$	33,702
Municipal obligations		15,682		342		158		15,866
Mortgage-backed securities		6,480		42		31		6,491
Collateralized mortgage obligations		32		2		—		34
	$	55,373	$	975	$	255	$	56,093

The following table summarizes other comprehensive (loss) income, which is comprised of the net unrealized gains (losses) on available for sale securities less the related taxes for the respective years ended December 31:

	2003			2002			2001
	(In thousands)
Other comprehensive (loss) income:
Net unrealized (loss) gains on securities available for sale arising during the period	$	(8,563	)	$	10,970		$	7,983
Reclassification adjustment for net realized gains included in net income		(1,339	)		(292	)		(379	)
Other comprehensive (loss) income before tax		(9,902	)		10,678			7,604
Income tax benefit (expense) on other comprehensive (loss) income		3,981			(4,228	)		(3,172	)
Other comprehensive (loss) income, net of tax		(5,921	)		6,450			4,432
Comprehensive income	$	11,096		$	8,233		$	24,892

Information on temporarily impaired securities at December 31, 2003, segregated according to the length of time such securities had been in a continuous unrealized loss position, is summarized as follows:

	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Available for sale portfolio:
U. S. Government and agency securities	$	44,229	$	593	$	—	$	—	$	44,229	$	593
Municipal obligations		1,251		29		700		30		1,951		59
Mortgage-backed securities		13,061		53		5,713		22		18,775		75
Collateralized mortgage obligations		103,677		1,128		—		—		103,677		1,128
Equity securities		12,533		446		—		—		12,533		446
Corporate debt securities		4,949		51		—		—		4,949		51
	$	179,700	$	2,300	$	6,413	$	52	$	186,114	$	2,352

The above table represents 53 investment securities where the current fair value is less than the related amortized cost. These unrealized losses do not reflect any deterioration of the credit worthiness of the issuing

F-51

Note 3: Investment Securities and Other Comprehensive Income—(Continued)

entities. No security has a current rating that is below investment grade, and 38 of the securities are rated “AAA”. The lowest rated securities represent 3 “BBB” rated securities. The unrealized losses on these temporarily impaired securities are a result of changes in interest rates for fixed-rate securities where the interest rate received is less than the current rate available for new offerings of similar securities, changes in market spreads as a result of shifts in supply and demand, and changes in the level of prepayments for mortgage related securities.

The amortized cost and fair value of debt securities (mortgage-backed securities and collateralized mortgage obligations are shown separately) at December 31, 2003, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay certain obligations with or without penalties.

	Amortized Cost		Fair Value
	(In thousands)
Securities available for sale:
Within one year	$	12,247	$	12,522
After one year but within five years		39,588		41,035
After five years but within ten years		114,852		115,344
After ten years		59,723		59,573
Mortgage-backed securities and collateralized mortgage obligations		368,733		372,175
	$	595,143	$	600,649

The gross realized gains and gross realized losses on available for sale investment securities transactions are summarized below:

	Years Ended December 31,
	2003		2002		2001
	(In thousands)
Gross gains	$	1,738	$	518	$	905
Gross losses		399		226		526
Net gains	$	1,339	$	292	$	379

Investment securities at December 31, 2003 and 2002 include approximately $460.0 million and $470.0 million, respectively, pledged under various agreements, principally for municipal deposits, letters of credit, lines of credit and borrowings.

Note 4: Loans and Allowance for Loan Losses

Changes in the allowance for loan losses for the years ended December 31 are presented in the following summary:

	2003			2002			2001
	(In thousands)
Balance at beginning of year	$	63,250		$	58,829		$	59,291
Provision for loan losses		10,088			46,170			18,224
Loans charged-off		(37,601	)		(48,556	)		(23,631	)
Recoveries credited		11,684			6,807			4,945
Balance at end of year	$	47,421		$	63,250		$	58,829

F-52

Note 4: Loans and Allowance for Loan Losses—(Continued)

Non-performing loans at December 31 are presented in the following summary:

	2003		2002		2001
	(In thousands)
Non-accrual loans	$	13,100	$	50,337	$	59,796
Accruing loans with principal or interest payments 90 days or more past due		109		278		879
Total non-performing loans	$	13,209	$	50,615	$	60,675

The table of non-performing loans above does not include accruing loans classified as troubled debt restructurings totaling $13.8 million, $13.8 million and $8.8 million at December 31, 2003, 2002 and 2001, respectively.

In November 2003, the Company made the decision to sell and sold certain large, under-performing loans with an aggregate carrying value of $36.7 million. The proceeds from the sale of these loans, net of estimated transactions costs, was $27.2 million. The $9.5 million difference between the carrying value and the net proceeds from the sale of these loans approximated the Company’s previously established loan loss reserves and was charged-off against the allowance for loan losses. Prior to the decision to sell, these loans were either non-performing or performing loans classified as substandard.

At December 31, 2003 and 2002, the recorded investment in impaired loans totaled $26.1 million and $63.2 million, respectively. An impairment allowance aggregating $6.8 million and $15.2 million was recorded against these loans at December 31, 2003 and 2002, respectively. Impaired loans of $26.1 million in 2003 and $44.7 million in 2002 had an impairment allowance, with the remainder of $18.5 million in 2002 having no impairment allowance. The average recorded investment in impaired loans was approximately $39.0 million in 2003, $58.1 million in 2002 and $53.5 million in 2001. The Company recognized, on a cash basis, interest on impaired loans of $599,000, $544,000 and $799,000 during 2003, 2002 and 2001, respectively, for the portion of the year they were impaired.

At December 31, 2003 and 2002, loans to directors, officers or their affiliates were $12.2 million and $17.3 million, respectively. During 2003, new loans to such related parties amounted to $1.3 million and repayments were $6.4 million. In 2002, new loans to such related parties were $1.9 million with repayments of $5.6 million. Loans made by the Company to directors, officers or their affiliates were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. However, the Company currently permits certain employees, excluding officers and directors, to obtain certain loans at preferential interest rates and/or with discounted processing fees.

Note 5: Loan Servicing and Mortgage Servicing Rights

Mortgage loans serviced for others are not included in the accompanying consolidated statements of condition. The unpaid principal balances of mortgage loans serviced for others were $265.0 million and $366.0 million at December 31, 2003 and 2002, respectively.

The carrying value of mortgage servicing rights was $825,000 and $453,000 at December 31, 2003 and 2002, respectively.

Note 6: Other Real Estate Owned and Repossessed Assets

A summary of other real estate owned and repossessed assets at December 31 is shown below:

	2003		2002
	(In thousands)
Other real estate owned (“ORE”)	$	1,129	$	1,532
Repossessed assets		102		1,577
Total ORE and repossessed assets	$	1,231	$	3,109

F-53

Note 7: Bank Premises and Equipment

A summary of bank premises and equipment at December 31 is as follows:

	2003		2002
	(In thousands)
Land	$	1,872	$	1,872
Banking premises		22,757		22,227
Furniture and equipment		20,562		18,252
		45,191		42,351
Less: Accumulated depreciation		29,968		27,806
	$	15,223	$	14,545

Note 8: Deposits

A summary of deposits at December 31 is as follows:

	2003		2002
	(In thousands)
Savings accounts	$	181,720	$	175,637
Money market deposit accounts		429,376		339,191
Time deposit accounts		692,912		641,635
NOW accounts		128,400		131,535
Non-interest-bearing demand accounts		156,678		154,758
	$	1,589,086	$	1,442,756

Time deposits with balances of $100,000 or greater amounted to approximately $293.2 million and $212.7 million at December 31, 2003 and 2002, respectively.

The contractual maturity of time deposits at December 31, 2003 is as follows:

Years ending December 31,	Amount		Percent
2004	$	366,858	52.9	%
2005		135,693	19.6
2006		116,354	16.8
2007		48,761	7.1
2008		23,709	3.4
2009 and later		1,537	0.2
	$	692,912	100.0	%

F-54

Note 9: Borrowings, Junior Subordinated Obligations and Trust Preferred Securities

The following is a summary of borrowings, junior subordinated obligations and trust preferred securities at December 31:

	2003		2002
	(In thousands)
Federal Home Loan Bank (“FHLB”) advances	$	390,823	$	335,871
FHLB line of credit advances		—		5,000
Securities sold under repurchase agreements		18,846		35,167
Other		1,099		2,080
Total borrowings		410,768		378,118
Junior subordinated obligations issued to unconsolidated subsidiary trusts		48,202		—
Mandatorily redeemable preferred securities issued by consolidated subsidiary trusts		—		48,000
	$	458,970	$	426,118

Certain FHLB term advances are callable by the FHLB at pre-determined dates. Scheduled repayments of FHLB term advances and a schedule of callable advances by the first call date as of December 31, 2003 are as follows:

Maturing or callable in the years ending December 31,	Scheduled Payments		Weighed Average Interest Rate		Callable Amounts		Weighted Average Interest Rate
	(In thousands)
2004	$	90,051	2.60	%	$	165,000	4.71	%
2005		110,055	3.31			—	—
2006		40,059	2.62			—	—
2007		261	6.98			—	—
2008		30,026	4.18			—	—
2009 and later		120,371	4.49			—	—
	$	390,823	3.51	%	$	165,000	4.71	%

Information related to FHLB line of credit advances for the years ended December 31 is as follows:

	2003			2002			2001
	(In thousands)
Outstanding balance at end of year	$	—		$	5,000		$	63,500
Weighted average rate at year-end		—			1.35	%		1.85	%
Maximum outstanding at any month-end	$	62,000		$	58,000		$	63,500
Average amount outstanding during year	$	16,401		$	10,024		$	7,954
Average rate during year		1.19	%		1.77	%		5.35	%

Information related to securities sold under repurchase agreements for the years ended December 31 is as follows:

	2003			2002			2001
	(In thousands)
Outstanding balance at end of year	$	18,846		$	35,167		$	56,701
Weighted average rate at year-end		1.02	%		1.11	%		2.08	%
Maximum outstanding at any month-end	$	32,586		$	55,394		$	83,709
Average amount outstanding during year	$	27,735		$	46,970		$	59,603
Average rate during year		0.95	%		2.85	%		3.94	%

F-55

Note 9: Borrowings, Junior Subordinated Obligations and Trust Preferred Securities—(Continued)

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

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

As of December 31, 2003, the Company deconsolidated all of its subsidiary trusts, which had issued trust preferred securities (discussed above), and replaced the presentation of such instruments with the Company’s junior subordinated obligations issued to the subsidiary trusts. Such presentation reflects the adoption of FASB Interpretation No. 46 (“FIN 46 R”) issued in December 2003.

At December 31, 2003, the Company had available lines of credit of $150.0 million with the FHLB, subject to the amount of available collateral, and had no balance outstanding as of December 31, 2003. This outstanding balance and other borrowings with the FHLB are collateralized by certain mortgage loans, mortgage-backed securities, other investment securities, and FHLB stock under a blanket pledge agreement with the FHLB.

Note 10: Employee Benefits

Defined Benefit Pension Plan. The Company has a non-contributory, tax-qualified defined benefit pension plan with Retirement System Group, Inc. (“RS Group”) covering substantially all employees. Under the plan, retirement benefits are primarily a function of both the years of service and the level of compensation. Plan contributions are determined annually on the basis of (a) the maximum amount that can be deducted for Federal income tax purposes, or (b) the amount certified by an actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974. Contributions are intended to provide not only for benefits attributed to service to date, but also those expected to be earned in the future.

Investment Policies and Strategy. Plan assets are invested in six diversified investment funds of the RSI Retirement Trust (the “Trust”), a no load series open-ended mutual funds. RS Group, a company related to the Trust, provides actuarial services for the plan. The investment funds include four equity mutual funds and two bond mutual funds, each with its own investment objectives, investment strategies and risks, as detailed in the Trust’s prospectus. The Trust has been given discretion by the Company to determine the appropriate strategic asset allocation versus plan liabilities, as governed by the Trust’s Statement of Investment Objectives and Guidelines (the “Guidelines”).

The long-term investment objective is to be invested 65% in equity securities (equity mutual funds) and 35% in debt securities (bond mutual funds). If the plan is underfunded under the Guidelines, the bond fund portion will be temporarily increased to 50% in order to lessen asset value volatility. When the plan is no longer underfunded, the bond fund portion will be decreased back to 35%. Asset rebalancing is performed at least

F-56

Note 10: Employee Benefits—(Continued)

annually, with interim adjustments made when the investment mix varies more than 5% from the target (i.e., a 10% target range). In general, the plan is considered “underfunded” if the actuarial value of the ratio of plan assets to plan liabilities under ERISA is less than 90%. Accordingly, the Company does not consider the plan to be underfunded.

Current Asset Allocation. The investment goal is to achieve investment results that will contribute to the proper funding of the pension plan by exceeding the rate of inflation over the long-term. In addition, investment managers for the Trust are expected to provide above average performance when compared to their peer managers. Performance volatility is also monitored. Risk/volatility is further managed by the distinct investment objectives of each of the Trust funds and the diversification within each fund.

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

	Plan assets at October 1, 2003		Plan assets at October 1, 2002
Equity securities	65	%	62	%
Debt securities (bond mutual funds)	35	%	38	%
Total	100	%	100	%

Contribution Cash Flow. For the fiscal year ending December 31, 2004, the Bank expects to contribute approximately $500,000 to the Plan.

Postretirement Welfare Plan. The Company also provides certain life and health insurance benefits to substantially all employees and eligible retirees through an unfunded plan. The Company makes contributions to the plan, as premiums are due. Retiree contributions may be required based upon years of service with the employer and the retiree’s election for dependent coverage provided under the plan.

In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) became law in the United States. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to the Medicare benefit. In accordance with FASB Staff Position FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” the Company has elected to defer recognition of the effects of the Act in any measures of the benefit obligation or cost. Specific authoritative guidance on the accounting for the federal subsidy is pending and that guidance, when issued, could require the Company to change previously reported information. Currently, the Company does not believe it will need to amend its plan to benefit from the Act.

Supplemental Executive Retirement Plans. The Company also sponsors a Supplemental Executive Retirement Plan (“SERP”) for the purpose of paying full pension benefits under the terms of the tax-qualified plan without regard to limits imposed under the Internal Revenue Code (“IRC”) limiting compensation. The benefit under the SERP is determined as the total pension benefit that would be payable from the tax-qualified plan without applying IRC limits, less what is actually paid from the tax- qualified plan. Two former executives are covered under the SERP.

For one executive, the Company has agreed that he will receive his full benefit under the terms of the tax-qualified plan in the event he terminates employment prior to becoming fully vested in the tax-qualified plan. If the executive terminates prior to becoming fully vested in the tax-qualified plan, the vested benefit payable under the tax-qualified plan will be supplemented with a payment under the Employment Agreement. If the executive terminates after becoming fully vested in the tax-qualified plan, there is no additional benefit payable through his Employment Agreement.

F-57

Note 10: Employee Benefits—(Continued)

Plan Funding Status, Benefit Costs and Assumptions. The following table represents a reconciliation of the funded status of the plans at October 1 (the measurement date of the plans) in which the benefit obligation at the end of the year represents the projected benefit obligation for pension and SERP benefits and the accumulated benefit obligation for life and health benefits:

	Pension Benefits						Life and Health Benefits						SERP Benefits
	2003			2002			2003			2002			2003			2002
	(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of year	$	24,812		$	20,588		$	5,154		$	4,531		$	209		$	191
Service cost		1,139			850			164			152			—			—
Interest cost		1,694			1,561			338			329			14			14
Actuarial loss		2,301			3,130			389			427			10			16
Annuity payments		(1,238	)		(1,295	)		—			—			(13	)		(12	)
Premiums paid		—			—			(273	)		(285	)		—			—
Plan amendments		—			1			—			—			—			—
Settlements		(33	)		(23	)		—			—			—			—
Benefit obligations at end of year		28,675			24,812			5,772			5,154			220			209
Change in plan assets:
Fair value of plan assets at beginning of year		22,582			18,982			—			—			—			—
Actual gain (loss) on plan assets		2,713			(2,400	)		—			—			—			—
Employer contributions		1,271			7,318			273			285			13			12
Annuity payments		(1,238	)		(1,295	)		—			—			(13	)		(12	)
Premiums paid		—			—			(273	)		(285	)		—			—
Settlements		(33	)		(23	)		—			—			—			—
Fair value of plan assets at end of year		25,295			22,582			—			—			—			—
Unfunded status		(3,380	)		(2,230	)		(5,772	)		(5,154	)		(220	)		(209	)
Unrecognized transition obligation		—			—			1,559			1,732			—			—
Unrecognized loss (gain)		10,299			9,050			(150	)		(541	)		(55	)		(68	)
Unrecognized past service (credit) cost		(20	)		(45	)		—			—			45			50
Prepaid (accrued) benefit cost	$	6,899		$	6,775		$	(4,363	)	$	(3,963	)	$	(230	)	$	(227	)

The accumulated benefit obligation of the pension plan was $24.7 million and $21.3 million at the measurement dates for 2003 and 2003, respectively.

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

	Pension Benefits									Life and Health Benefits									SERP Benefits
	2003			2002			2001			2003			2002			2001			2003			2002			2001
	(In thousands)
Service cost	$	1,139		$	850		$	828		$	164		$	152		$	182		$	—		$	—		$	—
Interest cost		1,694			1,561			1,498			338			329			350			14			14			14
Expected return on assets		(2,146	)		(1,942	)		(1,978	)		—			—			—			—			—			—
Amortization of unrecognized transition obligation		—			—			—			173			173			173			—			—			—
Unrecognized (gain) loss		484			—			(70	)		(2	)		(39	)		(24	)		(2	)		(4	)		(4	)
Unrecognized past (credit) cost		(25	)		(24	)		(25	)		—			—			—			5			5			5
Net periodic benefit cost	$	1,146		$	445		$	253		$	673		$	615		$	681		$	17		$	15		$	15

F-58

Note 10: Employee Benefits—(Continued)

The following weighted average assumptions were used in the determination of the benefit obligations and net periodic benefit costs in the tables above. The discount rate and rate of compensation increase disclosed are as of the end of the plan year measurement date, or September 30 for the respective plans. Since the expected return on plan assets only impacts the net periodic benefit cost for the subsequent year, this rate is disclosed as of the beginning of the respective years.

	Pension Benefits						Life and Health Benefits						SERP Benefits
	2003		2002		2001		2003		2002		2001		2003		2002		2001
	(In thousands)
Weighted average assumptions used to determine benefit obligations at December 31:
Discount rate	6.25	%	6.75	%	7.50	%	6.25	%	6.75	%	7.50	%	6.25	%	6.75	%	7.50	%
Rate of compensation increase	3.50	%	4.00	%	4.00	%	3.50	%	4.00	%	4.00	%	—		—		—
Weighted average assumptions used to determine net periodic benefit cost for years ended December 31:
Discount rate	6.75	%	7.50	%	8.00	%	6.75	%	7.50	%	8.00	%	6.75	%	7.50	%	8.00	%
Expected return on plan assets	8.75	%	9.00	%	9.00	%	—		—		—		—		—		—
Rate of compensation increase	4.00	%	4.00	%	5.50	%	4.00	%	4.00	%	5.50	%	—		—		—

The long-term rate-of-return-on-assets assumption was set based on historical returns earned by equities and fixed income securities, adjusted to reflect expectations of future returns as applied to the plan’s target allocation of asset classes. Equities and fixed income securities were assumed to earn real rates of return in the ranges of 5-9% and 2-6%, respectively. The long-term inflation rate was estimated to be 3%. When these overall return expectations are applied to the plan’s target allocation, the current expected rate of return is determined to be 8.75%.

For measurement purposes, a 10.00% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2004. The rate was assumed to decrease steadily to 3.75% in 2010.

The health care cost trend rate assumptions can have a significant effect on the amounts reported. To illustrate, a one-percentage-point change in assumed health care cost trend rates would have the following effect on the amounts reported for life and health benefits at and for the year ended October 1, 2003 as follows:

	1-Percentage-Point Point Increase		1-Percentage-Point Point Decrease
	(In thousands)
Effect on total of service and interest cost components	$	4	$	(6	)
Effect on postretirement benefit obligation		30		(41	)

Target Benefit Plans. In October 2003, the Company executed non-qualified Target Benefit Supplemental Retirement Benefit agreements (“Target Benefit Plans”) with certain officers wherein the target benefit was based on providing incremental benefits equivalent to full pension benefits under the Company’s tax-qualified plan without regard to limits imposed by ERISA and the IRC. Seven officers are covered under the target benefit plans. The target benefit for each plan, established as of the effective date, is based on actuarial assumptions used to determine the enhanced benefit to commence at age 65. The Company allocates assets to fund the plans annually. The target benefit plans also provide for voluntary deferrals by each officer based on written elections filed prior to each annual effective date. The assets related to each plan are Company assets invested in the Company’s name or irrevocable trust arrangements established for such purpose. Such assets are invested in certain equity or fixed income investments selected in the sole discretion of the Bank. The Company’s obligation under the plans, subject to the vesting requirements, equals the value of the allocated assets for the respective plans, including any earnings and appreciation or depreciation with respect to such assets prior to payment of the benefits. The target benefit plans provide for vesting in plan funds after five (5) years of service from the

F-59

Note 10: Employee Benefits—(Continued)

effective date or death. Vesting in the respective plans’ benefits also occurs in a “change in control” as defined within the plans. In December 2003, the Company amended the Target Benefit Plans of two officers such that, prior to the closing date of the pending merger, these officers would receive a fixed lump sum payment in full satisfaction of their Target Benefit Plans. The initial allocation of assets to the target benefit plans was $258,000. During 2003, the Company recognized expense of $43,000 for the target benefit plans.

Defined Contribution 401 (k) Plan. The Company also has a defined contribution 401(k) plan. The Company matches 100% of basic contributions up to 2.0% of each participant’s annual contribution and 50% of contributions over 2.0%, with the Company’s total match not to exceed 3%. The Company’s contributions to the plan amounted to $453,000 in 2003, $418,000 in 2002 and $338,000 in 2001.

Note 11: Commitments and Contingent Liabilities

The Company rents facilities under operating lease agreements expiring at various dates through 2016. Rent expense totaled approximately $747,000 in 2003, $746,000 in 2002 and $832,000 in 2001. Approximate minimum rental commitments under existing noncancelable operating leases with remaining terms of one year or more are presented below:

Years ending December 31,	(In thousands)
2004	$	734
2005		701
2006		590
2007		427
2008		282
Later years		1,548
Total minimum lease payments	$	4,282

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments consist primarily of commitments to extend credit and letters of credit, which involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated statements of condition. The contract amount of those commitments and letters of credit reflects the extent of involvement the Company has in those particular classes of financial instruments. The Company’s exposure to loss in the event of non-performance by the counterparty to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of the instruments. The Company uses the same credit policies in making commitments and letters of credit as it does for on-balance-sheet instruments.

Financial instruments whose contract amounts represent credit risk at December 31 were as follows:

	2003		2002
	(In thousands)
Commitments to extend credit	$	131,475	$	269,266
Standby letters of credit		8,430		17,006

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitment amounts are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Letters of credit written are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including bond financing and similar transactions. Most of these guarantees extend for periods

F-60

Note 11: Commitments and Contingent Liabilities—(Continued)

ranging from one month to five years. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Since some of the letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

For both commitments to extend credit and standby letters of credit, the amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies, but includes residential and commercial real estate and business related assets. As required by a standby letter of credit agreement for one commercial relationship, the Company has $280,000 in a pledged deposit account at a commercial bank. With respect to a second standby letter of credit agreement, the Company has $1.7 million in corporate securities pledged to the Bank at December 31, 2003. The estimated fair value of standby letters of credit was insignificant at December 31, 2003 and 2002.

The Company has sold certain pools of adjustable-rate residential real estate loans in the secondary market with recourse. Outstanding loans sold with recourse approximated $6.5 million and $7.8 million as of December 31, 2003 and 2002, respectively. Due to the adequacy of the collateral related to these loans, no reserve is considered necessary to secure the obligations at December 31, 2003 and 2002.

The Company generally enters into rate lock agreements at the time that residential mortgage loan applications are taken. These rate lock agreements fix the interest rate at which the loan, if ultimately made, will be originated. Such agreements may exist with borrowers with whom commitments to extend loans have been made, as well as with individuals who have not yet received a commitment. The Company makes its determination of whether or not to identify a loan as held for sale at the time rate lock agreements are entered into. Accordingly, the Company is exposed to interest rate risk to the extent that a rate lock agreement is associated with a loan application or a loan commitment which is intended to be held for sale, as well as with respect to loans held for sale.

At December 31, 2003 and 2002, the Company had rate lock agreements (certain of which relate to loan applications for which no formal commitment has been made) and conventional mortgage loans held for sale equal to approximately $6.3 million and $10.2 million, respectively.

In order to reduce the interest rate risk associated with the portfolio of conventional mortgage loans held for sale, as well as outstanding loan commitments and uncommitted loan applications with rate lock agreements which are intended to be held for sale, the Company enters into mandatory forward sales commitments to sell loans in the secondary market to unrelated investors. At December 31, 2003 and 2002, the Company had mandatory commitments to sell certain conventional fixed-rate mortgage loans at set prices amounting to approximately $3.2 million and $9.1 million, respectively. The Company believes that it will be able to meet the mandatory commitments without incurring any material losses. The fair value of outstanding loan commitments, uncommitted loan applications with rate lock agreements which intended to be held for sale, and mandatory forward sales commitments were are not significant as of December 31, 2003 and 2002.

The Company is required to maintain a reserve balance, as established by the Federal Reserve Board. The required average total reserve for the 14-day maintenance period ended December 24, 2003 was $17.4 million, of which $6.4 million was required to be on deposit with the Federal Reserve Bank of New York. The remaining $11.0 million was represented by cash on hand.

In the ordinary course of business, there are various legal proceedings pending against the Company. Based on consultation with outside counsel, management believes that the aggregate exposure, if any, arising from such litigation would not have a material adverse effect on the Company’s consolidated financial statements.

F-61

Note 12: Limits on Dividends

The Company’s ability to pay dividends to its stockholders is largely dependent on the Bank’s ability to pay dividends to the Company. The circumstances under which the Bank may pay dividends are limited by federal and state statutes, regulations and policies. The Bank must obtain the approval of the New York State Superintendent of Banks for payment of dividends if the total of all dividends declared in any calendar year would exceed the total of the Bank’s net profits (as defined by applicable regulations) for that year, combined with its retained net profits for the preceding two years. Furthermore, the Bank may not pay a dividend in an amount greater than its retained earnings, as defined by applicable regulations. Due to the reduced net income in 2002, coupled with dividends previously paid, the Bank exceeded its dividend limitations for 2002. However, in October 2002, the Bank received regulatory approval for and paid a special dividend of $30 million to the Company. As a result of this special dividend, and based on regulatory limitations noted above, the Company does not anticipate receiving dividends from the Bank until 2004. At December 31, 2003, the Company had immediately available funds totaling $18.2 million. Management anticipates that the Bank will be able to resume the payment of cash dividends to the Company, without regulatory approval, in 2004. However, circumstances, including additional common stock and trust preferred security repurchases or unanticipated cash obligations, may require the Company to seek additional sources of funding or require the Bank to seek regulatory approval for another special cash dividend to the Company, should the Bank be otherwise unable to make such cash dividend payments.

In addition, the Federal Reserve Board and the Federal Deposit Insurance Corporation (“FDIC”) are authorized to determine under certain circumstances that the payment of dividends would be an unsafe or unsound practice and to prohibit payment of such dividends. The payment of dividends that deplete a bank’s capital base could be deemed to constitute such an unsafe or an unsound practice. There are also statutory limits on the transfer of funds to the Company by its banking subsidiary, whether in the form of loans or other extensions of credit, investments or asset purchases. Such transfers by the Bank to the Company generally are limited in amount to 10% of the Bank’s capital and surplus. Furthermore, such loans and extensions of credit are required to be collateralized in specific amounts.

Note 13: Income Taxes

The components of income tax expense (benefit) for the years ended December 31 are as follows:

	2003		2002			2001
	(In thousands)
Current expense (benefit)	$	1,400	$	(269	)	$	13,746
Deferred expense (benefit)		7,325		15			(1,174	)
Income tax expense (benefit)	$	8,725	$	(254	)	$	12,572

A reconciliation between the federal statutory income tax rate and the effective income tax rate for the years ended December 31 follows:

	2003		2002		2001
Federal statutory income tax rate	35.0	%	35.0	%	35.0	%
State income taxes, net of federal benefit	2.5		(24.5	)	4.2
Tax-exempt interest income	(1.9	)	(21.3	)	(0.8	)
Dividends received deduction	(1.2	)	(5.2	)	(0.2	)
Other	(0.5	)	(0.6	)	(0.1	)
Effective income tax rate	33.9	%	(16.6	)%	38.1	%

During 2003 and 2002, the Company recognized various tax credits related to New York State’s Qualified Empire Zone Enterprise (“QEZE”) program. QEZE credits recognized in 2003 and 2002 totaled $227,000 and $469,000, respectively.

F-62

Note 13: Income Taxes—(Continued)

The components of deferred income taxes at December 31 included in other assets are as follows:

	2003		2002
	(In thousands)
Assets:
Allowance for loan losses	$	19,388	$	26,218
Postretirement benefits		1,740		1,580
State operating losses and tax credits		1,096		298
Non-accrual loans		426		1,189
Deferred compensation		539		588
Other		762		431
		23,951		30,304
Liabilities:
Net unrealized gain on investment securities available for sale		2,049		6,029
Pension benefits		2,615		2,567
Depreciation		895		663
Deferred loan costs		1,177		743
Other		604		346
		7,340		10,348
Net deferred tax asset	$	16,611	$	19,956

Deferred tax assets are recognized subject to management’s judgment that these tax benefits will more likely than not be realized. Based on the sufficiency of taxable temporary items, historical taxable income, anticipated future taxable income, as well as available tax planning strategies, management believes it is more likely than not that the deferred tax assets at December 31, 2003 will be realized.

At December 31, 2003 and 2002, the Company had state net operating loss carryforwards of $15.8 million and $8.7 million, respectively, which expire at various dates through 2023. At December 31, 2003 and 2002, the Company also has New York State tax credit carryforwards of $795,000 and $198,000, respectively, which may be carried forward indefinitely.

F-63

Note 14: Earnings Per Share

The following table provides information on the calculation of basic earnings per share and diluted earnings per share for the years ended December 31:

	Net Income		Weighted Average Shares	Earnings Per Share
	(In thousands, except share data)
2003:
Basic earnings per share	$	17,017	9,209,058	$	1.85
Dilutive effect of stock options			170,978
Diluted earnings per share	$	17,017	9,380,036	$	1.81
Anti-dilutive stock options			17,813
2002:
Basic earnings per share	$	1,783	9,589,361	$	0.19
Dilutive effect of stock options			150,902
Diluted earnings per share	$	1,783	9,740,263	$	0.18
Anti-dilutive stock options			44,179
2001:
Basic earnings per share	$	20,460	9,958,952	$	2.05
Dilutive effect of stock options			155,245
Diluted earnings per share	$	20,460	10,114,197	$	2.02
Anti-dilutive stock options			102,082

Note 15: Stock Option Plans and Stockholder Rights Plan

The Company has a 1996 Long-Term Incentive and Capital Accumulation Plan (the “1996 Incentive Plan”) for the benefit of officers and certain other employees of the Company and its subsidiaries. The 1996 Incentive Plan, as approved by stockholders at the 1996 Annual Meeting of Stockholders, and as amended at the 1998, 1999, and 2003 Annual Meetings of Stockholders, provides for options to purchase a total of 2.05 million shares of authorized common stock. Options to purchase 1,430,244 shares have been granted as of December 31, 2003 under the 1996 Incentive Plan and a previous incentive plan. At December 31, 2003, there were 619,756 options to purchase shares available for future grant under the 1996 Incentive Plan, subject to the covenant limitations of the pending merger. Four kinds of awards are contained in the 1996 Incentive Plan and are available for grant: incentive stock options, non-qualified options, stock appreciation rights and performance share awards. Options under the 1996 Incentive Plan have a 10-year term, and vest and become exercisable at 25% per year at the end of each of the first four years following the grant date, as long as the optionee remains an employee of the Company or its subsidiaries, or as otherwise determined by the Company’s Compensation Committee.

The Directors’ Stock Option Plan (the “Directors’ Plan”), as approved by stockholders at the 1994 Annual Meeting of Stockholders, provides for options to purchase 393,750 shares of authorized common stock by incumbent and future non-employee directors of the Company; 306,000 options to purchase shares have been granted as of December 31, 2003. At December 31, 2003, 87,750 options to purchase shares were available for future grant under the Directors’ Plan. All options granted under the Directors’ Plan are intended to be non-qualified options. Vesting occurs on the grant date, and options may be exercised beginning or commencing six months after the grant date and have a 10-year term. Under the Directors’ Plan, to the extent options remain available for grant, upon initial election or appointment as a director, new non-employee directors of the Company each receive a grant of an option to purchase 6,750 shares of common stock. Furthermore, to the extent options remain available for grant, in January of each year, each non-employee director is granted an option to purchase 2,250 shares of common stock.

F-64

Note 15: Stock Option Plans and Stockholder Rights Plan—(Continued)

Activity in the plans during 2001, 2002 and 2003 was as follows:

		Number of Shares		Weighted Average Exercise Price
		(In thousands, except share data)
2001:	Outstanding options at December 31, 2000 Options forfeited Options exercised Options granted	846,094 (105,675 (32,228 195,000	) )	$	20.57 25.75 13.65 13.65
2002:	Outstanding options at December 31, 2001 Options forfeited Options exercised Options granted	903,191 (44,044 125,226 256,660	)		19.94 23.22 16.34 26.48
2003:	Outstanding options at December 31, 2002 Options forfeited Options exercised Options granted	990,581 (31,246 (127,456 536,112	) )		19.94 25.20 17.45 30.94
	Outstanding options at December 31, 2003	1,367,991		$	25.78

The following table summarizes information about options outstanding at December 31, 2003:

	Outstanding				Exercisable
Range of Exercise Prices	Options Outstanding	Weighted Average Remaining Contractual Life in Years	Weighted Average Exercise Price		Number Exercisable	Weighted Average Exercise Price
$10.167 to $14.50	150,122	5.33	$	13.65	143,872	$	13.66
$15.08 to $19.85	207,325	5.21	$	17.93	167,166	$	18.03
$20.82 to $27.065	589,898	8.09	$	23.96	200,910	$	26.29
$28.75 to $32.75	130,650	4.97	$	29.94	114,636	$	29.88
$39.50	289,996	10.00	$	39.50	—		—
	1,367,991	7.46	$	25.78	626,584	$	21.84

Options exercisable and the weighted average exercise price thereon were 650,833 and $20.87 at December 31, 2002 and 633,375 and $19.33 at December 31, 2001.

The Company maintains a stockholders’ rights plan pursuant to which the Company’s board of directors declared a dividend of one right for each outstanding share of common stock. These rights will also be attached to common stock issued subsequent to the adoption of the plan. The rights can only be exercised when an individual or group intends to acquire or has acquired a defined amount of the Company’s outstanding common shares. Each right will entitle the holder to receive common stock having a market value equivalent to two times the exercise price (as defined). The rights will expire on June 4, 2009 and may be redeemed by the Company in whole at a price of $.01 per right. In December 2003, the Company’s board of directors amended the rights plan to render the stock purchase rights under the plan inapplicable to the proposed merger with Partners Trust Financial Group, Inc.

F-65

Note 16: Fair Value of Financial Instruments

SFAS No. 107 requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated statement of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, certain fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The fair value of off-balance-sheet financial instruments is not significant.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a trust and investment management operation that contributes net fee income annually. The trust and investment management operation is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities include the benefits resulting from the low-cost funding of deposit liabilities as compared to the cost of borrowing funds in the market, bank owned life insurance and premises and equipment. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimate of fair value.

The net carrying amount and fair values of financial instruments at December 31 are as follows:

	2003				2002
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Financial assets:
Cash and cash equivalents	$	61,670	$	61,670	$	46,912	$	46,912
Investment securities		623,832		623,832		593,918		594,638
FHLB of New York stock		19,541		19,541		19,934		19,934
Loans held for sale		1,144		1,160		4,001		4,001
Net loans		1,404,776		1,415,234		1,286,044		1,314,533
Accrued interest receivable		7,981		7,981		9,875		9,875
Financial liabilities:
Deposits	$	1,589,086	$	1,595,049	$	1,442,756	$	1,452,586
Borrowings		410,768		423,585		378,118		400,659
Junior subordinated obligations		48,202		48,202		—		—
Trust preferred securities		—		—		48,000		48,000
Accrued interest payable		4,176		4,176		4,299		4,299

F-66

Note 17: Regulatory Matters

The Company and the Bank each are subject to various regulatory capital guidelines and a framework for prompt corrective action that are administered by the Federal banking agencies. Under these guidelines and this framework, the Company and the Bank must each meet specific capital levels that are based on the amount of their assets, liabilities and certain off-balance-sheet items, as calculated under various regulatory capital definitions and accounting practices. The Company’s and the Bank’s capital amounts and classifications also are subject to qualitative judgments by regulators about asset and capital components, risk-weightings and other factors. Failure by the Company or the Bank to meet minimum capital requirements necessitates certain mandatory actions and authorizes further discretionary actions by regulators, which could have a direct material effect on the Company’s and the Bank’s financial statements.

Quantitative measures established by regulation to ensure capital adequacy require that the Company and the Bank each maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and Tier 1 capital (as defined) to average assets (as defined). Management believes that, as of December 31, 2003, the Company and the Bank each met all capital adequacy guidelines to which they are subject.

The Company’s and the Bank’s capital amounts and ratios at December 31 are shown in the table below:

BSB Bancorp, Inc. (Consolidated)

	Actual Capital				Minimum Required Ratios
	Amount		Ratio		For Capital Adequacy		For Classification as Well Capitalized
	(In thousands)
As of December 31, 2003
Total capital/risk-weighted assets	$	208,510	13.80	%	8.0	%	10.0	%
Tier I capital/risk-weighted assets	$	190,355	12.52	%	4.0	%	6.0	%
Tier I capital/average assets	$	190,355	8.76	%	4.0	%	5.0	%
As of December 31, 2002
Total capital/risk-weighted assets	$	206,049	14.48	%	8.0	%	10.0	%
Tier I capital/risk-weighted assets	$	186,266	13.09	%	4.0	%	6.0	%
Tier I capital/average assets	$	186,266	9.10	%	4.0	%	5.0	%
BSB Bank & Trust Company
	Actual Capital				Minimum Required Ratios
	Amount		Ratio		For Capital Adequacy		For Classification as Well Capitalized
	(In thousands)
As of December 31, 2003
Total capital/risk-weighted assets	$	190,419	12.64	%	8.0	%	10.0	%
Tier I capital/risk-weighted assets	$	171,239	11.37	%	4.0	%	6.0	%
Tier I capital/average assets	$	171,239	7.93	%	4.0	%	5.0	%
As of December 31, 2002
Total capital/risk-weighted assets	$	167,910	11.90	%	8.0	%	10.0	%
Tier I capital/risk-weighted assets	$	149,708	10.61	%	4.0	%	6.0	%
Tier I capital/average assets	$	149,708	7.31	%	4.0	%	5.0	%

F-67

Note 18: Parent Company Financial Information

The following financial statements for the parent company should be read in conjunction with the Company’s consolidated financial statements and notes thereto.

Statements of Condition

	At December 31,
	2003		2002
	(In thousands)
Assets:
Cash and due from banks	$	18,182	$	37,660
Investment in Bank, at equity		174,776		158,934
Investment in trust subsidiaries		1,702		1,702
Prepaid expenses		1,220		1,282
Other assets		42		39
Total assets	$	195,922	$	199,617
Liabilities & Stockholders’ Equity
Accrued interest payable	$	1,027	$	940
Other liabilities		390		49
Junior subordinated obligations issued to subsidiary trusts		48,202		49,702
Total liabilities		49,619		50,691
Total stockholders’ equity		146,303		148,926
Total liabilities and stockholders’ equity	$	195,922	$	199,617

Statements of Income

	Years Ended December 31,
	2003		2002			2001
	(In thousands)
Income:
Dividends from Bank	$	—	$	33,007		$	22,509
Interest income		129		97			75
Other income		6		727			—
Effect of the Bank’s earnings and distributions:
Equity in undistributed earnings		19,857		—			66
Distributions in excess of earnings		—		(29,247	)		—
Total income		19,992		4,584			22,650
Expense:
Interest on junior subordinated obligations		3,141		2,818			2,513
Merger related expenses		325		—			—
Other expenses		1,106		1,095			922
Total expense		4,572		3,913			3,435
Income before income tax benefit		15,420		671			19,215
Income tax benefit		1,597		1,112			1,245
Net income	$	17,017	$	1,783		$	20,460

F-68

Note 18: Parent Company Financial Information—(Continued)

Statements of Cash Flow

	Years Ended December 31,
	2003			2002			2001
	(In thousands)
Operating activities
Net income	$	17,017		$	1,783		$	20,460
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Effect of the Bank’s earnings and distributions		(19,857	)		29,247			(66	)
Net gain on repurchase of trust preferred securities		(6	)		(726	)		—
Net change in other assets and liabilities		(1,103	)		(2,151	)		(515	)
Net cash (used in) provided by operating activities		(3,949	)		28,153			19,879
Investing activities:
Capital contributions to subsidiaries		—			(774	)		—
Net cash used in investing activities		—			(774	)		—
Financing activities:
Net proceeds from the issuance of trust preferred securities		—			25,774			—
Repurchase of trust preferred securities		(1,494	)		(6,098	)		—
Proceeds from exercise of stock options		2,224			2,048			440
Purchases of treasury stock		(7,082	)		(7,879	)		(15,405	)
Dividends paid		(9,177	)		(9,628	)		(9,989	)
Net cash (used in) provided by financing activities		(15,529	)		4,217			(24,954	)
Net (decrease) increase in cash and cash equivalents		(19,478	)		31,596			(5,075	)
Cash and cash equivalents at beginning of year		37,660			6,064			11,139
Cash and cash equivalents at end of year	$	18,182		$	37,660		$	6,064

F-69

No person has been authorized to give any information or to make any representation other than as contained in this prospectus and, if given or made, such other information or representation must not be relied upon as having been authorized by Partners Trust Financial Group or SBU Bank. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this prospectus nor any sale hereunder shall under any circumstances create any implication that there has been no change in the affairs of Partners Trust Financial Group or SBU Bank since any of the dates as of which information is furnished herein or since the date hereof.

Partners Trust Financial Group, Inc.

(Holding Company for SBU Bank, to become Partners Trust Bank)

20,125,000 Shares of Common Stock

(Anticipated Maximum, Subject to Increase)

COMMON STOCK

Prospectus

Sandler O’Neill & Partners, L.P.

                    , 2004

Until                 , 2004, or [        ] days after commencement of the syndicated community offering, if any, whichever is later, all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the obligation of dealers to deliver a prospectus when acting as underwriters and with respect to their unsold allotments of subscriptions.

PART II

Information Not Required in Prospectus

Item 13. Other Expenses of Issuance and Distribution

	Amount
* Legal Fees and Expenses	$	450,000
* Accounting Fees and Expenses		120,000
* Appraisal and Business Plan Fees and Expenses		175,000
* Conversion Agent and Data Processing Fees		95,000
* Marketing Agent Fees and Expenses (1)		1,680,000
* Printing, Postage and Mailing		1,000,000
* Filing Fees (OTS, NASD, Nasdaq and SEC)		185,000
* Other		365,000
* Total	$	4,070,000

* Estimated.

(1) Partners Trust Financial Group, Inc. has retained Sandler O’Neill & Partners, L.P. to assist in the sale of common stock on a best efforts basis in the offering. Fees are estimated at the midpoint of the offering range.

Item 14. Indemnification of Directors and Officers.

Delaware General Corporation Law, the Certificate of Incorporation and Bylaws of Partners Trust Financial Group, Inc. (the “Corporation”) set forth circumstances under which directors, officers, employees and agents of the Corporation may be insured or indemnified against liability which they incur in their capacities as such.

Delaware General Corporation Law

Section 145 of the Delaware General Corporation Law sets forth provisions that define the extent to which a corporation organized under the laws of Delaware may indemnify directors, officers, employees or agents. Section 145 provides as follows:

(a) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person’s conduct was unlawful.

II-1

(b) A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

(c) To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith.

(d) Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the shareholders.

(e) Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys’ fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate.

(f) The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office.

(g) A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section.

(h) For purposes of this section, references to “the corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a

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consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.

(i) For purposes of this section, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this section.

(j) The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

(k) The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of shareholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including attorneys’ fees).

Section 102(b)(7) of the Delaware General Corporation Law permits corporations to eliminate or limit the personal liability of their directors by adding to the certificate of incorporation a provision eliminating or limiting the personal liability of a director to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director for (a) any breach of any director’s duty of loyalty to the corporation or its shareholders, (b) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (c) payment of dividends or repurchases or redemptions of stock other than from lawfully available funds, or (d) any transaction from which the director derived an improper personal benefit.

Certificate of Incorporation

Pursuant to the Certificate of Incorporation, no director of the Corporation shall be liable to the Corporation or its shareholders for monetary damages for any breach of fiduciary duty as a director, provided that this shall not eliminate or limit the liability of a director (a) for any breach of the director’s duty of loyalty to the Corporation or its shareholders; (b) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (c) under Section 174 of the Delaware General Corporation Law; or (d) for any transaction from which the director derived an improper personal benefit.

To the extent permitted by law, the Corporation shall fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding.

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To the extent permitted by law, the Corporation will fully indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding (whether civil, criminal, administrative or investigative) by reason of the fact that such person is or was an employee or agent of the Corporation, or is or was serving at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding.

The Corporation will advance expenses (including attorneys’ fees) incurred by a director or officer in advance of the final disposition of such action, suit or proceeding upon the receipt of an undertaking by or on behalf of the director or officer to repay such amount if it shall ultimately be determined that such director or officer is not entitled to indemnification. The Corporation may advance expenses (including attorneys’ fees) incurred by an employee or agent in advance of the final disposition of such action, suit or proceeding upon such terms and conditions, if any, as the board of directors deems appropriate.

Bylaws

Pursuant to the Bylaws, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, and any appeal therein, whether civil, criminal, administrative, arbitrative, or investigative (other than an action by or in right of the Corporation) by reason of the fact that such person is or was a director, officer, trustee, employee, or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, trustee, employee, or agent of another corporation, association, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, and any appeal therein, if such person acted in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe that such conduct was unlawful. The termination of any action, suit or proceeding, and any appeal therein, by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such conduct was unlawful.

The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding by or in the right of the corporation to procure a judgment in its favor by reason of the fact that such person is or was a director, officer, trustee, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, trustee, employee or agent of another corporation, association, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation. No such indemnification shall be made against expenses in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation or against amounts paid in settlement unless and only to the extent that there is a determination that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses or amounts paid in settlement.

Item 15. Recent Sales of Unregistered Securities

Not applicable.

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Item 16. Exhibits and Financial Statement Schedules

(a)  Exhibits

See the Exhibit Index following the Signatures page in this Registration Statement, which Exhibit Index is incorporated herein by reference.

(b)  Financial Statement Schedules

No financial statement schedules are filed because the required information is included in the consolidated financial statements or related notes.

Item 17. Undertakings

The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreements, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

The undersigned registrant hereby undertakes that:

(1)  For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430(A) and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.

(2)  For the purpose of determining any liability under the Securities Act of 1933 each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

The undersigned registrant hereby undertakes:

(1)  To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

(i)  To include any prospectus required by Section 10(a) (3) of the Securities Act of 1933;

(ii)  To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of

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prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;

(iii)  To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in & registration statement;

(2)  That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

(3)  To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Utica, State of New York, on February 26, 2004.

PARTNERS TRUST FINANCIAL GROUP, INC.
By:	/s/    JOHN A. ZAWADZKI
	John A. Zawadzki President and Chief Executive Officer

POWER OF ATTORNEY

Each person whose individual signature appears below hereby authorizes and appoints John A. Zawadzki and Steven A. Covert, and each of them, with full power of substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name, place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file, any and all amendments to this Registration Statement, including any and all post-effective amendments, and any registration statement relating to the same offerings as this Registration Statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or either of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue thereof.

Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities indicated below on the 26th day of February, 2004.

Signatures	Title
/s/    JOHN A. ZAWADZKI         John A. Zawadzki	President, Chief Executive Officer and Director (Principal Executive Officer)
/s/    STEVEN A. COVERT Steven A. Covert	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
Elizabeth B. Dugan	Director
/s/    RICHARD R. GRIFFITH Richard R. Griffith	Director
/s/    GORDON M. HAYES, JR. Gordon M. Hayes, Jr.	Director

Signatures	Title
/s/    NICHOLAS O. MATT Nicholas O. Matt	Director
/s/    MARYBETH K. MCCALL Dr. Marybeth K. McCall	Director
/s/    WILLIAM L. SCHRAUTH William L. Schrauth	Director
/s/    JOHN B. STETSON John B. Stetson	Director
/s/    DWIGHT E. VICKS, JR. Dwight E. Vicks, Jr	Director
/s/    JOHN R. ZAPISEK John R. Zapisek	Director

EXHIBIT INDEX

Exhibit	Description	Incorporated Herein By Reference To	Filed Herewith
1.1	Agency Agreement between Partners Trust Financial Group, Inc. and Sandler O’Neill & Partners, L.P.		To be filed by amendment
1.2	Letter agreement among SBU Bank, Partners Trust Financial Group, Inc. Partners Trust, MHC and Sandler O’Neill & Partners, L.P., dated December 16, 2003		X
1.3	Letter agreement among SBU Bank, Partners Trust Financial Group, Inc. Partners Trust, MHC and Sandler O’Neill & Partners, L.P., dated December 16, 2003		X
2.1	Amended Plan of Conversion and Reorganization of Partners Trust, MHC (the “Plan”)		X
2.2	Plan of Reorganization from a Mutual Savings Bank to a Mutual Holding Company and Stock Issuance Plan	Exhibit 2 to Partners Trust Financial Group, Inc.’s Registration Statement on Form S-1, Registration No. 333-75514
2.3	Agreement and Plan of Merger by and between Partners Trust, MHC, Partners Trust Financial Group, Inc., a federal corporation, Partners Trust Financial Group, Inc., a Delaware corporation, SBU Bank and BSB Bancorp, dated as of December 23, 2003		X
3.1	Certificate of Incorporation of the Registrant		X
3.2	Bylaws of the Registrant		X
4.1	Form of Stock Certificate of Partners Trust Financial Group		X
5.1	Opinion of Hogan & Hartson L.L.P. regarding legality of securities being registered		To be filed by amendment
8.1	Opinion of Hogan & Hartson L.L.P. regarding certain federal income tax matters		To be filed by amendment
10.1	Employment Agreement between The Savings Bank of Utica and John A. Zawadzki	Exhibit 10.1 to Partners Trust Financial Group, Inc.’s Registration Statement on Form S-1, Registration No. 333-75514

Exhibit	Description	Incorporated Herein By Reference To	Filed Herewith
10.2	Employment Agreement between The Savings Bank of Utica and Steven A. Covert	Exhibit 10.2 to Partners Trust Financial Group, Inc.’s Registration Statement on Form S-1, Registration No. 333-75514
10.3	Employment Protection Agreement between SBU Bank, Partners Trust Financial Group, Inc. and Richard F. Callahan		X
10.4	Employment Protection Agreement between SBU Bank, Partners Trust Financial Group, Inc. and Daniel J. O’Toole		X
10.5	Employment Agreement by and between SBU Bank and Howard W. Sharp, dated as of December 23, 2003		X
10.6	Employment Agreement by and between SBU Bank and William M. Le Beau, dated as of December 23, 2003		X
10.7	Employment Agreement by and between SBU Bank and Randy J. Wiley, dated as of December 23, 2003		X
10.8	Letter Agreement by and between BSB Bancorp, Inc. and William M. Le Beau		X
10.9	Letter Agreement by and between BSB Bancorp, Inc. and Randy J. Wiley		X
10.10	Executive Supplemental Retirement Income Agreement by and between The Savings Bank of Utica and John A. Zawadzki, dated as of June 27, 2001		X
10.11	Endorsement Split Dollar Agreement by and between The Savings Bank of Utica and John A. Zawadzki, dated as of June 27, 2001		X
10.12	SBU Bank Employee Change of Control Severance Plan, dated as of August 26, 2003		X
10.13	Partners Trust Long-Term Equity Compensation Plan	Exhibit A to Partners Trust Financial Group, Inc.’s Proxy Statement filed September 6, 2002 pursuant to Section 14(a) of the Securities Exchange Act of 1934
10.14	Partners Trust Financial Group, Inc. Employee Stock Ownership Plan, dated as of January 1, 2002		To be filed by amendment
10.15	ESOP Trust Agreement between RSGroup Trust Company and Partners Trust Financial Group, Inc., dated as of March 1, 2002		X
10.16	The Savings Bank of Utica Management Employees Deferred Compensation Plan, dated as of January 1, 1999		X
10.17	The Savings Bank of Utica Board of Trustees Deferred Compensation Plan, amended and restated as of January 1, 1999		X

Exhibit	Description	Incorporated Herein By Reference To	Filed Herewith
10.18	Amendment Number Two to The Savings Bank of Utica Board of Trustees Deferred Compensation Plan, dated as of February 14, 2002		X
10.19	The Savings Bank of Utica Incentive Savings Plan, amended and restated as of January 1, 1999		X
10.20	Amendment Number One to The Savings Bank of Utica Incentive Savings Plan, dated as of November 5, 2001		X
10.21	Amendment Number Two to The Savings Bank of Utica Incentive Savings Plan, dated as of February 13, 2002		X
10.22	Amendment Number Three to The Savings Bank of Utica Incentive Savings Plan, dated as of May 28, 2002		X
10.23	Amendment Number Four to the SBU Bank Incentive Savings Plan, dated as of October 15, 2002		X
10.24	Addendum A to the SBU Bank Incentive Savings Plan, dated as of October 15, 2002		X
10.25	The Retirement Plan of SBU Bank In RSI Retirement Trust, amended and restated as of October 1, 1997		X
10.26	Trust Agreement between RSGroup Trust Company and The Savings Bank of Utica, dated as of January 1, 1999		X
10.27	Amendment Number One to The Retirement Plan of SBU Bank In RSI Retirement Trust, dated as of September 24, 2002		X
10.28	Addendum A to The Retirement Plan of SBU Bank In RSI Retirement Trust, dated as of October 15, 2002		X
10.29	The Retirement Plan of SBU Bank, amended and restated as of January 1, 2004		X
21	Subsidiaries of the Registrant		X
23.1	Consent of KPMG LLP with respect to Partners Trust Financial Group		X
23.2	Consent of KPMG LLP with respect to BSB Bancorp, Inc.		X
23.3	Consent of PricewaterhouseCoopers, with respect to BSB Bancorp, Inc.		X
23.4	Consent of Hogan & Hartson L.L.P.	Included in Exhibits 5.1 and 8.1 respectively
23.5	Consent of RP Financial, LC.		X
24.1	Powers of Attorney	Included on Signature Page	X
99.1	Form of Marketing Materials		To be filed by amendment
99.2	Form of Partners Trust, MHC proxy material		To be filed by amendment
99.3	Prospectus Supplement for participants in the Partners Trust Financial Group, Inc. 401(k) Plan		X

Exhibit	Description	Incorporated Herein By Reference To	Filed Herewith
99.4	Appraisal Report of RP Financial, LC.		X
99.5	Consent of Robert Allen to be identified as a proposed director		X
99.6	Consent of William Craine to be identified as a proposed director		X
99.7	Consent of David Niermeyer to be identified as a proposed director		X