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United States
Securities and Exchange Commission
Washington, D.C. 20549

Form 10-K

Securities registered pursuant to Section 12(b) of the Act:   Not applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference to Part III of this Form 10-K or any amendment to this Form 10-K.   o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

The aggregate market value of the common equity held by non-affiliates of the Registrant as of June 28, 2002 was approximately $237.5 million. Number of shares of common stock outstanding as of March 6, 2003 - 9,195,914

DOCUMENTS INCORPORATED BY REFERENCE

     List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated:

     (1)  Portions of the Registrant’s Annual Report to Shareholders for the year ended December 31, 2002 are incorporated by reference into Part II, Items 5 - 8 of this Form 10-K.

     (2)  Portions of the Definitive Proxy Statement are incorporated by reference into Part III, Items 10 - 13 of this Form 10-K.

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FORM 10-K ANNUAL REPORT
FOR THE YEAR ENDED
DECEMBER 31, 2002
BSB BANCORP, INC.

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PART I

GENERAL

BSB Bancorp, Inc.

          BSB Bancorp, Inc. (the “Company”) is the Delaware chartered bank holding company for BSB Bank & Trust Company (“BSB Bank & Trust” or the “Bank”). The Company owns 100% of the issued and outstanding common stock, $1.00 par value, of the Bank, which is the primary asset of the Company. The business of the Company is the business of the Bank, which is the Company’s sole segment. All references to the Company include the activities of the Bank, unless the context indicates otherwise. The Company’s and the Bank’s principal executive offices are located at 58-68 Exchange Street, Binghamton, New York 13901, telephone (607) 779-2406.

          The Company, as a bank holding company, is subject to regulation, examination and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”), as well as the New York State Banking Department.

BSB Bank & Trust Company

          The Bank is headquartered in Binghamton, New York and at December 31, 2002 conducted business in Broome, Chenango, Onondaga and Tioga Counties and adjacent areas of New York State. During the first quarter of 2002, the Company sold its $10.7 million credit card portfolio to American Express and recognized a net gain before taxes of approximately $1.8 million on the sale. The increasing costs associated with maintaining the technology to provide a high level of service to our customers and the higher levels of charge-offs associated with credit card debt made this a less profitable line of business for the Company. During the fourth quarter of 2002, the Company sold its two Elmira branches located in the Chemung County area. The sale allowed the Company to concentrate efforts on the further development of its retail branch operations in the Greater Binghamton area and the Central New York region. The sale included deposits of approximately $44.2 million, net loans of approximately $2.8 million and certain other assets and resulted in a net gain before taxes of approximately $3.1 million. BSB Bank & Trust serves its customers from 20 full-service banking offices. Additional banking services are provided by a network of branch-based and off-premise automatic teller machines, as well as 12 proprietary banking service locations (“Storeteller”) within a large area supermarket chain.

          The primary market areas of the Bank 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. Over the past decade, BSB Bank & Trust has grown from a traditional thrift institution to a diversified financial services organization providing a full range of deposit and loan products to area businesses and consumers, mortgage banking, trust, investment and insurance services. The Bank is a major provider of banking services to consumers and the business community, as well as banking services for school districts and cooperative education centers, cities, towns, villages and numerous municipal agencies. It is also active in indirect automobile financing.

          The Bank is subject to regulation, examination and supervision by the New York State Banking Department (“NYSBD”) and the Federal Deposit Insurance Corporation (“FDIC”). Deposits in the Bank are insured by the FDIC to the extent provided by law. The Bank is also a member of the Federal Home Loan Bank of New York (“FHLB”).

LENDING ACTIVITIES

          The Company offers commercial and residential permanent and construction mortgage loans, commercial and industrial loans (“C&I”), various direct and indirect consumer loans including home equity lines of credit and home equity loans and other types of small business and 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 the Company 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 the Company’s objectives during 2002 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 commercial and industrial

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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.

          The Company’s portfolio of loans totaled $1.3 billion at December 31, 2002, representing 66.2% of the Company’s total assets at that date, compared to $1.5 billion, and 72.0% of the Company’s total assets at December 31, 2001. The Company continued to lower the balance of C&I loans within its portfolio of assets. The balance of C&I loans decreased to $492.2 million or 36.5% of all loans at December 31, 2002 compared to $750.6 million or 50.6% of all loans at December 31, 2001. These loans are generally tied to the Company’s Prime Rate. Real estate loans, another strategic focus during 2002, increased to $477.3 million or 35.4% of all loans at December 31, 2002 compared to $355.8 million or 24.0% at December 31, 2001.

          The balance of consumer loans remained stable at $378 million at both December 31, 2002 and 2001. Indirect new auto loans increased from $39.5 million at December 31, 2001 to $60.1 million at December 31, 2002. This shift of loans was done with competitive pricing to obtain higher quality new auto loans which historically have lower incidences of charge-offs. Net charge-offs for these loans represent 10 basis points in 2002 compared to 28 basis points in 2001 of the average loan balances for indirect new auto loans.

          As rates continued to decline during the year, the Company considered it prudent to sell its longest duration residential mortgage loan originations while retaining its shorter term fixed- and variable-rate loans and all bi-weekly mortgage loans. In this strategy, real estate loans increased to 35.4% of the loan portfolio at December 31, 2002 from 24.0% at December 31, 2001. This increase in the percent of real estate loans to total loans is consistent with the Company’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.

Loan Portfolio Composition

          The following table sets forth the composition of the Company’s loan portfolio by loan type as of the dates indicated.

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          The following table sets forth scheduled contractual maturities of loans in the Company’s portfolio at December 31, 2002. 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.

          Contractual maturities of loans do not necessarily reflect the actual life of loans in the Company’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 the Company 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.

Commercial and Industrial Lending

          As of December 31, 2002, commercial loans amounted to $492.2 million or 36.5% of the Company’s total loans. Under New York law, the Bank generally may not lend to any one entity more than 15% of the Bank’s capital stock, surplus and undivided profits. However, the Bank is permitted to extend a loan up to 25% of the Bank’s capital stock, surplus and undivided profits, provided that the loan is collateralized to the extent that such loan is between 15% and 25% of the Bank’s capital stock, surplus and undivided profits. The Bank’s policy, consistent with regulation, restricts loans to any borrower and related entities to 15% of shareholders’ equity, unless the amount in excess of 15% is secured by liquid collateral. Loan relationships approaching 15% of the Bank’s shareholders’ equity generally require diversification in both repayment source and collateral.

          The Company 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 the Company than most other types of lending. The C&I portfolio has required two major changes that the Company has worked toward. One change was a decrease in overall portfolio size to a more manageable level that would represent a smaller percent of the overall loan portfolio. Consistent with this objective, the C&I loan portfolio has decreased $258.4 million from $750.6 million or 50.6% of the entire loan portfolio at December 31, 2001. Second, the Company wanted to decrease the number of large borrowing relationships within the portfolio. At December 31, 2002, there were 8 loan relationships exceeding $10.0 million compared to 14 loan relationships at December 31, 2001. The average size of a C&I loan decreased from $272,000 in 2001 to $222,000 in 2002.

          Management continues to review commercial loan applications from companies with a strong financial base and strong credit history, principally within the Company’s market area. Commercial loan originations amounted to $99.4 million or 18.4% of total loans originated in 2002 compared to $140.6 million, or 34.3% of total loans originated in 2001. Total loan commitments to the 10 largest lending relationships ranged from $9.9 million to $25.9 million at December 31, 2002. Outstanding loan balances for these 10 relationships, ranging from $8.6 million to $20.2 million, are made up of 41 individual loans. Each of these loans has varied sources of repayment and collateral. The Company periodically reviews all larger group credits.

          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 55.2% of the Company’s commercial loans bear floating interest rates tied to the Company’s prime rate (“Prime Rate”). The average yield on the commercial loan portfolio was 6.58% in 2002 and 8.03% in 2001. The Company’s average Prime Rate was 4.67% in 2002 and 6.91% in 2001. 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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          The Company’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 Review department reviews risk ratings assigned and has authority to change ratings as appropriate. These risk ratings are used in conjunction with a risk rating migration analysis program to assist monthly in determining levels of loss allowance needed. Delinquency reports are reviewed during the month to assist the loan officer in active management of the loan by calling or sending 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 and that officer’s team leader. Loans exceeding $5.0 million require multiple approvals from the senior loan officer and the CEO, plus the credit administration department and the Directors’ Loan Committee. For commercial loans at intermediate levels, the Company requires designated approvals of the senior loan officers, the CEO, plus the credit administration department. Individual loan authority is approved by the Board of Directors.

          For loan portfolio analysis, geographic concentrations are reviewed at the same time as industry concentrations. Approximately 70.5% of commercial loans are located in the Company’s primary market area of Broome, Chenango, Onondaga and Tioga Counties. Of the remaining 29.5%, 25.0% are spread through other counties of New York State with primary concentrations in Monroe, Cortland and Tompkins Counties. The balance of these loans are in other states.

          In addition to the various types of lending services, the Company 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.

          The Company monitors commercial loan and commercial real estate industry stratifications at least twice a year and continues to require diversity throughout its commercial loan and commercial real estate portfolios.

          The following table gives the breakdown of the commercial and industrial and commercial real estate portfolios at December 31 by industry: 

Commercial Real Estate Lending

          The Company originated $42.8 million in commercial real estate loans in 2002 compared to $21.6 million in 2001. At December 31, 2002, the Company had $147.0 million of commercial real estate loans outstanding, representing approximately 10.90% of the Company’s total loan portfolio. Of the $147.0 million outstanding at December 31, 2002, $34.9 million were fixed-rate loans with amortization periods of 3 to 25 years. Adjustable-rate loans at December 31, 2002 were $112.0 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 the loans, the Company has seen an increase in fixed-rate loans being closed in 2002 as these loan balances increased from $18.6 million at December 31, 2001 to $34.9 million at December 31, 2002. The origination of commercial real estate loans primarily comes from the Company’s major market areas in a four county area of the Southern Tier and Central regions of New York. The urban areas of Rochester, Albany and Buffalo also produce new loans for the Company, similar to our residential real estate lending results.

          In setting interest rates and origination fees on new loans and 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, 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.

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

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Consumer Lending

          The Company engages in a variety of consumer lending activities including auto loans, both direct and indirect, home equity line of credit loans, overdraft loans, passbook loans, student loans and direct personal loans. Consumer loans provide diversification within the loan portfolio and allow the Company to meet the credit needs of our customers. The short term nature of these loans shortens the duration of the entire loan portfolio. As of December 31, 2002, a total of $378.0 million of consumer loans was outstanding as compared to $378.4 million at December 31, 2001. 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. The Company has maintained a strong presence in indirect lending within our market areas. New auto loans historically have a lower incidence of loss than used autos. Indirect new auto loan balances have increased 52.1% from $39.5 million at December 31, 2001 to $60.1 million at December 31, 2002.

          Of the $336.4 million in personal loans outstanding at December 31, 2002, $65.8 million or 19.6% represented direct consumer loans originated by the Company’s lending staff. The remaining $270.6 million or 80.4% represented the indirect consumer loan portfolio originated through relationships with mobile home service companies, automobile and other retail dealers. Indirect originations in 2002 totaled $118.0 million or 60.0% of all consumer loan originations. Of these indirect originations, used auto loans were the largest source at $68.0 million, but the ending balance at December 31, 2002 was $128.5 million, down from $131.6 million at December 31, 2001. These loans typically are shorter term and pay off faster than new auto loans. All personal loans originated for the Company 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, 2002, the outstanding balance of total home equity lines of credit was $36.3 million. Interest rates on home equity lines of credit are adjusted monthly to reflect changes in the Prime Rate.

          Consumer loans are marketed throughout the Company’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 the Company which normally include employment status, credit history and credit score.

          In the first quarter of 2002, the Company sold its $10.7 million credit card portfolio to American Express Company.

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

Residential Real Estate Lending

          The Company historically has been, and continues to be, a leading originator of residential real estate loans in its market area. At December 31, 2002, $330.3 million or 24.5% of the Company’s total loan portfolio consisted of residential mortgage loans. In 2002 and 2001, residential mortgage loan originations amounted to $200.5 million and $90.6 million, respectively, which represented approximately 37.1% and 22.1%, respectively, of the Company’s total loan originations.

          The continued decline in interest rates during 2002 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. Residential mortgage lending continues to be an important component of the Company’s loan portfolio. During 2002, the Company retained in its portfolio all loans with maturities of 20 years or less as well as 30-year bi-weekly fixed-rate loans. The bi-weekly residential loan has been the most popular among our customers as they are able to obtain attractive rates with an actual duration closer to that of a 20-year loan. For 2002, total originations of bi-weekly residential loans was $84.0 million or 41.9% of all originations. By comparison, in 2001, total bi-weekly residential loan originations were only $6.6 million or 7.3%. The trend to refinance at lower fixed rates is reflected in the 2002 originations of 10-year mortgages ($14.6 million) and 15-year mortgages ($37.8 million). By comparison, the Company originated, in 2001, a total of $33.5 million of 10- and 15-year fixed-rate mortgages, with 98.8% of these in the 15-year category.

          The growth in these portfolios is shown in the following chart of residential mortgage loan balances at December 31, 2002 and December 31, 2001.

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          Residential real estate loans provide a favorable alternative for the Company as a key element of the strategy to reduce credit risk within its overall loan portfolio. Such loans also fulfill the objective of a full range of loan services to customers within our primary market areas. Generally, retail originations of residential real estate loans provide the Company more direct control over the volume of such loans, and more favorable origination costs. In order to achieve favorable operational efficiencies, the Company opened a new facility dedicated to residential real estate loan production. The balance between wholesale and retail loans closed remained nearly the same with approximately 66% of the residential real estate loans closed within the Company’s facilities. Significant changes in the penetration of the Company’s two major markets were achieved during 2002 as retail residential real estate loans closed in Central New York were approximately 43% of the total in 2002 as compared to approximately 23% in 2001. The fourth quarter of 2002 showed almost an even split of loans closed between the two regions.

Loan Review

          The Company 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 reserve 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 the Company. 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, reconciliation 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 provides 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, the Company attempts to cure the deficiency by contacting the borrower and seeking payment. Contacts are generally made within five business days after the expiration of the payment grace period set forth in the loan contract for residential mortgage and consumer loans. Commercial customers are contacted within five days after a payment becomes past due. The Company 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 the Company generally prefers to work with borrowers to resolve such problems, the Company does initiate foreclosure or repossession proceedings or pursues other legal collection procedures, as necessary, to minimize any potential loss. Once the Company takes legal title, the property is classified as other real estate owned and repossessed assets on the Consolidated Statement of Condition.

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Classification of Loans

          The Company’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, the Company 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.

          At December 31, 2002, the Company had classified $78.2 million of assets as performing substandard loans, which include $12.2 million of accruing loans identified as troubled debt restructured loans. Comparative information at December 31, 2001, reflects $131.1 million of assets as performing substandard loans, which include $8.8 million of accruing loans identified as troubled debt restructured loans.

Non-performing Assets and Other Real Estate Owned (“ORE”)

          Loans are placed on a non-accrual status when, in the judgement 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, the Company 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.

          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, less an estimate of the costs expected to be incurred during its disposition. 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 to operating expense.

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

          Accruing loans classified as troubled debt restructured loans totaled $13.8 million, $8.8 million, $4.8 million, $13.1 million and $11.9 million at December 31, 2002, 2001, 2000, 1999 and 1998, respectively. The Company does not consider these loans to be non-performing.

          Additional interest income would have been recorded on loans accounted for on a non-accrual basis of approximately $3.0 million, $4.0 million, $1.8 million, $806,000 and $783,000, at December 31, 2002, 2001, 2000, 1999 and 1998, respectively, if such loans had been current throughout the respective years. Such amounts were not included in the Company’s interest and dividend income for the respective periods.

          Interest income on non-accrual loans was recognized during the years 2002, 2001, 2000, 1999 and 1998, of approximately $540,000, $2.1 million, $1.3 million, $119,000 and $567,000, respectively.

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, the Company monitors its loan portfolio by reviewing delinquent loans and taking appropriate measures as discussed above. In addition, with respect to the Company’s commercial real estate and commercial business loans, the Company closely watches all loans with a risk rating (described above under “Classification of Loans”) that indicates 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 the Company’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 determined through review of impaired loans, non-performing loans and certain performing loans designated as problems. General reserves are determined through regular disciplined analysis of the portfolio. The risk profile and experience of the existing portfolio, along with growth, concentration and management resources are also considered. The allowance for loan losses reflects management’s best estimate of probable loan losses.

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          At December 31, 2002, the allowance for loan losses was $63.3 million or 4.69% of total loans outstanding providing coverage for non-performing loans of 124.96%. The coverage of non-performing loans was 96.96% at December 31, 2001, and the allowance for loan losses was $58.8 million or 3.96% of total loans outstanding. The table below summarizes the activity in the Company’s allowance for loan losses over the last five years. The Company’s improved coverage ratio for non-performing loans is consistent with management’s priority to strategically balance the mix of the Company’s loan portfolio and recognize the influence of general economic and business conditions, especially those influencing our regional businesses. Management’s assessment of the adequacy of the allowance for loan losses incorporates an evaluation of the Company’s overall loan portfolio, based on both general economic factors and specific factors influencing loans covered by the risk-rating system described above.

          The allowance for loan losses required an aggregate provision for loan losses of $46.2 million in 2002 compared to $18.2 million in 2001. The 2002 provision included a provision of $26.7 million during the second quarter. The significant provision in the second quarter reflected specific circumstances affecting specific individual loans and our ongoing analysis of other borrowers whose reported financial statements revealed further deterioration of collateral and repayment ability. As a result, the increased provision for loan losses was primarily due to increased net loan charge-offs, continued high levels of non-performing and problematic loans, as well as the continued economic sluggishness within the Company’s primary markets.

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          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 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.