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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2003

OR

For the transition period from              to             

Commission File Number: 0-17177

BSB Bancorp, Inc.

(Exact name of registrant as specified in its charter)

58-68 Exchange Street, Binghamton, New York 13901

(Address of principal executive offices) (Zip Code)

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

n/a

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of May 5, 2003: 9,152,736 shares of common stock, $0.01 par value.

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INDEX

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Item 1

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

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BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

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BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

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BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (unaudited)

(In Thousands, Except Share and Per Share Data)

See accompanying notes to unaudited interim consolidated financial statements.

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BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

See accompanying notes to unaudited interim consolidated financial statements.

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NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2003

In the opinion of management, the unaudited interim consolidated financial statements reflect all adjustments which are of a normal recurring nature necessary for a fair statement of the results for the interim periods presented. All intercompany transactions have been eliminated in consolidation. Amounts in the prior periods’ financial statements are reclassified whenever necessary to conform to the current period’s presentation. The December 31, 2002 Consolidated Statement of Condition is derived from the audited consolidated financial statements included in the Company’s 2002 Annual Report to Shareholders. The accompanying unaudited interim consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes included in the Company’s 2002 Annual Report to Shareholders. The results of operations for the March 31, 2003 interim period are not necessarily indicative of the results of operations to be expected for the full fiscal year ended December 31, 2003, or any other interim periods.

Basic earnings per share are calculated by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is computed in a manner similar to that of basic earnings per share, except that the weight-average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares (such as stock options) were issued during the reporting period, computed using the treasury stock method. The following table provides information on the calculation of basic earnings per share and diluted earnings per share for the quarters ended March 31, 2003 and 2002, respectively.

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

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

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

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

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

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

The Company does not issue any guarantees that would require liability-recognition or disclosure, other than its standby letters of credit. Standby and other letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Typically, these instruments have terms of from 3 months to four years or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements.

For letters of credit, the amount of collateral obtained, if any, is based on management’s credit evaluation of the counterparty. Collateral held varies, but may include residential and commercial real estate and business related assets. As required by certain letter of credit agreements, the Company has pledged as collateral mortgage-backed securities having a fair value of approximately $3.8 million at March 31, 2003 and $3.3 million at December 31, 2002.

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

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

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

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Item 2

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

General

BSB Bancorp, Inc. (“BSB” or the “Company”), holding company for BSB Bank & Trust Company (the “Bank”), earned net income for the quarter ended March 31, 2003 of $3.9 million or $0.41 per diluted share, compared to net income of $4.0 million or $0.41 per diluted share for the fourth quarter of 2002 and $5.0 million or $0.51 per diluted share for the first quarter of 2002.

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

Critical Accounting Policies

In the course of the Company’s normal business activity, management must select and apply many accounting policies and methodologies that lead to the financial results presented in the consolidated financial statements of the Company. Some of these policies are more critical than others. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy because of the uncertainty and subjectivity inherent in estimating the levels of allowance needed to cover probable credit losses within the loan portfolio and the material effect that these estimates can have on the Company’s results of operations. While management’s evaluation of the allowance for loan losses as of March 31, 2003 considers the allowance to be adequate, under adversely different conditions or assumptions, the Company may need to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Company’s non-performing loans and potential problem loans, as well as the associated evaluation of the related collateral coverage for these loans, has a significant impact on the overall analysis of the adequacy of the allowance for loan losses. Though management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Company’s allowance for loan losses policy would also require making additional provisions for loan losses. All accounting policies are important and the reader of the financial statements should review these policies, described in Note 1 to the Consolidated Financial Statements included in the Company’s 2002 Annual Report to Shareholders, to gain a greater understanding of how the Company’s financial performance is reported.

Forward-Looking Statements

Certain statements in this quarterly report, especially within Management’s Discussion and Analysis of Financial Condition and Results of Operations, will include forward-looking statements within the meaning of the Securities Exchange Act of 1934, as amended. In general, the word or phrases “will likely result”, “are expected to”, “will continue”, “is anticipated”, “estimate”, “project”, “believe” or similar expressions are intended to identify “forward-looking statements”. In addition, certain disclosures and information customarily provided by financial institutions, such as analysis of the adequacy of the allowance for loan losses or an analysis of the interest rate sensitivity of the Company’s assets and liabilities, are inherently based upon predictions of future events and circumstances. Although the Company makes such statements based on assumptions which it believes to be reasonable, there can be no assurance that actual results will not differ materially from the Company’s expectations. Some of the important factors which could cause its results to differ from any results which might be projected, forecasted or estimated, based on such forward-looking statements include: ( i ) general economic and competitive conditions in the markets in which the Company operates, and the risks inherent in its operations; (ii) the Company’s ability to manage its credit risk and control its operating expense, increase earning assets and non-interest income, and maintain its net interest margin; and (iii) the level of demand for new and existing products. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements. Except as required by applicable law, the Company does not intend, and specifically disclaims any obligation, to update forward-looking statements.

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Financial Condition

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

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

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

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

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

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

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

In March 2003, the Company sold its entire holdings of certain corporate securities based upon an internal analysis that anticipated downgrades associated with deteriorating fundamentals of the issuer. These corporate securities were acquired in 2002 and were initially classified as held to maturity securities. Under the provisions of SFAS No. 115, such sales transactions cast doubt on the Company’s intent to hold other held to maturity securities to maturity. As a result, in March 2003, the Company reclassified its entire held to maturity portfolio to available for sale. The aggregate amortized cost of the held to maturity portfolio was $44.9 million at the time of the transfer. In addition, as a result of the sale and transfer, the Company is precluded from classifying any newly purchased securities as held to maturity for the foreseeable future.

Other real estate owned and repossessed assets increased to $3.7 million at March 31, 2003, primarily due to the addition of one commercial property with a carrying amount of $464,000. Repossessed assets, as a component of this total, remained constant at $1.6 million at December 31, 2002 as well as March 31, 2003, due to aggressive efforts to reduce the Company’s holding period for such assets. Retail market repossession additions, including autos and mobile home units, for the three months ended March 31, 2003, offset all sales of such repossessed assets for the same period.

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

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

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

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

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Asset Quality

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

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

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