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<STREET1>5790 WIDEWATERS PKWY
<CITY>DEWITT
<STATE>NY
<ZIP>13214
<PHONE>8007242262
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<FILENAME>d62959_10-k.txt
<DESCRIPTION>FORM 10-K
<TEXT>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

|X|   FOR ANNUAL AND TRANSITIONAL REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE
      SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2004
                        Commission file number 001-13695

        ----------------------------------------------------------------
                           [LOGO]
                           COMMUNITY BANK SYSTEM, INC.
             (Exact name of registrant as specified in its charter)
        ----------------------------------------------------------------

                             New York Stock Exchange
                   (Name of Each Exchange on Which Registered)

          Delaware                                        16-1213679
(State or other jurisdiction                (I.R.S. Employer Identification No.)
     of incorporation)

5790 Widewaters Parkway, DeWitt, New York                 13214-1883
 (Address of principal executive offices)                 (Zip Code)

                                 (315) 445-2282
               Registrant's telephone number, including area code

    Securities registered pursuant to Section 12(b) of the Act: Common Stock,
     $1.00 Par Value Securities registered pursuant to Section 12(g) of the
                                    Act: None

      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 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 the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. |_|

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

The aggregate market value of the voting stock held by non-affiliates of the
registrant on June 30, 2004 determined using the closing price per share on that
date of $22.79, as reported on the New York Stock Exchange was approximately
$636,000,000.

Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.

     30,312,681 shares of Common Stock, $1.00 par value, were outstanding on
                                 March 9, 2005.

                      DOCUMENTS INCORPORATED BY REFERENCE.

      List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K into which the document is incorporated: (1) any
annual report to security holders; (2) any proxy or information statement; and
(3) any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act
of 1933.

<PAGE>

      Portions of Definitive Proxy Statement for Annual Meeting of Shareholders
to be held on May 11, 2005 (the "Proxy Statement") is incorporated by reference
in Part III of this Annual Report on Form 10-K.

                    Exhibit Index is located on page 69 of 74

<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
PART I                                                                                          Page
                                                                                                ----
<S>                                                                                              <C>
Item 1.   Business ............................................................................   3
Item 2.   Properties ..........................................................................   7
Item 3.   Legal Proceedings ...................................................................   7
Item 4.   Submission of Matters to a Vote of Security Holders .................................   7
Item 4A.  Executive Officers of the Registrant ................................................   7

PART II

Item 5.   Market for Registrant's Common Stock, Related Shareholders Matters and Issuer
            Purchases of Equity Securities ....................................................   8
Item 6.   Selected Financial Data .............................................................   9
Item 7.   Management's Discussion and Analysis of Financial Condition and Results of
            Operations ........................................................................  11
Item 7A.  Quantitative and Qualitative Disclosures about Market Risk ..........................  35
Item 8.   Financial Statements and Supplementary Data:
               Consolidated Statements of Condition ...........................................  38
               Consolidated Statements of Income ..............................................  39
               Consolidated Statements of Changes in Shareholders' Equity .....................  40
               Consolidated Statements of Comprehensive Income ................................  41
               Consolidated Statements of Cash Flows ..........................................  42
               Notes to Consolidated Financial Statements .....................................  43
               Management's Report on Internal Control over Financial Reporting ...............  65
               Report of Independent Registered Public Accounting Firm ........................  66
          Two Year Selected Quarterly Data ....................................................  67

Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure   67
Item 9A.  Controls and Procedures .............................................................  67
Item 9B.  Other Information ...................................................................  67

PART III

Item 10.  Directors and Executive Officers of the Registrant ..................................  68
Item 11.  Executive Compensation ..............................................................  68
Item 12.  Security Ownership of Certain Beneficial Owners and Management ......................  68
Item 13.  Certain Relationships and Related Transactions ......................................  68
Item 14.  Principal Accounting Fees and Services ..............................................  68

PART IV

Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....................  69
Signatures ....................................................................................  73
</TABLE>


                                       2
<PAGE>

                                     Part I

This Annual Report on Form 10-K contains certain forward-looking statements with
respect to the financial condition, results of operations and business of
Community Bank System, Inc. These forward-looking statements involve certain
risks and uncertainties. Factors that may cause actual results to differ
materially from those contemplated by such forward-looking statements are set
forth herein under the caption "Forward-Looking Statements." The share and
per-share information in this document has been adjusted to give effect to a
two-for-one stock split of the Company's common stock effected as of April 12,
2004.

Item 1. Business

Community Bank System, Inc. ("the Company") was incorporated on April 15, 1983,
under the Delaware General Corporation Law. Its principal office is located at
5790 Widewaters Parkway, DeWitt, New York 13214. The Company maintains a
web-site at communitybankna.com and firstlibertybank.com. Annual reports on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and
amendments to those reports, are available on the Company's web-site free of
charge as soon as reasonably practicable after such reports or amendments are
electronically filed with or furnished to the Securities and Exchange
Commission. The information on the web-site is not part of this filing.

The Company's business philosophy is to operate as a community bank with local
decision-making, principally in non-metropolitan markets, providing a broad
array of banking and financial services to retail, commercial, and municipal
customers.

Community Bank System, Inc. is a single bank holding company which wholly-owns
four subsidiaries: Community Bank, N.A. ("the Bank"), Benefit Plans
Administrative Services, Inc. ("BPAS"), CFSI Closeout Corp. ("CFSICC"), and
First of Jermyn Realty Co. ("FJRC"). BPAS owns two subsidiaries, Benefit Plans
Administrative Services LLC (BPA) and Harbridge Consulting Group LLC. BPAS
provides administration, consulting and actuarial services to sponsors of
employee benefit plans. CFSICC and FJRC are inactive companies. The Company also
wholly-owns three unconsolidated subsidiary business trusts formed for the
purpose of issuing mandatorily redeemable preferred securities which are
considered Tier I capital under regulatory capital adequacy guidelines.

The Bank operates 125 customer facilities throughout twenty-two counties of
Upstate New York and five counties of Northeastern Pennsylvania offering a range
of commercial and retail banking services. The Bank owns the following
subsidiaries: Community Investment Services, Inc. ("CISI"), CBNA Treasury
Management Corporation ("TMC"), CBNA Preferred Funding Corporation ("PFC"),
Elias Asset Management, Inc. ("EAM") and First Liberty Service Corp. ("FLSC").
CISI provides broker-dealer and investment advisory services. TMC operates the
cash management, investment, and treasury functions of the Bank. PFC primarily
is an investor in residential real estate loans. EAM provides asset management
services to individuals, corporate pension and profit sharing plans, and
foundations. FLSC provides banking related services to the Pennsylvania branches
of the Bank.

Acquisition History (1999-2004)

Dansville Branch Acquisition

On December 3, 2004, the Company completed the purchase of a branch office in
Dansville, N.Y. ("Dansville") from HSBC Bank USA, N.A with deposits of $32.6
million.

First Heritage Bank

On May 14, 2004, the Company acquired First Heritage Bank ("First Heritage"), a
closely held bank headquartered in Wilkes-Barre, PA with three branches in
Luzerne County, Pennsylvania. First Heritage's three branches operate as part of
First Liberty Bank & Trust, a division of Community Bank, N.A. Consideration
included 2,592,213 shares of common stock with a fair value of $52 million,
employee stock options with a fair value of $3.0 million, and $7.0 million of
cash (including capitalized acquisition costs of $1.0 million).

Grange National Banc Corp.

On November 24, 2003, the Company acquired Grange National Banc Corp.
("Grange"), a $280 million-asset bank holding company based in Tunkhannock, Pa.
Grange's 12 branches operate as part of First Liberty Bank & Trust, a division
of Community Bank, N.A. The Company issued approximately 2,294,000 shares of its
common stock to certain of the former shareholders at a cost of $23.97 per
share. The remaining shareholders received $21.25 per share in cash or
approximately $20.9 million. In addition, Grange stock options representing $5.4
million of fair value were exchanged for options of the Company.


                                       3
<PAGE>

Peoples Bankcorp Inc.

On September 5, 2003, the Company acquired Peoples Bankcorp, Inc. ("Peoples"), a
$29-million-asset savings and loan holding company based in Ogdensburg, New
York. Peoples' single branch is being operated as a branch of the Bank's network
of branches in Northern New York.

Harbridge Consulting Group

On July 31, 2003, the Company acquired PricewaterhouseCoopers' Upstate New York
Global Human Resource Solutions consulting group. This practice has been renamed
Harbridge Consulting Group ("Harbridge") and is a leading provider of retirement
and employee benefits consulting services throughout Upstate New York, and is
complementary to BPA, the Company's defined contribution plan administration
subsidiary.

FleetBoston Financial Corporation branches

On November 16, 2001, the Company acquired 36 branches from FleetBoston
Financial Corporation with $470 million in deposits and $177 million in loans.
The branches are located in the Southwestern and Finger Lakes Regions of New
York State.

First Liberty Bank Corp.

On May 11, 2001, the Company completed its acquisition of the $648-million-asset
First Liberty Bank Corp. ("First Liberty"). Pursuant to the terms of the merger,
each share of First Liberty stock was exchanged for 1.12 shares of the Company's
common stock, which amounted to approximately 7.2 million shares. The merger
constituted a tax-free reorganization and was accounted for as a pooling of
interests under APB Opinion 16.

Citizens National Bank of Malone

On January 26, 2001, the Company acquired the $111-million-asset Citizens
National Bank of Malone, a commercial bank with five branches throughout
Franklin and St. Lawrence counties in New York State. The Company issued
1,904,000 shares of its common stock to the former shareholders at a cost of
$13.25 per share. All of the 1,296,200 shares then held in the Company's
treasury were issued in this transaction as part of the total 1,904,000 shares.

Elias Asset Management, Inc.

On April 3, 2000, the Company acquired all the stock of Elias Asset Management,
Inc. (EAM) for cash of $6.5 million. Additional consideration of $3.0 million
was recognized in 2001 based upon performance targets set forth within the stock
purchase agreement. EAM, based in Williamsville, NY, is a nationally recognized
firm that manages assets for individuals, corporate pension and profit sharing
plans, and foundations.

Services

The Bank is a community retail bank committed to the philosophy of serving the
financial needs of customers in local communities. The Bank's branches are
generally located in small towns and villages within its geographic market areas
of Upstate New York and Northeastern Pennsylvania. The Company believes that the
local character of business, knowledge of the customer and customer needs, and
comprehensive retail and small business products, together with responsive
decision-making at the branch and regional level, enable the Bank to compete
effectively. The Bank is a member of the Federal Reserve System and the Federal
Home Loan Bank of New York ("FHLB"), and its deposits are insured by the FDIC up
to applicable limits.

Competition

The financial services business is highly competitive. The Company competes
actively with national and state banks, thrift institutions, credit unions,
retail brokerage firms, mortgage bankers, finance companies, insurance
companies, and other regulated and unregulated providers of financial services.


                                       4
<PAGE>

The table below summarizes the Bank's deposits and market share by the
twenty-seven counties of New York and Pennsylvania in which it has customer
facilities. Market share is based on deposits of all commercial banks, credit
unions, savings and loan associations, and savings banks.

<TABLE>
<CAPTION>
                                                                          Number of
                                                         --------------------------------------------
                                                                                        Towns Where
                                Deposits                                                  Company
                                6/30/2004       Market                                 Has 1st or 2nd
    County           State     (000's) (1)      Share    Facilities   ATM's   Towns   Market Position
-----------------------------------------------------------------------------------------------------
<S>                  <C>       <C>               <C>        <C>        <C>     <C>          <C>
   Allegany            NY      $  193,624        48.6%       10         8        9           9
     Lewis             NY          80,637        37.7%        4         1        3           3
     Yates             NY          76,378        32.2%        3         2        2           2
    Seneca             NY         106,485        30.4%        4         3        4           3
  Cattaraugus          NY         262,982        30.4%       11         7        7           6
 St. Lawrence          NY         343,673        26.6%       13         8       11          10
    Wyoming            PA          76,592        23.5%        3         2        3           2
   Franklin            NY          83,558        16.9%        5         3        4           4
  Chautauqua           NY         195,187        13.9%       12        10       10           7
   Schuyler            NY          18,147        13.8%        1         1        1           0
   Jefferson           NY         135,393        12.1%        5         5        4           2
    Steuben            NY         164,712        11.4%        9         6        8           5
     Tioga             NY          35,724         9.5%        2         2        2           1
  Livingston           NY          48,106         8.2%        3         3        3           2
  Susquehanna          PA          38,045         7.3%        3         1        3           3
  Lackawanna           PA         446,679         6.3%       11        13        8           4
    Ontario            NY          77,931         5.7%        3         4        3           1
   Herkimer            NY          30,495         5.5%        1         1        1           1
     Wayne             NY          47,904         5.3%        2         1        1           0
    Luzerne            PA         291,214         4.7%        9         8        5           1
    Oswego             NY          45,446         4.3%        2         2        2           2
    Cayuga             NY          27,571         3.4%        2         1        2           1
   Bradford            PA          15,055         1.8%        2         2        2           1
-----------------------------------------------------------------------------------------------------
       Subtotal                 2,841,538        10.0%      120        94       98          70

    Oneida             NY          58,592         1.4%        2         1        1           1
    Chemung            NY          12,292         1.3%        1         1        1           0
   Onondaga            NY          10,106         0.1%        1         1        1           0
     Erie              NY          26,407         0.1%        1         0        1           1
-----------------------------------------------------------------------------------------------------
      27             Total     $2,948,935         4.6%      125        97      102          72
=====================================================================================================
</TABLE>

(1)   Deposit market share data as of June 30, 2004, the most recent information
      available, calculated by Sheshunoff Information Services, Inc.

Employees

As of December 31, 2004 and 2003 the Company employed 1,301 and 1,259 full-time
equivalent employees, respectively. The Company offers a variety of employment
benefits and considers its relationship with its employees to be good.


                                       5
<PAGE>

Supervision and Regulation

Bank holding companies and national banks are regulated by state and federal
law. The following is a summary of certain laws and regulations that govern the
Company and the Bank. To the extent that the following information describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the actual statutes and regulations thereunder.

Federal Bank Holding Company Regulation

The Company is registered under, and is subject to, the Bank Holding Company Act
of 1956, as amended. This Act limits the type of companies that Community Bank
System, Inc. may acquire or organize and the activities in which it or they may
engage. In general, the Company and the Bank are prohibited from engaging in or
acquiring direct or indirect control of any corporation engaged in non-banking
activities unless such activities are so closely related to banking as to be a
proper incident thereto. In addition, the Company must obtain the prior approval
of the Board of Governors of the Federal Reserve System ("the FRB") to acquire
control of any bank; to acquire, with certain exceptions, more than five percent
of the outstanding voting stock of any other corporation; or, to merge or
consolidate with another bank holding company. As a result of such laws and
regulation, the Company is restricted as to the types of business activities it
may conduct and the Bank is subject to limitations on, among others, the types
of loans and the amounts of loans it may make to any one borrower. The Financial
Modernization Act of 1999 created, among other things, a new entity, the
"financial holding company". Such entities may engage in a broader range of
activities that are "financial in nature", including insurance underwriting,
securities underwriting and merchant banking. Bank holding companies which are
well capitalized and well managed under regulatory standards may convert to
financial holding companies relatively easily through a notice filing with the
FRB, which acts as the "umbrella regulator" for such entities. The Company may
seek to become a financial holding company in the future.

Federal Reserve System

The Company is required by the Board of Governors of the Federal Reserve System
to maintain cash reserves against its deposits. After exhausting other sources
of funds, the Company may seek borrowings from the Federal Reserve for such
purposes. Bank holding companies registered with the FRB are, among other
things, restricted from making direct investments in real estate. Both the
Company and the Bank are subject to extensive supervision and regulation, which
focus on, among other things, the protection of depositors' funds.

The Federal Reserve System also regulates the national supply of bank credit in
order to influence general economic conditions. These policies have a
significant influence on overall growth and distribution of loans, investments
and deposits, and affect the interest rates charged on loans or paid for
deposits.

Fluctuations in interest rates, which may result from government fiscal policies
and the monetary policies of the Federal Reserve System, have a strong impact on
the income derived from loans and securities, and interest paid on deposits.
While the Company and the Bank strive to anticipate changes and adjust their
strategies for such changes, the level of earnings can be materially affected by
economic circumstances beyond their control.

The Bank is subject to minimum capital requirements established, respectively,
by the FRB and the FDIC. For information on these capital requirements and the
Company's and the Bank's capital ratios see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Capital" and Note P
to the Financial Statements.

Office of Comptroller of the Currency

The Bank is supervised and regularly examined by the Office of the Comptroller
of the Currency ("the OCC"). The various laws and regulations administered by
the OCC affect corporate practices such as payment of dividends, incurring debt,
and acquisition of financial institutions and other companies. It also affects
business practices, such as payment of interest on deposits, the charging of
interest on loans, types of business conducted and location of offices. There
are no regulatory orders or outstanding issues resulting from regulatory
examinations of the Bank.

Sarbanes-Oxley Act of 2002

The Sarbanes Oxley Act of 2002 (the "Sarbanes-Oxley Act") implemented a broad
range of corporate governance, accounting and reporting reforms for companies
that have securities registered under the Exchange Act of 1934. In particular,
the Sarbanes-Oxley Act established, among other things: (i) new requirements for
audit and other key


                                       6
<PAGE>

committees involving independence, expertise levels, and specified
responsibilities; (ii) additional responsibilities regarding financial statement
oversight for the Chief Executive Officer and Chief Financial Officer of the
reporting company; (iii) the creation of an independent accounting oversight
board for the accounting industry; (iv) new standards for auditors and
regulation of audits, including independence provisions that restrict non-audit
services that accountants may provide to their audit clients; (v) increased
disclosure and reporting obligations for the reporting company and their
directors and executive officers including accelerated reporting of company
stock transactions; (vi) a prohibition of personal loans to directors and
officers, except certain loans made by insured financial institutions on
nonpreferential terms and in compliance with other bank regulator requirements;
and (vii) a range of new and increased civil and criminal penalties for fraud
and other violation of the securities laws.

Item 2. Properties

The Company has 136 properties, 90 are owned and 46 are located in long-term
leased premises. Real property and related banking facilities owned by the
Company at December 31, 2004 had a net book value of $46.5 million and none of
the properties was subject to any material encumbrances. For the year ended
December 31, 2004, rental fees of $2.5 million were paid on facilities leased by
the Company for its operations.

Item 3. Legal Proceedings

The Company and its subsidiaries are subject in the normal course of business to
various pending and threatened legal proceedings in which claims for monetary
damages are asserted. Management, after consultation with legal counsel, does
not anticipate that the aggregate liability, if any, arising out of litigation
pending against the Company or its subsidiaries will have a material effect on
the Company's consolidated financial position or results of operations.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to a vote of the shareholders during the quarter
ended December 31, 2004.

Item 4A. Executive Officers of the Registrant

The executive officers of the Company and the Bank which are elected by the
Board of Directors are as follows:

<TABLE>
<CAPTION>
       Name            Age                                                 Position
       ----            ---                                                 --------
<S>                     <C>   <C>
Sanford A. Belden       62    Director, President and Chief Executive Officer of the Company and the Bank. Mr. Belden has held this
                              position since he joined the Company in October 1992.

Mark E. Tryniski        44    Executive Vice President and Chief Operating Officer of the Bank. Mr. Tryniski joined the Company in
                              June 2003 as the Treasurer and Chief Financial Officer. In March 2004 he assumed his current position.
                              He previously served as a partner in the Syracuse office of PricewaterhouseCoopers LLP, with eighteen
                              years of experience working with SEC registrants in banking and other industries.

Scott A. Kingsley       40    Treasurer of the Company, and Executive Vice President and Chief Financial Officer of the Bank. Mr.
                              Kingsley joined the Company in August 2004 in his current position. He served as Vice President and
                              Chief Financial Officer of Carlisle Engineered Products, Inc., a subsidiary of the Carlisle Companies,
                              Inc., from 1997 until joining the Company.

Brian D. Donahue        48    Executive Vice President and Chief Banking Officer. Mr. Donahue assumed his current position in August
                              2004. He served as the Bank's Chief Credit Officer from February 2000 to July 2004 and as the Senior
                              Lending Officer for the Southern Region of the Bank from 1992 until June 2004.

Michael A. Patton       59    President, Financial Services. Mr. Patton assumed his current position in February 2000 and previously
                              served as the President of the Southern Region of the Bank from January 1992 to January 2000.

James A. Wears          55    President, New York Banking. Mr. Wears assumed his current position in February 2000 and previously
                              served as the President of the Northern Region of the Bank from January 1992 to January 2000.

Thomas A. McCullough    58    President, Pennsylvania Banking. Mr. McCullough joined the Company in November 2003 in his current
                              position. He was previously the President and Chief Executive Officer of Grange National Banc Corp.
                              from 1989 until they merged with the Company.

Steven R. Tokach        58    Senior Vice President and Chief Credit Administrator. Mr. Tokach assumed the Credit Administrator
                              position in March 2003. He was previously the President of our Pennsylvania franchise since May 2001,
                              when the Company acquired First Liberty Bank Corp. He was Executive Vice President of First Liberty
                              Bank Corp. and First Liberty Bank & Trust from 1998 to 2001.
</TABLE>


                                       7
<PAGE>

<TABLE>
<CAPTION>
       Name            Age                                                 Position
       ----            ---                                                 --------
<S>                     <C>   <C>
Timothy J. Baker        53    Senior Vice President and Director of Special Projects. Mr. Baker assumed his current position in
                              August 2004. He was previously the Senior Operations Officer of the Bank responsible for bank
                              operations, special projects and technology innovation since from 1995.

W. Valen McDaniel       58    Senior Vice President and Chief Risk Officer. Mr. McDaniel assumed his current position in January
                              2004. He served as the Company's corporate auditor and risk manager since joining the Company in 1992.
                              He is responsible for the audit function, compliance, loan review, facilities, and security of the
                              bank and all subsidiaries.

Joseph J. Lemchak       43    Senior Vice President and Chief Investment Officer. Mr. Lemchak joined the Company in 1990 and since
                              May 1991 he has served in the duel capacity of Chief Investment Officer and Asset/Liability Manager
                              for the Bank.

J. David Clark          50    Senior Vice President and Chief Credit Officer. Mr. Clark assumed his current position in October
                              2004. He was previously the Commercial Market Manager in the Bank's Corning, New York market since
                              April 1993.

Robert P. Matley        53    Executive Vice President and Senior Lending Officer, PA Banking. Mr. Matley joined the Company in
                              2004. He was previously employed by First Heritage Bank, having joined that organization in 1994 as
                              Executive Vice President and Senior Lending Officer. He was promoted to President and Chief Operating
                              Officer in 2003 and served in that capacity until the merger with the Company in 2004.

Bernadette R. Barber    43    Senior Vice President and Chief Human Resources Officer. Ms. Barber joined the Company in February
                              2005 in her current position. She has served since 1997 as Vice President of Human Resources and
                              Administration for The Penn Traffic Company.

Harold M. Wentworth     40    Senior Vice President and Director of Sales and Marketing. Mr. Wentworth assumed his current position
                              in January 2005. He was previously a manager in the Bank's treasury department and was responsible for
                              asset liability management and product development.

J. Michael Wilson       34    Senior Vice President and Chief Technology Officer. Mr. Wilson joined the Company in June 2002 as Vice
                              President of Information Technology and assumed his current position in October 2004. He previously
                              held the position of Director of Technology Services for Unizan Bank in Ohio.
</TABLE>


                                     Part II

Item 5. Market for the Registrant's Common Stock, Related Shareholder Matters
and Issuer Purchases of Equity Securities

The Company's common stock has been trading on the New York Stock Exchange under
the symbol "CBU" since December 31, 1997. Prior to that, the common stock traded
over-the-counter on the NASDAQ National Market under the symbol "CBSI" beginning
on September 16, 1986. There were 30,641,591 shares of common stock outstanding
on December 31, 2004, held by approximately 3,760 registered shareholders of
record. The following table sets forth the high and low prices for the common
stock, and the cash dividends declared with respect thereto, for the periods
indicated. The prices do not include retail mark-ups, mark-downs or commissions.
The information below has been adjusted to reflect the two-for-one stock split
of the Company's common stock effected on April 12, 2004.

                                                   Closing Price
                              High       Low     ------------------   Quarterly
Year / Qtr                   Price      Price    Amount    % Change   Dividend
-------------------------------------------------------------------------------
   2004
   4th                       $28.66    $25.06    $28.25      12.4%     $ 0.18
   3rd                       $26.00    $20.87    $25.13      10.3%     $ 0.18
   2nd                       $23.85    $18.86    $22.79      (1.5%)    $ 0.16
   1st                       $25.39    $21.76    $23.14      (5.6%)    $ 0.16

   2003
   4th                       $25.48    $21.98    $24.50      11.6%     $ 0.16
   3rd                       $23.18    $18.67    $21.96      15.6%     $ 0.16
   2nd                       $19.38    $15.51    $19.00      20.9%     $ 0.15
   1st                       $17.12    $15.44    $15.72       0.3%     $ 0.15


                                       8
<PAGE>

The Company has historically paid regular quarterly cash dividends on its common
stock, and declared a cash dividend of $0.18 per share for the first quarter of
2005. The Board of Directors of the Company presently intends to continue the
payment of regular quarterly cash dividends on the common stock, as well as to
make payment of regularly scheduled dividends on the trust preferred stock when
due, subject to the Company's need for those funds. However, because
substantially all of the funds available for the payment of dividends by the
Company are derived from the Bank, future dividends will depend upon the
earnings of the Bank, its financial condition, its need for funds and applicable
governmental policies and regulations.

The following table provides information as of December 31, 2004 with respect to
shares of common stock that may be issued under the Company's existing equity
compensation plans:

<TABLE>
<CAPTION>
                                                                     Number of             Weighted
                                                                  Securities to be          Average             Number of
                                                                    Issued upon         Exercise Price     Securities Remaining
                                                                    Exercise of           on Options          Available for
Plan Category                                                   Outstanding Options (1)   Outstanding        Future Issuance
-------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                      <C>                 <C>
Equity compensation plans approved by security holder:
  1994 Long Term Incentive Plan                                     2,409,650                $15.62                      0
  2004 Long Term Incentive Plan                                        24,100                $23.24              3,973,900
Equity compensation plans not approved by security holder:
  Citizens Advisory Council Plan (2)                                    2,000                $16.03                  6,000
-------------------------------------------------------------------------------------------------------------------------------
     Total                                                          2,435,750                $15.70              3,979,900
===============================================================================================================================
</TABLE>

(1) The number of securities includes unvested restricted stock issued of
34,818.

(2) In connection with the acquisition of Citizens National Bank, the Company
formed an advisory council comprised of the former directors of Citizens
National Bank for the purpose of advising the Bank on banking activities in
Citizens National Bank's market area, the transition of business relationships
after the merger, and the continued development of business relationships
throughout Northern New York State. In consideration for serving on this
council, the members have been granted shares of restricted stock that vest over
two years.

Item 6. Selected Financial Data

The following table sets forth selected consolidated historical financial data
of the Company as of and for each of the years in the five-year period ended
December 31, 2004. The historical information set forth under the captions
"Income Statement Data" and "Balance Sheet Data" is derived from the audited
financial statements while the information under the captions "Average Balance
Sheet Data", "Capital and Related Ratios", "Selected Performance Ratios" and
"Asset Quality Ratios" for all periods is unaudited. All financial information
in this table should be read in conjunction with the information contained in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Consolidated Financial Statements and the related notes
thereto included elsewhere in this Annual Report on Form 10-K.


                                       9
<PAGE>

                   SELECTED CONSOLIDATED FINANCIAL INFORMATION

<TABLE>
<CAPTION>
In thousands except per share data                                               Years Ended December 31,
--------------------------------------------------------------------------------------------------------------------------------
                                                             2004           2003           2002           2001           2000
<S>                                                       <C>            <C>            <C>            <C>            <C>
Income Statement Data:
Interest income                                           $  212,795     $  191,129     $  205,093     $  198,492     $  189,665
Interest expense                                              61,752         59,301         77,243        101,837         99,232
  Net interest income                                        151,043        131,828        127,850         96,655         90,433
Provision for loan losses                                      8,750         11,195         12,222          7,097          7,722
  Net interest income after provision for loan losses        142,293        120,633        115,628         89,558         82,711
Other income                                                  44,373         37,929         30,389         26,252         23,200
Gain (loss) on investment securities & early retirement
  of LT borrowings                                                72         (2,698)         1,673           (113)          (159)
  Total non-interest income                                   44,445         35,231         32,062         26,139         23,041
Salaries and employee benefits                                61,146         53,164         47,864         40,930         36,743
Occupancy and equipment                                       18,813         17,125         15,692         12,197         10,308
Amortization of intangible assets                              7,414          5,093          5,953          6,679          4,891
Acquisition expenses                                           1,704            498            700          8,164            400
Other expenses                                                30,822         26,831         25,077         20,784         18,508
  Total operating expense                                    119,899        102,711         95,286         88,754         70,850
     Income before income taxes                               66,839         53,153         52,404         26,943         34,902
Provision for income taxes                                    16,643         12,773         13,887          7,814         10,003
     Net income                                           $   50,196     $   40,380     $   38,517     $   19,129     $   24,899
Diluted earnings per share (2)                            $     1.64     $     1.49     $     1.46     $     0.81     $     1.16
Diluted earnings per share - cash (1)                     $     1.78     $     1.61     $     1.60     $     0.98     $     1.29

Balance Sheet Data:
Cash and cash equivalents                                 $  118,345     $  103,923     $  113,531     $  106,554     $   76,456
Investment securities                                      1,584,339      1,329,534      1,286,583      1,150,713        930,509
Loans, net of unearned discount                            2,358,493      2,128,509      1,806,905      1,732,870      1,515,877
Allowance for loan losses                                    (31,778)       (29,095)       (26,331)       (23,901)       (20,035)
Intangible assets                                            232,500        196,111        134,828        142,342         55,234
Other assets                                                 131,932        126,415        121,731        104,787         93,598
  Total assets                                            $4,393,831     $3,855,397     $3,437,247     $3,213,365     $2,651,639
Deposits                                                  $2,928,978     $2,725,488     $2,505,356     $2,545,970     $1,948,557
Borrowings                                                   920,511        667,786        543,575        357,931        471,053
Other liabilities                                             69,714         57,295         63,278         41,484         30,238
Shareholders' equity                                         474,628        404,828        325,038        267,980        201,791
  Total liabilities and shareholders' equity              $4,393,831     $3,855,397     $3,437,247     $3,213,365     $2,651,639

Average Balance Sheet Data:
Investment securities                                     $1,454,278     $1,185,487     $1,266,070     $1,042,726     $  900,250
Loans                                                      2,264,857      1,885,604      1,759,564      1,580,870      1,484,945
  Total interest-earning assets                            3,719,135      3,071,091      3,025,634      2,623,596      2,385,195
Total assets                                               4,196,821      3,471,689      3,393,164      2,888,760      2,556,638
Interest-bearing deposits                                  2,316,696      2,090,749      2,100,960      1,783,938      1,613,918
Borrowings                                                   824,003        508,392        507,893        482,583        447,105
  Total interest-earning liabilities                       3,140,699      2,599,141      2,608,853      2,266,521      2,061,023
Shareholders' equity                                      $  440,627     $  342,679     $  294,856     $  239,368     $  174,498

Capital and Related Ratios:
Tier 1 leverage ratio                                           6.94%          7.26%          7.05%          6.73%          6.67%
Total risk-based capital to risk-adjusted assets               13.18%         13.01%         13.32%         11.83%         11.70%
Tangible equity to tangible assets                              5.82%          5.70%          5.76%          4.09%          5.64%
Cash dividend declared per share (2)                      $     0.68     $     0.61     $     0.56     $     0.54     $     0.52
Dividend payout ratio                                           40.9%          40.2%          37.7%          65.7%          40.6%
Book value per share (2)                                  $    15.49     $    14.29     $    12.52     $    10.38     $     9.55
Tangible book value per share (2)                         $     7.90     $     7.37     $     7.33     $     4.87     $     6.94
Market capitalization (in millions)                       $      866     $      694     $      407     $      338     $      261
Period end common shares outstanding (2)                      30,642         28,330         25,957         25,806         21,120
Diluted weighted average shares outstanding (2)               30,670         27,035         26,334         23,650         21,474

Selected Performance Ratios:
Return on assets                                                1.20%          1.16%          1.14%          0.66%          0.97%
Return on equity                                               11.39%         11.78%         13.06%          7.99%         14.27%
Net interest margin                                             4.45%          4.69%          4.62%          3.96%          4.06%
Non-interest income/operating income                            21.2%          19.7%          18.6%          20.1%          19.2%
Efficiency ratio                                                52.8%          53.4%          52.0%          56.8%          54.6%

Asset Quality Ratios:
Allowance for loan loss/loans outstanding                       1.35%          1.37%          1.46%          1.38%          1.32%
Non-performing loans/loans outstanding                          0.55%          0.62%          0.65%          0.53%          0.50%
Allowance for loan loss/non-performing loans                     245%           219%           225%           261%           266%
Net charge-offs/average loans                                   0.37%          0.54%          0.56%          0.42%          0.42%
Loan loss provision/net charge-offs                              104%           109%           125%           108%           124%
Non-performing assets/loans outstanding plus OREO               0.62%          0.67%          0.69%          0.61%          0.58%
</TABLE>

(1)   Cash earnings exclude the after-tax effect of the amortization of
      intangible assets.

(2)   All share and share-based amounts reflect the two-for-one stock split
      effected as a 100% stock dividend on April 12, 2004.


                                       10
<PAGE>

Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") primarily reviews the financial condition and results of
operations of Community Bank System, Inc. ("the Company") for the past two
years, although in some circumstances a period longer than two years is covered
in order to comply with Securities and Exchange Commission disclosure
requirements or to more fully explain long-term trends. The following discussion
and analysis should be read in conjunction with the Selected Consolidated
Financial Information on page 10 and the Company's Consolidated Financial
Statements and related notes that appear on pages 38 through 64. All references
in the discussion to the financial condition and results of operations are to
the consolidated position and results of the Company and its subsidiaries taken
as a whole.

All financial results reflect the 2001 acquisition of First Liberty in
accordance with the pooling of interests method of accounting. Unless otherwise
noted, all earnings per share ("EPS") figures disclosed in the MD&A refer to
diluted EPS; interest income, net interest income and net interest margin are
presented on a fully tax-equivalent ("FTE") basis. The term "this year" and
equivalent terms refer to results in calendar year 2004, "last year" and
equivalent terms refer to calendar year 2003, and all references to income
statement results correspond to full-year activity unless otherwise noted.
Lastly, all references to "peer banks" pertain to a group of 84 bank holding
companies nationwide having $3 billion to $10 billion in assets and their
associated composite financial results for the nine months ending September 30,
2004 (the most recently available disclosure), as provided by the Federal
Reserve Board's Division of Banking Supervision and Regulation in the Bank
Holding Company Performance Report. All share and share-based amounts reflect
the two-for-one stock split effected as a 100% stock dividend on April 12, 2004.

This Management's Discussion and Analysis of Financial Condition and Results of
Operations contains certain forward-looking statements with respect to the
financial condition, results of operations and business of Community Bank
System, Inc. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements are set herein under the
caption "Forward-Looking Statements" on page 33.

Critical Accounting Policies

As a result of the complex and dynamic nature of the Company's business,
management must exercise judgement in selecting and applying the most
appropriate accounting policies for its various areas of operations. The policy
decision process not only ensures compliance with the latest generally accepted
accounting principles, but also reflects on management's discretion with regard
to choosing the most suitable methodology for reporting the Company's financial
performance. It is management's opinion that the accounting estimates covering
certain aspects of the business have more significance than others due to the
relative importance of those areas to overall performance, or the level of
subjectivity in the selection process. These estimates affect the reported
amounts of assets and liabilities and disclosures of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Management believes that the critical accounting estimates include:

o     Allowance for loan losses - The allowance for loan losses reflects
      management's best estimate of probable loan losses in the Company's loan
      portfolio. Determination of the allowance for loan losses is inherently
      subjective. It requires significant estimates including the amounts and
      timing of expected future cash flows on impaired loans and the amount of
      estimated losses on pools of homogeneous loans which is based on
      historical loss experience and consideration of current economic trends,
      all of which may be susceptible to significant change.

o     Actuarial assumptions associated with pension, post-retirement and other
      employee benefit plans - These assumptions include discount rate, rate of
      future compensation increases and expected return on plan assets. Table 7
      on page 20 shows the impact of a one percentage point increase and
      decrease of each of these assumptions. Specific discussion of the
      assumptions used by management is discussed in Note K on pages 56 through
      59.

o     Provision for income taxes - The Company is subject to examinations from
      various taxing authorities. Such examinations may result in challenges to
      the tax return treatment applied by the Company to specific transactions.
      Management believes that the assumptions and judgements used to record
      tax-related assets or liabilities have been appropriate. Should tax laws
      change or the taxing authorities determine that management's assumptions
      were inappropriate, an adjustment may be required which could have a
      material effect on the Company's results of operations.

o     Carrying value of goodwill and other intangible assets - The carrying
      value of goodwill and other intangible assets is based upon discounted
      cash flow modeling techniques that require management to make estimates
      regarding the


                                       11
<PAGE>

      amount and timing of expected future cash flows. It also requires them to
      select a discount rate that reflects the current return requirements of
      the market in relation to present risk-free interest rates, required
      equity market premiums and company-specific risk indicators.

A summary of the accounting policies used by management is disclosed in Note A
(Summary of Significant Accounting Policies) starting on page 43.

Executive Summary

The Company's business philosophy is to operate as a community bank with local
decision-making, principally in non-metropolitan markets, providing a broad
array of banking and financial services to retail, commercial, and municipal
customers.

The Company's core operating objectives are: (i) grow the branch network,
primarily through a disciplined acquisition strategy, and certain selective de
novo expansions, (ii) build high-quality, profitable loan portfolios using both
organic and acquisition strategies, (iii) increase the non-interest income
component of total revenues through development of banking-related fee income,
growth in existing financial services business units, and the acquisition of
additional financial services and banking businesses, and (iv) utilize
technology to deliver customer-responsive products and services and to reduce
operating costs.

Significant factors management reviews to evaluate achievement of the Company's
operating objectives and its operating results and financial condition include,
but are not limited to: net income and earnings per share, return on assets and
equity, net interest margins, non-interest income, operating expenses, asset
quality, loan and deposit growth, capital management, performance of individual
banking and financial services business units, liquidity and interest rate
sensitivity, enhancements to customer products and services, technology
enhancements, market share, peer comparisons, and the performance of acquisition
and integration activities.

In 2004, the Company reported record earnings as a result of acquired and
organic growth in earning asset levels, strong growth in non-interest income and
improved asset quality, despite a lower net interest margin. Return on assets
improved slightly over 2003, to 1.20%. Return on equity declined slightly to
11.4%, due to strengthened capital levels. Non-interest income, excluding a loss
on early retirement of debt in 2003, increased 17% over 2003 with strong growth
from banking sources, as well as from the Company's employee benefits and wealth
management businesses. The Company's efficiency ratio improved to 52.8% for the
year.

Asset quality improved in 2004, with reductions in delinquency, charge-off and
non-performing loan ratios versus 2003. Excluding acquisition activity, the
Company experienced loan growth in consumer mortgage and consumer direct and
indirect lending, with declines in the business portfolio. On a geographical
basis, the New York markets reported strong growth in consumer mortgage and
consumer direct and indirect loans, with slight declines in business lending.
Excluding acquisitions, the Pennsylvania markets reported declines in all
portfolios. Excluding acquisition activity, total deposits declined slightly
from 2003.

The Company completed two acquisitions in 2004: (1) First Heritage Bank, a $275
million-asset commercial bank with three branches based in Wilkes-Barre, PA,
acquired in May, and (2) a bank branch in Dansville, NY, from HSBC Bank USA,
N.A., acquired in December with deposits of $32.6 million.

Net Income and Profitability

Net income for 2004 was $50.2 million, up $9.8 million or 24% from the prior
year. Earnings per share of $1.64 in 2004 were 10.1% higher than 2003's results.
The growth rate of EPS was below that of net income due to higher weighted
average diluted shares outstanding. The increase in diluted shares was primarily
driven by the 2.6 million and 2.3 million shares of common stock issued in
conjunction with the acquisition of First Heritage in May 2004 and Grange in
November 2003, an increased level of option grants and exercises, and a higher
average common share price (refer to the "Earnings per Share" section of Note A
on page 47 for information regarding the impact of share price on diluted
shares).

In addition to the earnings results presented above in accordance with GAAP, the
Company provides cash earnings per share, which excludes the after-tax effect of
the amortization of intangible assets. Management believes that this information
helps investors understand the effect of acquisition activity in reported
results. Cash earnings per share for 2004 were $1.78, up 10.6% from $1.61 for
the year ended December 31, 2003.

Net income and earnings per share for 2003 were $40.4 million and $1.49, up 4.8%
and 2.1%, respectively, from 2002 results. The 2003 results were impacted by
$2.6 million of debt restructuring charges associated with the early retirement
of higher-rate, medium-term borrowings. In contrast, 2002 earning per share
benefited from net security and debt


                                       12
<PAGE>

transaction gains of $1.7 million. In addition, banking services accounted for
$6.5 million of the improvement in 2003, as overdraft volume and the related
fees increased significantly in response to the implementation of the Overdraft
FreedomTM program.

                      Table 1: Condensed Income Statements

<TABLE>
<CAPTION>
                                                         Years Ended December 31,
                                                    --------------------------------
           (000's omitted, except per share data)     2004        2003        2002
           -------------------------------------------------------------------------
<S>                                                 <C>         <C>         <C>
           Net interest income                      $151,043    $131,828    $127,850
           Loan loss provision                         8,750      11,195      12,222
           Non-interest income                        44,445      35,231      32,062
           Operating expenses                        119,899     102,711      95,286
           -------------------------------------------------------------------------
           Income before taxes                        66,839      53,153      52,404
           Income taxes                               16,643      12,773      13,887
           -------------------------------------------------------------------------
           Net income                               $ 50,196    $ 40,380    $ 38,517
           =========================================================================

           Diluted earnings per share               $   1.64    $   1.49    $   1.46
           Diluted earnings per share-cash (1)      $   1.78    $   1.61    $   1.60
</TABLE>

           (1)   Cash earnings exclude the after-tax effect of the amortization
                 of intangible assets.

The primary factors explaining 2004 performance are discussed in detail in the
remaining sections of this document and are summarized as follows:

o     As shown in Table 1 above, net interest income increased 14.6% or $19
      million due to a $648 million increase in average earning assets,
      partially offset by a 24 basis point decrease in the net interest margin.
      Average loans grew $379 million (20%), primarily due to strong consumer
      mortgage growth as well as the impact of the acquisitions of First
      Heritage in May 2004 and Grange and Peoples in 2003. Average investments
      increased $268 million (23%) in 2004 primarily as a result of a leveraging
      strategy that began in the third quarter of 2003 and ended during the
      second quarter of 2004. The growth in earning assets was funded by $311
      million (12.1%) more average deposits and $316 million (62%) higher
      average borrowings.

o     The loan loss provision of $8.8 million decreased $2.4 million, or 22%,
      from the prior year level. Net charge-offs of $8.4 million decreased by
      $1.8 million from 2003, reducing the net charge-off ratio (net charge-offs
      / total average loans) to 0.37% for the year. The improved asset quality
      position in 2004 was evident in standard metrics such as non-performing
      loans as a percentage of total loans (down seven basis points),
      non-performing assets as a percentage of loans and other real estate owned
      (down five basis points) and delinquent loans (30+ days through
      non-accruing) as a percentage of total loans (down 32 basis points).
      Additional information on trends and policy related to asset quality is
      provided in the asset quality section on pages 25 through 28.

o     Non-interest income for 2004 of $44.4 million increased by $9.2 million
      (26%) from 2003's level, the eleventh consecutive year of growth. Banking
      services accounted for $2.6 million of the improvement, primarily due to
      the three whole bank acquisitions over the last 18 months. Financial
      services revenue was $3.8 million (30%) higher mostly as a result of the
      acquisition of Harbridge at the end of July 2003 and strong growth at the
      Company's retirement plan administration business, Benefit Plans
      Administrative Services. Gain (loss) on investment securities and debt
      prepayment transactions was $72,000 in 2004 as compared to a loss of $2.7
      million in 2003. The 2003 loss included $2.6 million of debt restructuring
      charges associated with the early retirement of higher-rate, medium-term
      borrowings.

o     Total operating expenses rose $17.2 million or 17% in 2004 to $119.9
      million. Excluding acquisition expenses in both years, 2004 operating
      expenses rose $16.0 million or 16%. A majority of the increase was due to
      increased personnel expenses associated with the acquisitions in late 2003
      and 2004, as well as merit increases, new hires, and higher costs in
      employee health and welfare programs. In addition, higher legal and
      professional expenses were incurred with a substantial portion of the
      increase due to compliance with recently promulgated reporting
      requirements. Net occupancy expenses also increased because of a larger
      number of facilities due to acquisitions, current and prior year
      renovations, and slightly higher property tax and utility rates. In
      addition, amortization of intangible assets increased $2.3 million, or 46%
      over 2003 due to the amortization of core deposit and customer
      relationship intangibles arising from the 2003 and 2004 acquisitions.


                                       13
<PAGE>

o     The Company's combined effective federal and state tax rate increased 0.9
      percentage points in 2004 to 24.9%, primarily as a result of a higher
      proportion of income being generated from fully taxable loans and
      investments.

Selected Profitability and Other Measures

Return on average assets, return on average equity, dividend payout and equity
to asset ratios for the years indicated are as follows:

                            Table 2: Selected Ratios

                                               2004     2003     2002
            -----------------------------------------------------------
            Return on average assets            1.20%    1.16%    1.14%
            Return on average equity           11.39%   11.78%   13.06%
            Dividend payout ratio               40.9%    40.2%    37.7%
            Average equity to average assets   10.50%    9.87%    8.69%

As displayed in Table 2 above, the return on average assets improved in 2004 in
comparison to both 2003 and 2002. This was primarily a result of a greater
proportion of earnings generated from non-interest income and improved
operational efficiencies. Reported return on equity in 2004 was down slightly
from 2003's level. This was mainly a result of the build-up of equity capital
this year from the retention of net profits and the common shares issued in
conjunction with the acquisitions of First Heritage in May 2004 and Grange in
November 2003. Consequently, average shareholders' equity increased 29% this
year, as compared to a 24% increase in reported net income. For similar reasons
average shareholder's equity increased 16% in 2003 well above the 4.8% increase
in net income for the same period, resulting in a decrease in return on equity
in 2003 as compared to 2002. The strengthening of the Company's equity capital
position over the past two years is reflected in the 63 and 118 basis-point
increases in the average equity to average total assets ratios in 2004 and 2003,
respectively.

Net Interest Income

Net interest income is the amount that interest and fees on earning assets
(loans and investments) exceeds the cost of funds, primarily interest paid to
the Company's depositors and interest on external borrowings. Net interest
margin is the difference between the gross yield on earning assets and the cost
of interest bearing funds as a percentage of earning assets.

As disclosed in Table 3, net interest income (with non-taxable income converted
to a fully tax-equivalent basis) totaled $165.6 million in 2004, up $21.6
million or 15% over the prior year. A $648 million increase in average
earning-assets more than offset a $542 million increase in average
interest-bearing liabilities and a 24 basis point decrease in the net interest
margin. As reflected in Table 4, the volume changes mentioned above drove net
interest income to rise $29.1 million, while the lower net interest margin had a
$7.5 million negative impact on net interest income.

The net interest margin declined in each of the quarters of 2004, from 4.67% for
the first quarter, ending with a 4.32% margin for the fourth quarter. This trend
was mostly attributable to the level and changes in market interest rates during
2004. Falling market rates early in the year allowed the Company to reduce or
hold steady rates on deposit interest-bearing accounts in the first three
quarters of 2004. The fourth quarter of 2004 saw interest rates on money market
and time deposit accounts rise slightly in response to increasing market rates.
Similarly, the yield on loans decreased throughout the first three quarters of
the year. The decline in loan yields had a greater negative impact on the margin
in 2004 ($12.1 million) than the benefit derived from deposit rate reductions
($7.2 million). Yields on investments declined 35 basis points during 2004 from
6.53% to 6.18% as investment purchases were at lower rates. Lastly, the average
interest rate paid on borrowings decreased 83 basis points from 4.13% for 2003
to 3.30% for 2004.

The net interest margin for 2003 increased seven basis points from 4.62% in 2002
to 4.69%. Falling market rates prevailed throughout the year. However, the
decline in total average earning asset yields of 56 basis points was less than
the benefit derived from a decline in the cost of funds of 60 basis points,
resulting in the increased net interest margin.

As shown in Table 3, total interest income increased by $24.1 million or 11.9%
in 2004. Table 4 shows that higher average earning assets contributed a positive
$40.5 million variance, partially offset by lower yields with a negative impact
of $16.4 million. Average loans grew a total of $379 million in 2004, the
majority being the result of the $207 million loans acquired in the First
Heritage acquisition in May of 2004 and the $186 million of loans acquired in
the Peoples and Grange acquisitions in late 2003. Interest and fees on loans
increased $11.6 million or 9.2%. The increase was attributable to higher average
loan balances (positive $23.7 million), partially offset by a 60-basis point
drop in loan yields (negative $12.1 million) due to falling capital market
rates. Average loans grew $126 million in 2003, with the vast majority coming


                                       14
<PAGE>

from organic consumer mortgage and consumer indirect loan growth. Interest and
fees on loans decreased $5.9 million or 4.5% in 2003 as compared to 2002. An
82-basis point drop in loan yields due to falling interest rates had more of an
impact (negative $15.0 million) than growth in average loans (positive $9.0
million).

In early fourth quarter 2002, management instituted an investment de-leveraging
strategy, allowing the portfolio to run down and using the proceeds to pay down
borrowings due to the lack of investment opportunities offering acceptable
yields. This approach was in effect through June 2003, when it was decided that
investment purchases should be reinitiated to take advantage of more attractive
medium and long-term rates and a steep yield curve, as well as protect the
Company from its interest rate exposure to falling rates. Due to the
de-leveraging strategy being in place for approximately half of 2003 versus a
leveraging strategy for most of 2004, average investment balances for 2004 were
up $268.3 million versus the year-earlier period, primarily in the U.S. treasury
and agency securities and obligations of state and political subdivision
segments of the portfolio (refer to the "Investments" section of the MD&A on
pages 31 through 33 for further information).

Investment interest income in 2004 of $89.8 million was $12.5 million or 16%
higher than the prior year as a result of a larger portfolio (positive $16.9
million impact) partially offset by a decrease in the average investment yield
from 6.53% to 6.18% (negative $4.5 million impact). The decrease in the yield
was principally driven by significant declines in market interest rates from
early 2001 through mid-2003. Consequently, the Company was unable to replace the
run-off of longer-term, higher-yielding securities with equivalent-rate
investments, and the purchase of securities in the relatively low-interest rate
environment in the second half of 2003 and 2004 led to yield declines. However,
the net spread on these medium-term investment purchases were comparable because
they were funded with a mixture of short to medium term low-rate, borrowings. In
addition, the performance of the investment portfolio in 2004 was strong given
the interest rate environment. The Company was able to maintain its yields to a
great extent primarily because of two important strategies: the addition of a
substantial amount of call-protected securities in 2001 and first half of 2002
when rates were higher, and foregoing security purchases in the late-2002 to
mid-2003 period as rates were falling significantly. The success of these
actions was evident in the Company's exceptional 98th percentile ranking within
its peer group for tax-equivalent investment yield for the nine months ended
September 2004. Investment interest income in 2003 of $77.4 million was $8.0
million or 9.4% lower than the prior year as a result of the smaller portfolio
(negative $4.5 million impact) and a decrease in the average investment yield
from 6.74% to 6.53% (negative $3.5 million impact).

The average earning asset yield fell 51 basis points to 6.11% in 2004 because of
the previously mentioned decrease in investment and loan yields and the fact
that the yields on the overall loan portfolio have converged with those of the
investment portfolio. In 2002 the yield on the loan portfolio was 75 basis
points higher than the yield on investments. Loan yields were only 14 basis
points above those produced by investments in 2003 and in 2004 the yield on the
investment portfolio was 11 basis points higher than the yield on the loan
portfolio.

Total average funding (deposits and borrowings) grew by $626.5 million in 2004,
with $310.9 million of the increase coming from deposits, mostly attributable to
the acquisitions of First Heritage, Grange and Peoples. External borrowings were
increased to fund organic loan growth and investment purchases over the last 18
months resulting in average borrowings that were up $315.6 million for 2004 as
compared to the previous year.

The cost of funding was aided by the change in the make-up of both the deposit
base and external borrowings. The fall of market interest rates over the last
two years not only enabled a significant reduction of interest-bearing deposit
rates, but also caused many customers to shift their funds from time deposits to
less restrictive accounts such as savings and demand deposits due to the greatly
diminished rate spread between the two groups of accounts. This is demonstrated
by the percentage of average deposits that were in time deposit accounts
dropping from 45% in 2002 to 41% in 2004, accounting for a portion of the
reduced funding costs beyond the absolute drop in rates. The Company also
changed the proportion of short-term funding in average external borrowings from
28% in 2002 to 54% in 2004 to take advantage of historically low short-term
rates, providing further funding cost savings.

Total interest expense increased by $2.5 million to $61.8 million in 2004. As
shown in Table 4, higher levels of deposits and borrowings accounted for an
$11.3 million increase in interest expense, offset by an $8.9 million decrease
as a result of lower rates on deposits and external borrowings. Interest expense
as a percentage of earning assets fell by 27 basis points to 1.66%. The rate on
interest bearing deposits fell 34 basis points to 1.49%, due largely to declines
in time deposit rates for the first three quarters of 2004. The rate on external
borrowings declined 83 basis points to 3.30% because of substantially lower
market rates and the previously mentioned shift in funding mix towards
short-term borrowings. Total interest expense decreased by $17.9 million to
$59.3 million in 2003 as compared to 2002. Lower rates on deposits and external
borrowings accounted for the majority of the decrease. The rate on interest
bearing deposits fell 73 basis points to 1.83% and the rate on external
borrowings declined 47 basis points to 4.13%.

                                       15
<PAGE>

The following table sets forth information related to average interest-earning
assets and interest-bearing liabilities and their associated yields and rates
for the years ended December 31, 2004, 2003 and 2002. Interest income and yields
are on a fully tax-equivalent basis using marginal income tax rates of 38.7% in
2004, 38.9% in 2003, and 39.3% in 2002. Average balances are computed by summing
the daily ending balances in a period and dividing by the number of days in that
period. Loan yields and amounts earned include loan fees. Average loan balances
include non-accrual loans.

                         Table 3: Average Balance Sheet

<TABLE>
<CAPTION>
(000's omitted except yields and rates)        Year Ended December 31, 2004            Year Ended December 31, 2003
                                          -------------------------------------   -------------------------------------
                                                                        Avg.                                    Avg.
                                            Average                  Yield/Rate     Average                  Yield/Rate
                                            Balance     Interest        Paid        Balance     Interest        Paid
-------------------------------------------------------------------------------   -------------------------------------
<S>                                       <C>          <C>              <C>       <C>          <C>              <C>
Interest-earning assets:
  Time deposits in other banks            $      868   $       22       2.53%     $      346   $        4       1.16%
  Taxable investment securities (2)          940,744       54,205       5.76%        779,107       48,212       6.19%
  Non-taxable investment securities (2)      512,666       35,626       6.95%        406,034       29,149       7.18%
  Loans (net of unearned discount)(1)      2,264,857      137,450       6.07%      1,885,604      125,855       6.67%
                                          -----------------------                 -----------------------
     Total interest-earning assets         3,719,135      227,303       6.11%      3,071,091      203,220       6.62%
Non-interest earning assets                  477,686                                 400,598
                                          ----------                              ----------
     Total assets                         $4,196,821                              $3,471,689
                                          ==========                              ==========

Interest-bearing liabilities:
  Interest checking, savings and
    money market deposits                 $1,128,071        6,368       0.56%     $1,000,238        6,769       0.68%
  Time deposits                            1,188,625       28,219       2.37%      1,090,511       31,519       2.89%
  Short-term borrowings                      442,287        7,242       1.64%        212,512        2,685       1.26%
  Long-term borrowings                       381,716       19,923       5.22%        295,880       18,328       6.19%
                                          -----------------------                 -----------------------
     Total interest-bearing liabilities    3,140,699       61,752       1.97%      2,599,141       59,301       2.28%
Non-interest bearing liabilities:
  Demand deposits                            558,552                                 473,568
  Other liabilities                           56,943                                  56,301
Shareholders' equity                         440,627                                 342,679
                                          ----------                              ----------
     Total liabilities and
       shareholders' equity               $4,196,821                              $3,471,689
                                          ==========                              ==========

Net interest earnings                                  $  165,551                              $  143,919
                                                       ==========                              ==========
Net interest spread                                                     4.14%                                   4.34%
Net interest margin on interest-
   earnings assets                                                      4.45%                                   4.69%

Fully tax-equivalent adjustment                        $   14,508                              $   12,091

<CAPTION>
(000's omitted except yields and rates)        Year Ended December 31, 2002
                                          -------------------------------------
                                                                        Avg.
                                            Average                  Yield/Rate
                                            Balance     Interest        Paid
-------------------------------------------------------------------------------
<S>                                       <C>          <C>              <C>
Interest-earning assets:
  Time deposits in other banks            $      525   $        6       1.14%
  Taxable investment securities (2)          906,902       58,458       6.45%
  Non-taxable investment securities (2)      358,643       26,899       7.50%
  Loans (net of unearned discount)(1)      1,759,564      131,801       7.49%
                                          -----------------------
     Total interest-earning assets         3,025,634      217,164       7.18%
Non-interest earning assets                  367,530
                                          ----------
     Total assets                         $3,393,164
                                          ==========

Interest-bearing liabilities:
  Interest checking, savings and
    money market deposits                 $  969,664       11,416       1.18%
  Time deposits                            1,131,296       42,462       3.75%
  Short-term borrowings                      141,024        2,586       1.83%
  Long-term borrowings                       366,869       20,779       5.66%
                                          -----------------------
     Total interest-bearing liabilities    2,608,853       77,243       2.96%
Non-interest bearing liabilities:
  Demand deposits                            441,800
  Other liabilities                           47,655
Shareholders' equity                         294,856
                                          ----------
     Total liabilities and
       shareholders' equity               $3,393,164
                                          ==========

Net interest earnings                                  $  139,921
                                                       ==========
Net interest spread                                                     4.22%
Net interest margin on interest-
   earnings assets                                                      4.62%

Fully tax-equivalent adjustment                        $   12,071
</TABLE>

(1)   The impact of interest and fees not recognized on non-accrual loans was
      immaterial.

(2)   Averages for investment securities are based on historical cost and the
      yields do not give effect to changes in fair value that is reflected as a
      component of shareholders' equity and deferred taxes.


                                       16
<PAGE>

As discussed above, the change in net interest income (fully tax-equivalent
basis) may be analyzed by segregating the volume and rate components of the
changes in interest income and interest expense for each underlying category.

                              Table 4: Rate/Volume

<TABLE>
<CAPTION>
                                          ------------------------------      ------------------------------
                                               2004 Compared to 2003               2003 Compared to 2002
                                          ------------------------------      ------------------------------
                                            Increase (Decrease) Due to          Increase (Decrease) Due to
                                                   Change in (1)                       Change in (1)
                                          ------------------------------      ------------------------------
                                                                   Net                                 Net
(000's omitted)                           Volume      Rate        Change      Volume       Rate       Change
                                          ------------------------------      ------------------------------
<S>                                       <C>       <C>          <C>          <C>       <C>         <C>
Interest earned on:
  Time deposits in other banks                $10         $8         $18         ($2)         $0         ($2)
  Taxable investment securities             9,485     (3,492)      5,993      (7,981)     (2,265)    (10,246)
  Non-taxable investment securities         7,437       (960)      6,477       3,439      (1,189)      2,250
  Loans (net of unearned discount)         23,730    (12,135)     11,595       9,033     (14,979)     (5,946)
Total interest-earning assets (2)         $40,477   ($16,394)    $24,083      $3,222    ($17,166)   ($13,944)

Interest paid on:
  Interest checking, savings
    and money market deposits                $803    ($1,204)      ($401)       $349     ($4,996)    ($4,647)
  Time deposits                             2,666     (5,966)     (3,300)     (1,483)     (9,460)    (10,943)
  Short-term borrowings                     3,578        979       4,557       1,058        (959)         99
  Long-term borrowings                      4,774     (3,179)      1,595      (4,274)      1,823      (2,451)
Total interest-bearing liabilities (2)    $11,329    ($8,878)     $2,451       ($286)   ($17,656)   ($17,942)

Net interest earnings (2)                 $29,139    ($7,507)    $21,632      $2,117      $1,881      $3,998
</TABLE>

(1)   The change in interest due to both rate and volume has been allocated to
      volume and rate changes in proportion to the relationship of the absolute
      dollar amounts of change in each.

(2)   Changes due to volume and rate are computed from the respective changes in
      average balances and rates of the totals; they are not a summation of the
      changes of the components.


                                       17
<PAGE>

Non-interest Income

The Company's sources of non-interest income are of three primary types: general
banking services related to loans, deposits and other core customer activities
typically provided through the branch network; financial services, comprised of
retirement plan administration and employee benefit trusts (Benefit Plans
Administrative Services or BPA), employee benefit actuarial and consulting
services (Harbridge Consulting Group or Harbridge), personal trust, investment
and insurance products (Community Investment Services, Inc. or CISI) and
investment management (Elias Asset Management or EAM); and periodic
transactions, most often net gains (losses) from the sale of investments and
prepayment of term debt.

                          Table 5: Non-interest Income

<TABLE>
<CAPTION>
                                                              Years Ended December 31,
                                                          --------------------------------
(000's omitted)                                             2004        2003         2002
------------------------------------------------------------------------------------------
<S>                                                       <C>         <C>          <C>
Banking services:
  Electronic banking                                      $ 2,585     $ 2,604      $ 2,375
  Mortgage banking                                            525         518          175
  Deposit service charges                                   5,475       5,374        5,310
  Overdraft fees                                           14,867      13,476        6,937
  Credit life and disability insurance                      1,206         856        1,082
  Commissions and other                                     2,974       2,199        2,662
------------------------------------------------------------------------------------------
     Total banking services                                27,632      25,027       18,541

Financial services:
  Retirement plan administration and trustee fees           5,820       4,668        3,845
  Actuarial and benefit plan consulting fees                3,478       1,552            0
  Asset advisory and management fees                        1,832       1,890        2,606
  Investment and insurance product commissions              3,907       3,339        3,715
  Personal trust                                            1,704       1,453        1,682
------------------------------------------------------------------------------------------
     Total financial services                              16,741      12,902       11,848

Gain (loss) on investment securities & debt prepayment         72      (2,698)       1,673
------------------------------------------------------------------------------------------
     Total non-interest income                            $44,445     $35,231      $32,062
==========================================================================================

Non-interest income/operating income (FTE)                   21.2%       19.7%        18.6%
</TABLE>

As displayed in Table 5, total non-interest income in 2004 increased by 26.2% to
$44 million, largely as a result of higher overdraft volume, the acquisition of
Harbridge, growth at BPA and the absence of losses on the early retirement of
long-term borrowings. Total non-interest income for 2003 was up $3.2 million or
9.9% from 2002's level, driven by significantly higher overdraft volume, the
acquisition of Harbridge and the growth at BPA. These improvements were offset
by substantially higher losses on the early retirement of long-term borrowings,
the absence of gains on the sale of securities and decreases in the other
financial services group businesses.

Non-interest income as a percent of operating income (FTE basis) was 21.2% in
2004, up 1.5 percentage points from the prior year, an all-time high for the
Company. This increase was primarily driven by the aforementioned strong growth
in overdraft fees and BPA revenue, as well as the acquisition of Harbridge. This
ratio is considered an important measure for determining the progress the
Company is making on one of its primary long-term strategies, expansion of
non-interest income in order to diversify its revenue sources and reduce
reliance on net interest margins that may be strongly impacted by general
interest rate and other market conditions.

The largest portion of the Company's recurring non-interest income is the wide
variety of fees earned from general banking services, which reached $27.6
million in 2004, up 10.4% from the prior year. Total banking services
contributed 62% of 2004 non-interest income. A large portion of the income
growth was attributable to overdraft fees, up $1.4 million (10.3%) over 2003's
level, due in large part to the incremental transaction volume generated from
the accounts added through the First Heritage, Grange and Peoples acquisitions.
In addition, commissions and other increased $0.8 million, due to higher
commissions and cash surrender values derived from life insurance policies
acquired in the 2003 and 2004 acquisitions. Fees from the general banking
services was $25.0 million in 2003, up $6.5 million or 35% from 2002 primarily
driven by the success of the Company's Overdraft FreedomTM program implemented
in December 2002.


                                       18
<PAGE>

As disclosed in Table 5, non-interest income from financial services rose $3.8
million or 30% in 2004 to $16.7 million. Financial services revenue now
comprises 38% of total non-interest income, excluding net gains (losses) on the
sale of investment securities and retirement of debt. This compares to 34% in
2003, with the increase primarily due to seven more months of revenue from
Harbridge, which was acquired at the end of July 2003, resulting in $1.9 million
of incremental revenue for the financial services group in the current year.
Another impressive year of revenue growth at BPA (up $1.2 million or 25%) was
driven by a significant number of new plans under administration and growth in
the market value of client assets. These two businesses are part of the BPAS
subsidiary, and operate collaboratively to offer clients a full array of
employee benefits, recordkeeping and consulting services throughout much of the
country. BPAS revenue of $9.3 million in 2004 was $3.1 million higher than prior
year results. BPAS revenue for 2003 was $6.2 million, up $2.4 million from 2002
primarily due to the acquisition of Harbridge in July of 2003 as well as strong
organic growth at BPA.

CISI and personal trust had positive growth of $568,000 (17%) and $251,000
(17%), respectively, as improving market conditions have positively impacted
both businesses. Increased volume of annuity sales in response to higher
interest rates and additional client relationships developed in the new markets
opened up by the Company's acquisitions has had a positive impact. Additionally,
CISI has obtained a large number of higher net-worth investors caused by recent
retirees rolling over their 401(k) plans and/or receiving inheritances. In 2003,
CISI, Elias and personal trust were all negatively impacted by the challenging
retail investment market conditions of the past few years. Non-interest income
for 2003 was down $376 million (10%), $716 million (27%) and $229 million (14%)
at CISI, Elias and personal trust, respectively as compared to 2002.

Assets under management from the Company's financial services businesses rose
considerably over the last two years reaching $2.102 billion at the end of 2004,
compared to $1.807 billion at year-end 2003 and $1.364 billion at year-end 2002.
Market-driven gains in equity-based assets were augmented by attraction of new
client assets. BPA in particular was very successful at growing its asset base,
as demonstrated by the $259 million or 34% increase in its assets under
administration.

The total financial services group contributed $2.1 million (excluding
allocation of indirect corporate expense) or 3.1% of the Company's pre-tax
income this year, reflecting nearly a 12% margin. In 2003, financial services'
contribution was $1.6 million or 2.9% of total pre-tax income, with a margin of
12%. The higher earnings were the result of new client business at BPA, CISI and
personal trust as well as a full year of Harbridge as compared to only five
months in 2003. The increase in percentage contribution was primarily due to
higher growth in the financial services businesses than the banking business's
increase in net interest income and decline of the provision for loan losses.

There was a total net gain on security and debt transactions of $72,000 this
year compared to a net loss of $2.7 million in 2003. The loss in 2003 was
primarily composed of $2.6 million of charges associated with the early
retirement of $25 million of longer-term FHLB borrowings that were replaced with
lower rate, short-term borrowings, which are expected to provide a long-term
earnings benefit as well as reduce interest rate risk. The $1.7 million net gain
in 2002 included $2.6 million of gains on $80 million of investment sales, and a
$0.9 million prepayment penalty on the retirement of approximately $11 million
of intermediate-term FHLB borrowings. The security and debt gains and losses
taken over the last three years are illustrative of the Company's active
management of its investment portfolio and external borrowings to achieve a
desirable total return through the combination of net interest income,
transaction gains/losses and changes in market value across financial market
cycles.

Operating Expenses

As shown in Table 6, operating expenses rose $17.2 million or 17% in 2004 to
$119.9 million. Excluding acquisition expenses, operating expenses were up $16.0
million or 15.6% in 2004, reflective mostly of incremental operating expenses
associated with the acquisitions of First Heritage in 2004 and Harbridge, Grange
and Peoples in 2003. This year's operating expenses as a percent of average
assets were 2.86%, down from 2.96% in 2003 and higher than the 2.81% in 2002.
The decrease in this ratio for 2004 was principally due to the acquisitions in
late 2003 and the first half of 2004 (Grange and First Heritage), whereby
average assets increased significantly (21%), while operating expenses only
increased 17%. The increase in this ratio for 2003 was principally due to the
acquisition of a financial services unit whose revenue is not driven by earning
assets (Harbridge), and the charge-offs resulting from higher overdraft volume,
another significant revenue generating tool with a limited underlying asset
base.

The efficiency ratio, a performance measurement tool widely used by banks, is
defined by the Company as operating expenses (excluding acquisition expenses and
intangible amortization) divided by operating income (fully tax-equivalent net
interest income plus non-interest income, excluding net securities and debt
gains and losses). Lower ratios correspond to higher efficiency. In 2004 the
efficiency ratio decreased 0.6 percentage points to 52.8% due in part to the
investment leverage strategy in effect during the first half of 2004. The
efficiency ratio for 2003 was 1.4 percentage points higher than the 52.0% ratio
for 2002. This was primarily a result of net interest income being tempered for
much of the year due to the


                                       19
<PAGE>

investment de-leveraging strategy, rising pension and medical expenses and the
impact from reduced pre-tax margins in the financial services businesses in
2003, as discussed earlier.

                           Table 6: Operating Expenses

                                                  Years Ended December 31,
                                             ----------------------------------
         (000's omitted)                       2004         2003         2002
         ----------------------------------------------------------------------
         Salaries and employee benefits      $ 61,146     $ 53,164     $ 47,864
         Occupancy                             10,177        9,297        8,154
         Equipment and furniture                8,636        7,828        7,538
         Legal and professional fees            4,578        3,183        3,272
         Data processing                        7,737        6,800        6,574
         Amortization of intangible assets      7,414        5,093        5,953
         Office supplies                        2,232        1,996        2,321
         Foreclosed property                      994          561          902
         Acquisition expenses                   1,704          498          700
         Other                                 15,281       14,291       12,008
         ----------------------------------------------------------------------
           Total operating expenses          $119,899     $102,711     $ 95,286
         ======================================================================

         Operating expenses/average assets       2.86%        2.96%        2.81%
         Efficiency ratio                        52.8%        53.4%        52.0%

Higher personnel expenses accounted for 46% of 2004's increase in operating
costs, primarily the result of three acquisitions in 2003 and the First Heritage
acquisition in 2004. The remainder of the increases in personnel expense reflect
higher benefit costs, merit increases and new hiring activity. Total full-time
equivalent staff at the end of 2004 was 1,301 compared to 1,259 at year-end 2003
and 1,120 at year-end 2002.

Medical expenses were up in 2004 due to a general rise in the cost of medical
care, administration and insurance, as well as a greater number of insured
employees. Qualified and non-qualified pension expenses decreased slightly in
2004 principally due to a change in the Company's defined benefit pension plan
from a standard annuity paid benefit, to a cash balance design, offset by a
reduction of the discount rate applied to future payments to 5.9% from 6.1%
(increases current expenses in present value terms) and additional obligations
for employees added through acquisition and organic growth. The three
assumptions that have the largest impact on the calculation of annual pension
expense are the aforementioned discount rate, the rate applied to future
compensation increases and the expected rate of return on plan assets. Table 7
contains the results of a sensitivity analysis conducted to determine what the
impact of a 1.0 percentage point increase and decrease in these three
assumptions would have on the annual pension expense for the two plans. Also,
see Note K to the financial statements for further information concerning the
pension plan.

                   Table 7: Pension Plan Sensitivity Analysis

                                               One Percentage Point
                                               --------------------
               (000's omitted)                  Increase  Decrease
               ----------------------------------------------------
               Discount rate                     ($611)    $ 707
               Rate of compensation increase     $ 324     ($289)
               Expected return on plan assets    ($402)    $ 402

Total non-personnel expenses increased $9.2 million or 19% in 2004. Excluding
acquisition-related expenses, non-personnel expenses were up $8.0 million or 16%
from 2003's level. As displayed in Table 6, this was largely caused by higher
occupancy expense (up $.9 million), equipment and furniture expense ($.8
million), legal and professional fees ($1.4 million), data processing expense
($.9 million), amortization of intangible assets ($2.3 million) and other
expenses ($1.0 million). The increase in occupancy expense and equipment and
furniture expense in 2004 was mainly due to incremental costs from recently
acquired facilities, expenses arising from renovations and repairs, the effect
of higher rates and severe weather on maintenance and utilities expenses and the
general increase in property taxes in many of the locations we do business in.
The increase in legal and professional fees over the prior year was caused, in
most part, by the additional responsibilities associated with complying with new
governance and regulatory requirements. Data processing and other expenses were
up primarily due to incremental recurring operating expense associated with the
five acquisitions completed during the last eighteen months. Intangible
amortization in 2004 was up versus the prior year due to the amortization of
core deposit and customer relationship intangibles arising from the 2003 and
2004 acquisitions.


                                       20
<PAGE>

Total non-personnel expenses increased $2.1 million or 4.5% in 2003 as compared
to 2002, largely caused by higher occupancy expense (up $1.1 million), and other
expenses (up $2.3 million) and partially offset by lower intangible amortization
(down $0.9 million). The increase in occupancy expense in 2003 was mainly due to
incremental costs from recently acquired facilities. Other expenses include two
volume-driven expense items that were up considerably due to record levels of
business activity. Intangible amortization in 2003 was down versus the prior
year because the drop in accelerated amortization of core deposit intangibles
from the FleetBoston branch acquisitions had a greater impact than the
amortization of intangibles added as a result of the three acquisitions
completed in 2003.

Acquisition expenses totaled $1.7 million in 2004, up from $498,000 in 2003.
These expenditures were primarily comprised of severance and employee benefits
of $1.0 million, legal and consulting fees of $491,000, and system conversion
costs of $130,000 and $39,000 of other general administrative expenses.

Acquisition expenses totaled $498,000 in 2003, down from $700,000 in 2002. These
expenditures were primarily comprised of legal and consulting fees of $213,000,
$191,000 of system conversion costs and $94,000 of other general administrative
expenses. The majority of these expenses were incurred in conjunction with the
Company's largest acquisition of 2003, Grange National Banc Corp., in November
2003.

Income Taxes

The Company estimates its tax expense based on the amount it expects to owe the
respective tax authorities, plus the impact of deferred tax items. Taxes are
discussed in more detail in Note I of the Consolidated Financial Statements on
page 55. Accrued taxes represent the net estimated amount due or to be received
from taxing authorities. In estimating accrued taxes, management assesses the
relative merits and risks of the appropriate tax treatment of transactions
taking into account statutory, judicial and regulatory guidance in the context
of the Company's tax position. If the final resolution of taxes payable differs
from our estimates due to regulatory determination or legislative or judicial
actions, adjustments to tax expense may be required.

The effective tax rate for 2004 increased by 0.9 percentage points to 24.9%.
This increase was primarily due to a larger proportion of income from fully
taxable sources in 2004, in comparison to 2003.

The effective tax rate for 2003 of 24.0% was down from the 26.5% rate in 2002.
This decline was primarily due to the benefits realized on a larger proportion
of income from tax-exempt investment securities in 2003, versus 2002.

Capital

Shareholders' equity ended 2004 at $474.6 million, up $69.8 million or 17% from
one year earlier. This increase reflects $54.7 million of common stock issued in
conjunction with the acquisition of First Heritage, net income of $50.2 million
and $8.9 million from the issuance of shares through employee stock plans. These
increases were partially offset by common dividends declared of $20.5 million,
treasury share purchases of $21.7 million and a $1.8 million decline in the
market value adjustment ("MVA", represents the after-tax, unrealized change in
value of available-for-sale securities in the Company's investment portfolio).
Excluding accumulated other comprehensive income in both 2004 and 2003, capital
rose by $71.6 million or 19%. Shares outstanding rose by 2,311,000 during the
year, comprised of 2,592,000 issued to First Heritage shareholders and 703,000
added through employee stock plans, offset by the purchase of 984,000 treasury
shares.

The Company's ratio of tier I capital to assets (or tier I leverage ratio), the
basic measure for which regulators have established a 5% minimum to be
considered "well-capitalized," decreased 32 basis points in 2004 to 6.94%. This
was due to the net issuance of common stock and the capital-building
contribution from retained earnings (net income less dividends declared) offset
by the proportionately higher organic and acquired growth of the investment and
loan portfolios. The tangible equity/tangible assets ratio was 5.82% at the end
of 2004 versus 5.70% one year earlier. The Company manages organic and acquired
growth in a manner that enables it to continue to build upon its strong capital
base, and maintain the Company's ability to take advantage of future strategic
growth opportunities.

Cash dividends declared on common stock in 2004 of $20.5 million represented an
increase of 26% over the prior year. This growth was mostly a result of
dividends per share of $0.68 for 2004 increasing from $0.61 in 2003 due to
quarterly dividends per share being raised from $0.16 to $0.18 (+12.5%) in the
third quarter of 2004 and from $0.145 to $0.16 (+10.3%) in the third quarter of
2003. The increase in dollar amount of dividends declared also reflects an
increase in the number of shares outstanding at the end of this year, primarily
a result of the 2.6 million shares issued in May 2004 to First Heritage
shareholders.


                                       21
<PAGE>

The dividend payout ratio for this year was 40.9% compared to 40.2% in 2003, and
37.7% in 2002, and near the top of the Company's targeted payout range for
dividends on common stock of 30 to 40%.

Liquidity

Liquidity risk is measured by the Company's ability to raise cash when needed at
a reasonable cost and with a minimum of loss. The Company must be capable of
meeting all obligations to its customers at any time and, therefore, the active
management of its liquidity position is critical. Given the uncertain nature of
our customers' demands as well as the Company's desire to take advantage of
earnings enhancement opportunities, the Company must have available adequate
sources of on and off balance sheet funds that can be acquired in time of need.
Accordingly, in addition to the liquidity provided by balance sheet cashflows,
liquidity must be supplemented with additional sources such as credit lines from
correspondent banks, Federal Home Loan Bank, and Federal Reserve Bank. Other
funding alternatives may also be appropriate from time to time, including
wholesale and retail repurchase agreements, large certificates of deposit, and
brokered CD relationships.

The Company's primary approach to measuring liquidity is known as the Basic
Surplus/Deficit model. It is used to calculate liquidity over two time periods:
first, the amount of cash that could be made available within 30 days
(calculated as liquid assets less short-term liabilities as a percentage of
total assets); and second, a projection of subsequent cash availability over an
additional 60 days. As of December 31, 2004, this ratio was 15.4% and 17.5% for
the respective time periods, excluding the Company's capacity to borrow
additional funds from the Federal Home Loan Bank and other sources. There is
currently $134 million in additional Federal Home Loan Bank borrowing capacity
based on the Company's year-end collateral levels. Additionally, the Company has
$11 million in unused capacity at the Federal Reserve Bank and $47 million in
unused capacity from an unsecured line of credit with other correspondent banks.

In addition to the 30 and 90-day basic surplus/deficit model, longer-term
liquidity over a minimum of five years is measured and a liquidity worksheet
projecting sources and uses of funds is prepared. To measure longer-term
liquidity, a baseline projection of loan and deposit growth for five years is
made to reflect how liquidity levels could change over time. This five-year
measure reflects ample liquidity for loan growth over the next five years.

Though remote, the possibility of a funding crisis exists at all financial
institutions and therefore must be planned for. Management has addressed this
issue by formulating a Liquidity Contingency Plan, which has been reviewed and
approved by both the Board of Directors and the Company's Asset/Liability
Management Committee. The plan addresses those actions the Company would take in
response to both a short-term and long-term funding crisis.

A short-term funding crisis would most likely result from a shock to the
financial system, either internal or external, which disrupts orderly short-term
funding operations. Such a crisis should be temporary in nature and would not
involve a change in credit ratings. A long-term funding crisis would most likely
be the result of drastic credit deterioration at the Company. Management
believes that both circumstances have been fully addressed, backed up with
detailed action plans and trigger points for monitoring such events.

Intangible Assets

Intangible assets at the end of 2004 of $232.5 million were up $36.4 million
from the prior year-end due to $43.4 million of additional intangible assets
arising from the acquisitions of First Heritage Bank and a branch located in
Dansville, as well as $0.4 million of goodwill adjustments related primarily to
fair value adjustments associated with the 2003 acquisitions, offset by $7.4
million of amortization during the year.

Intangible assets consist of goodwill, core deposit value and customer
relationships arising from acquisitions. Goodwill represents the excess cost of
an acquisition over the fair value of the net assets acquired. Goodwill at
December 31, 2004 equaled $195 million, comprised of $184 million related to
banking acquisitions and $11 million arising from the acquisition of financial
services businesses. Goodwill is subjected to an annual impairment analysis to
determine whether the carrying value of the acquired net assets exceeds their
fair value, which would necessitate a write-down of the goodwill. The Company
completed its goodwill impairment analyses during 2004 and 2003 and no
adjustments were necessary. The impairment analysis was based upon discounted
cash flow modeling techniques that require management to make estimates
regarding the amount and timing of expected future cash flows. It also requires
them to select a discount rate that reflects the current return requirements of
the market in relation to present risk-free interest rates, required equity
market premiums and company-specific risk indicators. Management believes that
there is a low probability of future impairment with regard to the goodwill
associated with whole-bank acquisitions. The performance of Elias Asset
Management weakened subsequent to its acquisition in 2000 as a result of adverse
market conditions, however, its performance stabilized in 2004


                                       22
<PAGE>

as market conditions improved. Additional declines in EAM's operating results
may result in impairment to its recorded goodwill of $7.3 million.

Core deposit intangibles represent the premium the Company has paid for deposits
acquired in excess of the cost incurred had the funds been purchased in the
capital markets. Core deposit intangibles are amortized on either an accelerated
or straight-line basis over periods ranging from seven to twenty years. The
recognition of a customer relationship intangible arose due to the acquisition
of Harbridge. This asset was determined based on a methodology that calculates
the present value of the projected future revenue derived from the acquired
customer base. This asset is being amortized over eleven years on an accelerated
basis.

Loans

The Company's loans outstanding, by type, as of December 31 are as follows:

                           Table 8: Loans Outstanding

<TABLE>
<CAPTION>
(000's omitted)                               2004          2003          2002          2001          2000
-------------------------------------------------------------------------------------------------------------
<S>                                        <C>           <C>           <C>           <C>           <C>
Consumer mortgage                          $  801,412    $  739,593    $  510,309    $  443,767    $  416,160
Business lending                              831,244       689,436       629,874       643,834       576,887
Consumer direct and indirect                  725,885       699,562       666,838       645,487       523,832
-------------------------------------------------------------------------------------------------------------
   Gross loans                              2,358,541     2,128,591     1,807,021     1,733,088     1,516,879
Less: unearned discount                            48            82           116           218         1,002
-------------------------------------------------------------------------------------------------------------
Net loans                                   2,358,493     2,128,509     1,806,905     1,732,870     1,515,877
Allowance for loan loss                        31,778        29,095        26,331        23,901        20,035
-------------------------------------------------------------------------------------------------------------
Loans, net of allowance for loan losses    $2,326,715    $2,099,414    $1,780,574    $1,708,969    $1,495,842
=============================================================================================================
</TABLE>

As disclosed in Table 8 above, gross loans outstanding, reached a record level
of $2.359 billion as of year-end 2004, up $230 million or 10.8% compared to
twelve months earlier. The acquisitions of First Heritage and Dansville
accounted for $212 million of that growth. Excluding the impact of these
acquisitions (at time of completion), total loans rose $18 million or 1% from
the prior year. All of the organic loan growth was produced in the consumer
mortgage and installment lines of business, with declines experienced in
business lending. The organic loan growth was attributable to the New York
market, with the Pennsylvania market experiencing a net decline in loans
outstanding.

The compounded annual growth rate ("CAGR") for the Company's total loan
portfolio between 2000 and 2003 was 8.3% with approximately 7% of the growth
coming from whole bank and branch acquisitions and the balance from organic
growth. The greatest overall expansion occurred in the consumer mortgage
segment, which grew at a 14% CAGR (including the impact of acquisitions) over
that time frame. The consumer mortgage growth was primarily driven by record
mortgage refinancing volumes over the last three years, as well as the
acquisition of consumer-oriented banks in the intervening period. The other loan
categories grew at compounded annual growth rates of between 5% and 7% from 2000
to 2004. As a consequence, the consumer mortgages segment accounted for 34% of
the total loan portfolio at year-end 2004 versus 27% at the end of 2000.

The weighting of retail lending in the Company's loan portfolio enables it to be
highly diversified. Approximately 65% of loans outstanding at the end of 2004
were made to consumers borrowing on an installment and residential mortgage loan
basis. The commercial portfolio is also broadly diversified by industry type as
demonstrated by the following distributions at year-end 2004: real estate
development (16%), healthcare (11%), general services (11%), motor vehicle and
parts dealers (9%), construction (7%), agriculture (6%), restaurant & lodging
(6%), retail trade (6%), manufacturing (5%) and wholesale trade (5%). A variety
of other industries with less than a 3% share of the total portfolio comprise
the remaining 18%. Over the last year, the mix of loans has become more weighted
towards business lending due to the high proportion of commercial loans in First
Heritage's portfolio.

The consumer mortgage segment of the Company's loan portfolio is comprised of
fixed (94%) and adjustable rate (6%) residential lending. Approximately $21
million of the $62 million growth in consumer mortgages was attributable to the
acquisition of First Heritage. Excluding the impact of this acquisition, this
segment was up $41 million or 5.6% in 2004 due to continued strong mortgage
volumes in the historically low interest rate environment. All of the organic
growth was generated in the New York market, as Pennsylvania experienced a net
decline in 2004 despite a significant volume of new originations.

The combined total of general-purpose business lending, dealer floor plans,
mortgages on commercial property, and farm loans is characterized as the
Company's business lending activity. Approximately $170 million in business
loans added


                                       23
<PAGE>

through the First Heritage acquisition offset the $28 million (4.1%) decrease
from ongoing operations in 2004. The majority of this decrease was attributable
to the Pennsylvania market, with the New York market experiencing a slight
decrease. Lending efforts in First Liberty's traditional markets continue to be
challenged by a modest economic recovery, diminished capital spending levels in
the commercial sector, an extremely competitive pricing environment and the
Company's dedication to maintaining strong credit quality standards. Management
has worked aggressively to address the loan generation challenges in
Pennsylvania by adding enhanced management, lending and credit administration
resources, and strong business relationships via the acquisition of First
Heritage in 2004 and Grange in 2003. The enhanced scale and coverage of the
Pennsylvania business combined with the new management team's continued
commitment to business development efforts, positions them to fully take
advantage of growth opportunities in this key market as economic conditions
continue to improve and increased capital spending leads to expanded borrowing
activity in the commercial sector.

Consumer installment loans, both those originated directly (such as personal
loans and home equity loans and lines of credit), and indirectly (originated
predominantly in automobile, marine and recreational vehicle dealerships), rose
$26 million (3.8%) from one year ago. Excluding acquisitions, consumer
installment loans increased $5 million year over year. Historically low interest
rates, aggressive dealer and manufacturer incentives on new vehicles, and very
competitive pricing on used vehicles have existed in these product types for
more than a year. Consumer installment loans increased in the New York markets
during the last 12 months, while the Pennsylvania markets decreased slightly.

The following table shows the maturities and type of interest rates for business
and construction loans as of December 31, 2004:

      Table 9: Maturity Distribution of Business and Construction Loans (1)

<TABLE>
<CAPTION>
                                                                  Maturing
                                                 Maturing in      After One      Maturing
                                                 One Year or     but Within     After Five
      (000's omitted)                                Less        Five Years        Years
      ------------------------------------------------------------------------------------
<S>                                                <C>            <C>            <C>
      Commercial, financial and agricultural       $328,497       $376,030       $120,629
      Real estate - construction                     11,304
      ------------------------------------------------------------------------------------
           Total                                   $339,801       $376,030       $120,629
      ====================================================================================

      Fixed or predetermined interest rates        $ 83,198       $189,120       $ 43,802
      Floating or adjustable interest rates         256,603        186,910         76,827
      ------------------------------------------------------------------------------------
           Total                                   $339,801       $376,030       $120,629
      ====================================================================================
</TABLE>

      (1)   Scheduled repayments are reported in the maturity category in which
            the payment is due.


                                       24
<PAGE>

Asset Quality

The following table presents information concerning non-performing assets:

                         Table 10: Non-performing Assets

<TABLE>
<CAPTION>
                                                                                 As of December 31,
                                                              -------------------------------------------------------
(000's omitted)                                                2004        2003        2002        2001        2000
---------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>         <C>         <C>         <C>         <C>
Non-accrual loans                                             $11,798     $11,940     $ 9,754     $ 7,186     $ 5,473
Accruing loans 90+ days delinquent                              1,158       1,307       1,890       1,914       1,930
Restructured loans                                                  0          28          43          75         116
---------------------------------------------------------------------------------------------------------------------
     Total non-performing loans                                12,956      13,275      11,687       9,175       7,519
Other real estate                                               1,645       1,077         704       1,427       1,293
---------------------------------------------------------------------------------------------------------------------
     Total non-performing assets                              $14,601     $14,352     $12,391     $10,602     $ 8,812
=====================================================================================================================

Allowance for loan losses to total loans                         1.35%       1.37%       1.46%       1.38%       1.32%
Allowance for loan losses to non-performing loans                 245%        219%        225%        261%        266%
Non-performing loans to total loans                              0.55%       0.62%       0.65%       0.53%       0.50%
Non-performing assets to total loans and other real estate       0.62%       0.67%       0.69%       0.61%       0.58%
</TABLE>

The Company places a loan on nonaccrual status when the loan becomes ninety days
past due (or sooner, if management concludes collection of interest is
doubtful), except when, in the opinion of management, it is well-collateralized
and in the process of collection. As shown in Table 10 above, non-performing
loans, defined as non-accruing loans plus accruing loans 90 days or more past
due, ended 2004 at $13.0 million, down approximately $0.3 million or 2.4% from
one year earlier despite a $230 million increase in loans outstanding. The ratio
of non-performing loans to total loans declined seven basis points from twelve
months earlier to 0.55%. The ratio of non-performing assets (which includes
troubled debt restructuring and other real estate, or OREO, in addition to
non-performing loans) to total loans plus OREO decreased to 0.62% at year-end
2004, down five basis points from one-year earlier. The improvement in both
ratios was driven by improvements in the economy, enhanced collection and
recovery efforts, and the charge-off and disposition of certain problematic
loans over the last two years. Had nonaccrual loans as of December 31, 2004 been
current in accordance with their original terms, additional interest income of
approximately $1.0 million would have been recorded. At year end 2004, there
were 30 OREO properties with a value of $1.6 million as compared to 25 OREO
properties at a value of $1.1 million a year earlier.

Total delinquencies, defined as loans 30 days or more past due or in nonaccrual
status, finished the current year at 1.45% of total loans outstanding versus
1.77% at the end of 2003. As of year-end 2004, total delinquency ratios for
commercial loans, consumer loans, and real estate mortgages were 1.57%, 2.08%,
and 1.00%, respectively. These measures were 2.18%, 2.36% and 1.10%,
respectively, as of December 31, 2003. Delinquency levels, particularly in the
30 to 89 days category, tend to be somewhat volatile due to their measurement at
a point in time, and therefore management believes that it is useful to look at
this ratio over a longer period. The total average delinquency ratio for 2004
was 1.52% versus 1.76% in 2003.


                                       25
<PAGE>

The changes in the allowance for loan losses for the last five years is as
follows:

                   Table 11: Allowance for Loan Loss Activity

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                            ----------------------------------------------------------------------
(000's omitted)                                                2004           2003           2002           2001           2000
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>            <C>            <C>            <C>            <C>
Amount of loans outstanding at end of period                $2,358,493     $2,128,509     $1,806,905     $1,732,870     $1,515,877
Daily average amount of loans (net of unearned discount)    $2,264,857     $1,885,604     $1,759,564     $1,580,870     $1,484,945

Allowance for loan losses at beginning of period            $   29,095     $   26,331     $   23,901     $   20,035     $   18,528
Charge-offs:
  Business lending                                               3,621          5,521          5,071          2,310          3,423
  Consumer mortgage                                                535            239            221            282             93
  Consumer direct and indirect                                   7,624          7,351          6,723          6,070          3,964
----------------------------------------------------------------------------------------------------------------------------------
     Total charge-offs                                          11,780         13,111         12,015          8,662          7,480
Recoveries:
  Business lending                                                 871            417            281            313            181
  Consumer mortgage                                                 48             78            119             56             72
  Consumer direct and indirect                                   2,437          2,353          1,823          1,709          1,012
----------------------------------------------------------------------------------------------------------------------------------
     Total recoveries                                            3,356          2,848          2,223          2,078          1,265
----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs                                                  8,424         10,263          9,792          6,584          6,215
Provision for loan losses                                        8,750         11,195         12,222          7,097          7,722
Allowance on acquired loans (1)                                  2,357          1,832              0          3,353              0
----------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses at end of period                  $   31,778     $   29,095     $   26,331     $   23,901     $   20,035
==================================================================================================================================

Net charge-offs to average loans outstanding                      0.37%          0.54%          0.56%          0.42%          0.42%
</TABLE>

(1)   This reserve addition is attributable to loans purchased from First
      Heritage Bank in 2004, Peoples Bankcorp Inc. and Grange National Banc Corp
      in 2003 and Citizens National Bank of Malone and FleetBoston Financial
      Corporation in 2001.

As displayed in Table 11 above, total net charge-offs in 2004 were $8.4 million,
down $1.8 million from the prior year, principally due to significantly improved
results in the business lending portfolio. Net charge-offs in 2003 were $0.5
million above 2002's level, and were impacted by the increased size of the
average loan portfolio, resulting from both organic and acquired loan growth in
2003. In addition, a prolonged period of economic weakness from late 2000
through early 2003 impacted the net charge-off levels in both 2002 and 2003,
with the greatest impact being realized in the business loan segment.

Due to the significant increase in average loan balances in 2004 and 2003 as a
result of the factors mentioned above, management believes that net charge-offs
as a percent of average loans ("net charge-off ratio") offers a clearer
representation of asset quality trends. The net charge-off ratio for 2004 was
down 17 basis points from last year to 0.37%. This year's ratio benefited from
improved recovery performance, as evidenced by the $0.5 million increase in
recoveries to $3.4 million, representing 27% of average gross charge-offs for
the latest two years, compared to 23% in 2003.

Business loan net charge-offs decreased in 2004, totaling $2.8 million or 0.35%
of average business loans outstanding versus $5.1 million and 0.80% in 2003. The
primary reason for the decreased net charge-off ratio for business loans was
generally improved economic conditions in the markets served by the Company, as
well as the charge-off of a number of business loans in 2003 that had been
identified as weak and had been specifically reserved for in previous periods.
Consumer direct and indirect loan net charge-offs increased slightly to $5.2
million this year from $5.0 million in 2003, but the net charge-off ratio
dropped slightly from 0.74% in 2003 to 0.73% in 2004 due to larger average
balances. Consumer mortgage net charge-offs rose $0.3 million to $0.5 due to the
much larger size of the portfolio. The net charge-off ratio of 0.06% was higher
than the prior year, but remains low.

All the primary asset quality metrics deteriorated in 2002 and continued into
2003, in comparison to the 1999 to 2001 period. This was principally due to the
weakened economic conditions in the Company's markets, and was manifested most
strongly in the business loan portfolio. Based on almost all measurements, the
asset quality profile of the Company began to improve in 2003 in conjunction
with gradually improving economic conditions and strengthened credit
administration and loan review resources. Significant changes and enhancements
were made to lending and credit administration functions in 2003 and through
2004, and these improvements had a significantly positive impact on credit
management performance in 2004.


                                       26
<PAGE>

Management continually evaluates the credit quality of the Company's loan
portfolio and conducts a formal review of the allowance for loan loss adequacy
on a quarterly basis. The two primary components of the loan review process that
are used to determine proper allowance levels are specific and general loan loss
allocations.

Measurement of specific loan loss allocations is typically based on expected
future cash flows, collateral values and other factors that may impact the
borrower's ability to pay. Impaired loans greater than $500,000 are evaluated
for specific loan loss allocations, as defined in SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan," as amended. Consumer mortgages and consumer
direct and indirect loans are considered smaller balance homogeneous loans and
are evaluated collectively. The Company considers a loan to be impaired when,
based on current information and events, it is probable that the Company will be
unable to collect all amounts according to the contractual terms of the loan
agreement or the loan is delinquent 90 days or more.

The second component of the allowance establishment process, general loan loss
allocations, is composed of two calculations that are computed on the four main
loan segments: commercial, consumer direct, consumer indirect and residential
real estate. The first calculation determines an allowance level based on the
latest three years of historical net charge-off data for each loan category
(commercial loans exclude balances with special loan loss allocations). The
second calculation is qualitative and takes into consideration five major
factors affecting the level of loan loss risk: portfolio risk migration patterns
(internal credit quality trends); the growth of the segments of the loan
portfolio; economic and business environment trends in the Company's markets
(includes review of bankruptcy, unemployment, population, consumer spending and
regulatory trends); industry, geographical and product concentrations in the
portfolio; and the perceived effectiveness of managerial resources and lending
practices and policies. These two allowance calculations are added together to
determine the general loan loss allocation. The allowance levels computed from
the specific and general loan loss allocation methods are combined to derive the
necessary allowance for loan loss to be reflected on the Consolidated Statement
of Condition.

The loan loss provision is calculated by subtracting the previous period
allowance for loan loss, net of the interim period net charge-offs, from the
current required allowance level. This provision is then recorded as an expense
in the income statement for that period.

Members of senior management and the loan committee of the Board of Directors
review the adequacy of the allowance for loan loss quarterly. Management is
committed to continually improving the credit assessment and risk management
capabilities of the Company and will dedicate the resources necessary to ensure
advancement in this critical area of operations.

The allowance for loan loss was increased to $31.8 million at year-end 2004 from
$29.1 million at the end of 2003. The $2.7 million increase was primarily due to
$230 million more in loans outstanding, offset by an overall improvement in the
Company's asset quality profile. The ratio of the allowance for loan loss to
total loans decreased to 1.35% for year-end 2004 versus 1.37% at the end of last
year. Management believes the year-end 2004 allowance for loan losses to be
adequate in light of the probable losses inherent in the Company's loan
portfolio.

The loan loss provision decreased by $2.4 million or 22% in 2004 as a result of
management's assessment of the probable losses in the loan portfolio, and the
reduced level of charge-offs in 2004, as discussed above. The loan loss
provision as a percentage of average loans decreased from 0.59% in 2003 to 0.39%
this year in most part due to the provision last year being elevated to cover
higher risk levels in the business loan segment of the portfolio. The loan loss
provision covered net charge-offs by 104% this year versus 109% in 2003,
reflective of the improvements in asset quality trends during the year.

The net charge-off ratio in 2004 was more consistent with the ratios of the 1999
to 2001 period, as shown in Table 11 above. As previously noted, there was a
strong correlation between the increased level of net charge-offs in 2002 and
2003 and the performance of the overall economy. The Company's net charge-off
ratio was also above 50 basis points during the 1990 to 1992 period, when the
ratio fluctuated between 51 and 59 basis points. Not surprisingly, similar to
the period from mid-2001 through late 2003, that time frame included a recession
and the first stage of an economic recovery. The net charge-off ratio dropped
significantly in the years immediately following that period. In 2004, the
Company realized the benefits of one of management's primary goals, which was to
steadily bring the net charge-off ratio back to a range that was consistent with
historical performance.


                                       27
<PAGE>

The following table shows management's allocation of the allowance for loan
losses by loan type as of December 31:

                Table 12: Allowance for Loan Losses by Loan Type

<TABLE>
<CAPTION>
                            2004                 2003                 2002                 2001                 2000
                      -----------------    -----------------    -----------------    -----------------    -----------------
                                   Loan                 Loan                 Loan                 Loan                 Loan
(000's omitted)       Allowance    Mix     Allowance    Mix     Allowance    Mix     Allowance    Mix     Allowance    Mix
--------------------  -----------------    -----------------    -----------------    -----------------    -----------------
<S>                    <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>       <C>        <C>
Consumer mortgage      $ 1,810     34.0%    $ 1,724     34.7%    $   479     28.2%    $   406     25.6%    $ 1,483     27.5%
Business lending        16,439     35.2%     15,549     32.4%     16,765     34.9%     14,417     37.2%      7,386     38.0%
Consumer direct and
  indirect              11,487     30.8%     11,112     32.9%      8,978     36.9%      8,970     37.2%      8,314     34.5%
Unallocated              2,042                  710                  109                  108                2,852
--------------------   ----------------     ----------------     ----------------     ----------------     ----------------
Total                  $31,778    100.0%    $29,095    100.0%    $26,331    100.0%    $23,901    100.0%    $20,035    100.0%
====================   ================     ================     ================     ================     ================
</TABLE>

As demonstrated in Table 12 above and discussed previously, the risk inherit in
the consumer mortgage portfolio is much lower than that of the other segments of
the loan portfolio. The risk differential is illustrated by the average net
charge-off ratio of 0.04% over the last three years for consumer mortgages
compared to the 0.68% average for the rest of the portfolio over the same time
frame. This is manifested in the comparatively small $1.8 million allowance
attributable to consumer mortgages, representing only 0.2% of the their ending
balance versus 1.8% for the remaining portion of the loan portfolio. The
increase in the unallocated portion of the allowance for loan losses over 2003
related principally to the portfolio and reserves acquired as part of the First
Heritage acquisition. As that acquired portfolio is further subjected to the
Company's established risk rating and review procedures, it is expected that
some portion of the unallocated reserve will be allocated to the specific
product categories.

Funding Sources

The Company utilizes a variety of funding sources to support the earning asset
base as well as to achieve targeted growth objectives. Overall funding is
comprised of three primary sources that possess a variety of maturity,
stability, and price characteristics: deposits of individuals, partnerships and
corporations (IPC deposits); collateralized municipal deposits (public funds);
and external borrowings.

The average daily amount of deposits and the average rate paid on each of the
following deposit categories are summarized below for the years indicated:

                           Table 13: Average Deposits

<TABLE>
<CAPTION>
                                                    2004                           2003                          2002
                                         ---------------------------   ----------------------------   ----------------------------
                                          Average           Average      Average           Average      Average           Average
(000's omitted, except rates)             Balance          Rate Paid     Balance          Rate Paid     Balance          Rate Paid
-----------------------------------      ---------------------------   ----------------------------   ----------------------------
<S>                                      <C>                 <C>        <C>                 <C>        <C>                 <C>
Noninterest-bearing demand deposits      $  558,552          0.00%      $  473,568          0.00%      $  441,800          0.00%
Interest-bearing demand deposits            300,377          0.24%         274,688          0.24%         262,313          0.47%
Regular savings deposits                    521,582          0.66%         430,263          0.80%         402,728          1.32%
Money market deposits                       306,112          0.72%         295,287          0.89%         304,623          1.60%
Time deposits                             1,188,625          2.37%       1,090,511          2.89%       1,131,296          3.75%
-----------------------------------      ----------                     ----------                     ----------
  Total deposits                         $2,875,248          1.20%      $2,564,317          1.49%      $2,542,760          2.12%
===================================      ==========                     ==========                     ==========
</TABLE>

As displayed in Table 13 above, total average deposits for 2004 equaled $2.875
billion, up $311 million or 12.1% from the prior year. This increase was
principally the result of deposits obtained through the First Heritage
acquisition in 2004 and the Grange and Peoples acquisitions in late 2003. The
Dansville branch acquisition did not have a significant impact on full-year
average deposit levels because it was completed late in the year. Average
deposits in 2003 were up $22 million or 0.8% from 2002. The acquisitions of
Peoples and Grange did not have a significant impact on full-year average
deposit levels because they were completed relatively late in the year.

The Company's funding composition continues to benefit from a high level of IPC
deposits, which reached an all-time high in 2004 with an average balance of
$2.692 billion, an increase of $295 million or 12.3% over the comparable 2003
period. This was largely due to the $210 million and $219 million in IPC
deposits added in conjunction with the acquisition of First Heritage in May 2004
and Grange in late 2003, respectively. IPC deposits are frequently considered to
be a bank's most attractive source of funding because they are generally stable,
do not need to be collateralized, have a relatively low cost, and provide a
strong customer base for which a variety of loan, deposit and other financial
service-related products can be sold.

Full-year average deposits of local municipalities increased $16 million or 9.5%
during 2004, $7.3 million as a result of the Grange, First Heritage and
Dansville acquisitions. The Company is required to collateralize all local
government deposits


                                       28
<PAGE>

with marketable securities from its investment portfolio. Because of this
stipulation, management considers this source of funding to be equivalent to
external borrowings. As such, the Company generally prices these deposits
consistent with alternative external borrowing rates.

The mix of average deposits in 2004 changed slightly in comparison to 2003. The
weightings of demand deposit and savings account balances all increased from
their 2003 levels, while interest checking, money market and time deposit
weightings decreased. This change in mix largely reflects less willingness by
certain customers to being locked into lower CD rates and accounts with higher
minimum balance requirements (interest checking and money market) given the
market-driven contraction of interest rate spreads between these accounts and
the ones with less restrictions on withdrawels, such as demand deposits and
savings. This shift in the deposit mix resulted in a greater drop in the overall
cost of funds on deposits than would have been achieved through the reduction of
interest rates alone. As a result of market interest rates remaining at
historically low levels for an extended period of time, spreads between these
groups of accounts have stabilized and customers appear to be more willing to
hold term deposits given the lack of viable alternatives with similar
risk/return characteristics. This factor combined with the Company's ongoing
commitment to continually expand its advantageous IPC deposit base to fund
earning-asset growth, prompted the development of a new money market product in
the fourth quarter of 2004 that has been an effective tool for attracting new
customer funds.

The remaining maturities of time deposits in amounts of $100,000 or more
outstanding as of December 31 are as follows:

                  Table 14: Time Deposit > $100,000 Maturities

            (000's omitted)                     2004          2003
            --------------------------------------------------------
            Less than three months            $ 69,239      $ 60,504
            Three months to six months          32,163        24,351
            Six months to one year              41,768        48,306
            Over one year                       36,364        35,080
            --------------------------------------------------------
              Total                           $179,534      $168,241
            ========================================================

External borrowings are defined as funding sources available on a national
market basis, generally requiring some form of collateralization. Borrowing
sources for the Company include the Federal Home Loan Bank of New York and
Federal Reserve Bank of New York, as well as access to the national repurchase
agreement market through established relationships with primary market security
dealers. The Company also had approximately $80 million in fixed and
floating-rate subordinated debt outstanding at the end of 2004 that is held by
unconsolidated subsidiary trusts. External borrowings averaged $824 million or
22% of total funding sources for all of 2004 as compared to $508 million or 17%
of total funding sources for 2003. As shown in Table 15 below, at year-end 2004,
$649 million or 71% of external borrowings had remaining terms of one year or
less, up considerably from $397 million and 60% at the end of 2003. This change
in external funding mix is due to an increase in short and medium term
borrowings to take advantage of historically low short term rates, as well as,
to reduce the Company's sensitivity to falling interest rates and to provide
more flexibility with regard to altering future debt levels.

During fourth quarter 2003, $25 million in longer-term Federal Home Loan Bank
borrowings were retired early and replaced with significantly lower rate,
short-term debt, resulting in an earnings charge of $2.6 million. This strategy
was implemented because the projected cost of the replacement debt, including
prepayment charges, was favorable on a long-term, economic basis in comparison
to holding the existing borrowings.

As displayed in Table 3 on page 16, the overall mix of funding has shifted in
2004. The percentage of funding derived from deposits decreased to 78% in 2004
from 83% in 2003 and 2002. Short and medium term FHLB borrowings increased
during the year principally to fund security purchases. These borrowings carry
relatively short maturities and help provide funding cost stability for a period
of time that is complementary to our asset/liability profile.


                                       29
<PAGE>

The following table summarizes the outstanding balance of short-term borrowings
of the Company as of December 31:

                         Table 15: Short-term Borrowings

<TABLE>
<CAPTION>
            (000's omitted, except rates)              2004         2003         2002
            ---------------------------------------------------------------------------
<S>                                                  <C>          <C>          <C>
            Federal funds purchased                  $ 13,200     $ 36,300     $ 33,000
            Term borrowings at banks
                 90 days or less                      465,000      361,000      215,000
                 Over 90 days                         171,000            0            0
            Commercial loans sold with recourse            74            0            0
            Capital lease obligations                       0           96          241
            ---------------------------------------------------------------------------
                      Balance at end of period       $649,274     $397,396     $248,241
            ===========================================================================

            Daily average during the year            $442,287     $212,512     $141,024
            Maximum month-end balance                $649,274     $397,396     $248,241
            Weighted average rate during the year        1.64%        1.26%        1.83%
            Year-end average rate                        2.51%        1.28%        1.50%
</TABLE>

The following table shows the maturities of various contractual obligations as
of December 31, 2004:

                 Table 16: Maturities of Contractual Obligations

<TABLE>
<CAPTION>
                                                                              Maturing      Maturing
                                                                Maturing      After One   After Three
                                                                 Within       Year but     Years but      Maturing
                                                                One Year       Within        Within        After
(000's omitted)                                                 or Less      Three Years   Five Years    Five Years      Total
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>           <C>           <C>           <C>           <C>
Federal funds purchased                                         $ 13,200      $      0      $      0      $      0      $ 13,200

Federal Home Loan Bank advances                                  636,000            --        15,000       175,000       826,000

Subordinated debt held by unconsolidated subsidiary trusts                                                  80,446        80,446

Commercial loans sold with recourse                                   74           236            --           555           865
Operating leases                                                   2,204         3,810         2,282         4,374        12,670
--------------------------------------------------------------------------------------------------------------------------------
     Total                                                      $651,478      $  4,046      $ 17,282      $260,375      $933,181
================================================================================================================================
</TABLE>

Financial Instruments with Off-Balance Sheet Risk

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 standby letters of credit. Commitments to extend credit are agreements to
lend to customers, generally having fixed expiration dates or other termination
clauses that may require payment of a fee. These commitments consist principally
of unused commercial and consumer credit lines. Standby letters of credit
generally are contingent upon the failure of the customer to perform according
to the terms of an underlying contract with a third party. The credit risks
associated with commitments to extend credit and standby letters of credit are
essentially the same as that involved with extending loans to customers and are
subject to normal credit policies. Collateral may be obtained based on
management's assessment of the customer's creditworthiness. The fair value of
these commitments is immaterial for disclosure in accordance with FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others".

The contract amount of these off-balance sheet financial instruments as of
December 31 is as follows:

                Table 17: Off-Balance Sheet Financial Instruments

            (000's omitted)                     2004          2003
            --------------------------------------------------------
            Commitments to extend credit      $429,751      $315,898
            Standby letters of credit           22,948        19,163
            --------------------------------------------------------
                 Total                        $452,699      $335,061
            ========================================================


                                       30
<PAGE>

Investments

The objective of the Company's investment portfolio is to hold low-risk,
high-quality earning assets that provide favorable returns and are another
effective tool to actively manage its asset/liability position to maximize
future net interest income operation. This must be accomplished within the
following constraints: (a) implementing certain interest rate risk management
strategies which achieve a relatively stable level of net interest income; (b)
providing both the regulatory and operational liquidity necessary to conduct
day-to-day business activities; (c) considering investment risk-weights as
determined by the regulatory risk-based capital guidelines; and (d) generating a
favorable return without undue compromise of the other requirements.

As displayed in Table 18 below, the book value of the Company's investment
portfolio increased $258 million or 20% during the year to $1.529 billion as a
result of the First Heritage acquisition and the leveraging strategy that began
in the third quarter of 2003 and ended during the second quarter of 2004.
Average investment balances (book value basis) for 2004 were up $268 million or
23% versus the prior year.

Investment interest income in 2004 was $10 million or 14.9% higher than the
prior year as a result of the increased average balances in the portfolio,
offset by the decrease in the average investment yield from 6.53% to 6.18%. The
decline in the yield was primarily due to the maturity of securities from the
portfolio that had been issued in the higher interest rate environments of
previous periods and were replaced with investments that carry comparatively
lower yields. This was expected given the fact that longer-term market interest
rates, despite modest increases in the third quarter of 2003 and all of 2004,
were still at historically low levels. However, the impact of lower investment
yields was mostly offset by the funding of the purchases with very low rate
medium and short-term borrowings, resulting in similar net spreads.

In order to protect the Company against its exposure to falling interest rates,
the vast majority of the investment purchases in 2003 and 2004 were in
intermediate-term US Agency securities with average call protection in excess of
six years. Investments sales, excluding Federal Home Loan Bank, in the current
year totaled $18 million and were all related to securities inherited from
acquired companies, and resulted in an immaterial amount of net gains. The sales
were based on the Company's total return strategy (see below) or to remove
securities that no longer adhere to investment policy guidelines. Those proceeds
that were reinvested resulted in an improved interest rate risk position. As of
December 31, 2004 the investment portfolio had a weighted average life of 5.9
years as compared to 6.6 as of December 31, 2003.

The investment portfolio has limited credit risk due to the composition
continuing to heavily favor U.S. Agency debentures, U.S. Agency mortgage-backed
pass-throughs, U.S. Agency CMOs and municipal bonds insured by third parties. As
of year-end 2004, these four AAA-rated (highest possible rating) security types
accounted for 97% of the portfolio's total book value, excluding Federal Home
Loan Bank stock and Federal Reserve Bank stock, or 52%, 3%, 5% and 37%
respectively. These four security types comprised 98% of total investments as of
December 31, 2003 at 48%, 6%, 7% and 37%, respectively. The change in the
investment mix reflects management's strategy over the last several years of
primarily purchasing medium-term, call-protected US Agency and municipal bonds
that offer both attractive yields and are free from short-term reinvestment
risk. MBS and CMO securities typically possess a high level of this latter risk,
particularly in periods with high levels of mortgage refinancing such as have
existed over the last few years in the extremely low interest rate environment.
As a consequence, the Company has avoided investing in these types of securities
during this period, and this fact combined with high run-off rates explains the
significant drop in their weighting in the total investment portfolio.

The Company has utilized total return as its primary methodology for managing
investment portfolio assets. Under this analytical method, shareholder value is
maximized through both interest income and market value appreciation. The
commitment to this approach is reflected in the fact that no security sales were
conducted in 2004 outside of minor transactions associated with the investments
of acquired banks, despite the significant level of market gains in the
portfolio (see MVA discussion in the following paragraph). Management chose not
to take gains in the current year to increase short-term earnings at the expense
of profitability in future periods.

Ninety one percent of the investment portfolio was classified as
available-for-sale at year-end 2004 versus eighty nine percent at the end of
2003. The net pre-tax market value gain over book value for the
available-for-sale portfolio as of December 31, 2004 was $55.8 million, $3.1
million lower than it was one year earlier.


                                       31
<PAGE>

The following table sets forth the amortized cost and market value for the
Company's investment securities portfolio:

                         Table 18: Investment Securities

<TABLE>
<CAPTION>
                                                        2004                           2003                         2002
                                              -------------------------     -------------------------     -------------------------
                                              Amortized                     Amortized                     Amortized
                                              Cost/Book        Fair         Cost/Book        Fair         Cost/Book        Fair
(000's omitted)                                 Value          Value          Value          Value          Value          Value
-----------------------------------------     -------------------------     -------------------------     -------------------------
<S>                                           <C>            <C>            <C>            <C>            <C>            <C>
Held-to-Maturity Portfolio:
  U.S. treasury and agency securities         $  127,490     $  125,906     $  127,635     $  125,003     $        0     $        0
  Obligations of state and political
    subdivisions                                   6,576          6,694          7,459          7,677          7,412          7,666
  Other securities                                 3,578          3,578          3,558          3,558          3,018          3,018
-----------------------------------------     -------------------------     -------------------------     -------------------------
    Total held-to-maturity portfolio             137,644        136,178        138,652        136,238         10,430         10,684
-----------------------------------------     -------------------------     -------------------------     -------------------------

Available-for-Sale Portfolio:
  U.S. treasury and agency securities            630,058        650,767        456,913        479,454        380,243        411,278
  Obligations of state and political
    subdivisions                                 545,698        573,551        443,930        470,210        404,864        420,605
  Corporate securities                            40,443         43,898         27,712         30,251         27,972         30,225
  Collateralized mortgage obligations             70,986         72,444         89,566         93,552        235,286        245,368
  Mortgage-backed securities                      50,347         52,664         76,628         80,177        131,755        137,211
-----------------------------------------     -------------------------     -------------------------     -------------------------
    Sub-total                                  1,337,532      1,393,324      1,094,749      1,153,644      1,180,120      1,244,687
  Equity securities (1)                           43,515         43,515         29,185         29,185         25,814         25,814
  Federal Reserve Bank common stock                9,856          9,856          8,053          8,053          5,652          5,652
-----------------------------------------     -------------------------     -------------------------     -------------------------
    Total available-for-sale portfolio         1,390,903      1,446,695      1,131,987      1,190,882      1,211,586      1,276,153
Net unrealized gain on available-for-sale
  portfolio                                       55,792              0         58,895              0         64,567              0
-----------------------------------------     -------------------------     -------------------------     -------------------------
     Total                                    $1,584,339     $1,582,873     $1,329,534     $1,327,120     $1,286,583     $1,286,837
=========================================     =========================     =========================     =========================
</TABLE>

(1)   Includes $42,480, $28,365 and $24,575 of FHLB common stock at December 31,
      2004, 2003, and 2002, respectively.


                                       32
<PAGE>

The following table sets forth as of December 31, 2004, the maturities of
investment securities and the weighted-average yields of such securities, which
have been calculated on the cost basis, weighted for scheduled maturity of each
security, and adjusted to a fully tax-equivalent basis:

                  Table 19: Maturities of Investment Securities

<TABLE>
<CAPTION>
                                                                       Maturing        Maturing
                                                       Maturing       After One       After Five                        Total
                                                        Within         Year but       Years but        Maturing        Amortized
                                                       One Year         Within          Within          After          Cost/Book
(000's omitted, except rates)                          or Less        Five Years      Ten Years       Ten Years          Value
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>             <C>             <C>             <C>             <C>
Held-to-Maturity Portfolio:
  U.S. treasury and agency securities                 $        0      $        0      $   99,344      $   28,146      $  127,490
  Obligations of state and political subdivisions          4,387           1,959             230               0           6,576
  Other securities                                             0               0              22           3,556           3,578
--------------------------------------------------------------------------------------------------------------------------------
     Total held-to-maturity portfolio                 $    4,387      $    1,959      $   99,596      $   31,702      $  137,644
================================================================================================================================

Weighted Average Yield for Year (1)                         3.89%           6.30%           4.71%           5.46%           4.88%

Available-for-Sale Portfolio:
  U.S. treasury and agency securities                 $        0      $   20,000      $  458,221      $  151,837      $  630,058
  Obligations of state and political subdivisions          5,263          35,927         228,903         275,605         545,698
  Corporate securities                                         0               0          25,044          15,399          40,443
  Collateralized mortgage obligations                          0           1,090          17,297          52,599          70,986
  Mortgage-backed securities                                   0           2,832           1,280          46,235          50,347
--------------------------------------------------------------------------------------------------------------------------------
    Total available-for-sale portfolio                $    5,263      $   59,849      $  730,745      $  541,675      $1,337,532
================================================================================================================================

Weighted Average Yield for Year (1)                         8.06%           5.82%           5.58%           6.47%           5.96%
</TABLE>

(1)   Weighted average yields on the tax-exempt obligations have been computed
      on a fully tax equivalent basis assuming a marginal federal tax rate of
      35.0%. These yields are an arithmetic computation of accrued income
      divided by average balance; they may differ from the yield to maturity,
      which considers the time value of money.

Impact of Inflation and Changing Prices

The Company's financial statements have been prepared in terms of historical
dollars, without considering changes in the relative purchasing power of money
over time due to inflation. Unlike most industrial companies, virtually all of
the assets and liabilities of a financial institution are monetary in nature. As
a result, interest rates have a more significant impact on a financial
institution's performance than the effect of general levels of inflation.
Interest rates do not necessarily move in the same direction or in the same
magnitude as the prices of goods and services. Notwithstanding this, inflation
can directly affect the value of loan collateral, in particular real estate.

New Accounting Pronouncements

See Accounting Pronouncement Section of Note A of the notes to the consolidated
financial statements on page 48 for additional accounting pronouncements.

Forward-Looking Statements

This document contains comments or information that constitute forward-looking
statements (within the meaning of the Private Securities Litigation Reform Act
of 1995), which involve significant risks and uncertainties. Actual results may
differ materially from the results discussed in the forward-looking statements.
Moreover, the Company's plans, objectives and intentions are subject to change
based on various factors (some of which are beyond the Company's control).
Factors that could cause actual results to differ from those discussed in the
forward-looking statements include: (1) risks related to credit quality,
interest rate sensitivity and liquidity; (2) the strength of the U.S. economy in
general and the strength of the local economies where the Company conducts its
business; (3) the effect of, and changes in, monetary and fiscal policies and
laws, including interest rate policies of the Board of Governors of the Federal
Reserve System; (4) inflation, interest rate, market and monetary fluctuations;
(5) the timely development of new products and services and customer perception
of the overall value thereof (including features, pricing and quality) compared
to competing products and services; (6) changes in consumer spending, borrowing
and savings habits; (7) technological changes; (8) any acquisitions or mergers
that might be considered or consumated by the Company and the costs and factors
associated therewith; (9) the ability to


                                       33
<PAGE>

maintain and increase market share and control expenses; (10) the effect of
changes in laws and regulations (including laws and regulations concerning
taxes, banking, securities and insurance) and accounting principles generally
accepted in the United States; (11) changes in the Company's organization,
compensation and benefit plans and in the availability of, and compensation
levels for, employees in its geographic markets; (12) the costs and effects of
litigation and of any adverse outcome in such litigation; (13) other risk
factors outlined in the Company's filings with the Securities and Exchange
Commission from time to time; and (14) the success of the Company at managing
the risks of the foregoing.

The foregoing list of important factors is not exclusive. Such forward-looking
statements speak only as of the date on which they are made and the Company does
not undertake any obligation to update any forward-looking statement, whether
written or oral, to reflect events or circumstances after the date on which such
statement is made. If the Company does update or correct one or more
forward-looking statements, investors and others should not conclude that the
Company will make additional updates or corrections with respect thereto or with
respect to other forward-looking statements.


                                       34
<PAGE>

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Market Risk

Market risk is the risk of loss in a financial instrument arising from adverse
changes in market rates, prices or credit risk. Credit risk associated with the
Company's loan portfolio has been previously discussed in the asset quality
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations. Although more than a third of the securities portfolio at
year-end 2004 was invested in municipal bonds, management believes that the tax
risk of the Company's municipal investments associated with potential future
changes in statutory, judicial and regulatory actions is minimal. The Company
also believes that it has an insignificant amount of credit risk in its
investment portfolio because essentially all of the fixed-income securities in
the portfolio are AAA-rated (highest possible rating). The Company does not have
any material foreign currency exchange rate risk exposure. Therefore, almost all
the market risk in the investment portfolio is related to interest rates.

The ongoing monitoring and management of both interest rate risk and liquidity,
in the short and long term time horizons is an important component of the
Company's asset/liability management process, which is governed by limits
established in the policies reviewed and approved annually by the Board of
Directors. The Board of Directors delegates responsibility for carrying out the
policies to the Asset/Liability Committee (ALCO), which meets each month. The
committee is made up of the Company's senior management as well as regional and
line-of-business managers who oversee specific earning asset classes and various
funding sources.

Asset/Liability Management

The primary objective of the Company's asset/liability management process is to
maximize earnings and return on capital within acceptable levels of risk. As the
Company does not believe it is possible to reliably predict future interest rate
movements, it has maintained an appropriate process and set of measurement tools
that enable it to identify and quantify sources of interest rate risk in varying
rate environments. The primary tools used by the Company in managing interest
rate risk are the income simulation model and economic value of equity modeling.

Interest Rate Risk

Interest rate risk (IRR) can result from the timing differences in the
maturity/repricing of an institution's assets, liabilities, and off-balance
sheet contracts; the effect of embedded options, such as loan prepayments,
interest rate caps, and deposit withdrawals; and differences in the behavior of
lending and funding rates, sometimes referred to as basis risk; an example of
basis risk would occur if floating rate assets and liabilities, with otherwise
identical repricing characteristics, were based on market indexes that were
imperfectly correlated.

Given the potential types and differing related characteristics of IRR, it is
important that the Company maintain an appropriate process and set of
measurement tools that enable it to identify and quantify its primary sources of
IRR. The Company also recognizes that effective management of IRR includes an
understanding of when potential adverse changes in interest rates will flow
through the income statement. Accordingly, the Company will manage its position
so that it monitors its exposure to net interest income over both a one year
planning horizon and a longer-term strategic horizon.

It is the Company's objective to manage its exposure to interest rate risk,
bearing in mind that it will always be in the business of taking on rate risk
and that rate risk immunization is not possible. Also, it is recognized that as
exposure to interest rate risk is reduced, so too may net interest margin be
reduced.

Income Simulation

Income simulation is tested on a wide variety of balance sheet and treasury
yield curve scenarios. The simulation projects changes in net interest income
caused by the effect of changes in interest rates. The model requires management
to make assumptions about how the balance sheet is likely to evolve through time
in different interest rate environments. Loan and deposit growth rate
assumptions are derived from management's outlook, as are the assumptions used
for new loan yields and deposit rates. Loan prepayment speeds are based on a
combination of current industry averages and internal historical prepayments.
Balance sheet and yield curve assumptions are analyzed and reviewed by the ALCO
Committee regularly.


                                       35
<PAGE>

The following table reflects the Company's one-year net interest income
sensitivity, using December 31, 2004 asset and liability levels as a starting
point.

The prime rate and federal funds rates are assumed to move up 300 basis points
and down 100 basis points over a 12-month period while flattening the long end
of the treasury curve to spreads over federal funds that are more consistent
with historical norms. Deposit rates are assumed to move in a manner that
reflects the historical relationship between deposit rate movement and changes
in the federal funds rate, generally reflecting 10%-65% of the movement of the
federal funds rate.

Cash flows are based on contractual maturity, optionality and amortization
schedules along with applicable prepayments derived from internal historical
data and external sources.

                      Net Interest Income Sensitivity Model

                                   Calculated increase (decrease) in Projected
                                        Net Interest Income at December 31
                                   -------------------------------------------
       Changes in Interest Rates              2004               2003
       -----------------------------------------------------------------------
          + 200 basis points              ($4,300,000)       ($3,900,000)
           -100 basis points              ($1,200,000)       ($2,100,000)

In the 2004 model, both the rising and falling rate environments reflect a
reduction in net interest income (NII) from a flat rate environment due to the
assumed flattening of the yield curve. The modeled NII in a falling rate
environment is initially more favorable than if rates were to rise due to a
faster initial reaction from core deposit pricing and short-term capital market
borrowing rates. Over a longer time period, however, the growth in NII improves
significantly in a rising rate environment as a result of lower yielding earning
assets running off and being replaced at increased rates.

The analysis does not represent a Company forecast and should not be relied upon
as being indicative of expected operating results. These hypothetical estimates
are based upon numerous assumptions: the nature and timing of interest rate
levels (including yield curve shape), prepayments on loans and securities,
deposit decay rates, pricing decisions on loans and deposits,
reinvestment/replacement of asset and liability cash flows, and other factors.
While the assumptions are developed based upon current economic and local market
conditions, the Company cannot make any assurances as to the predictive nature
of these assumptions, including how customer preferences or competitor
influences might change. Furthermore, the sensitivity analysis does not reflect
actions that ALCO might take in responding to or anticipating changes in
interest rates.

Management uses a "value of equity" model to supplement the modeling technique
described above. Those supplemental analyses are based on discounted cash flows
associated with on- and off-balance sheet financial instruments. Such analyses
are modeled to reflect changes in interest rates and shifts in the maturity
curve of interest rates and provide management with a long-term interest rate
risk metric.


                                       36
<PAGE>

Item 8. Financial Statements and Supplementary Data

The following consolidated financial statements and independent auditor's
reports of Community Bank System, Inc. are contained on pages 38 through 66 of
this item.

o     Consolidated Statements of Condition, December 31, 2004 and 2003

o     Consolidated Statements of Income, Years ended December 31, 2004, 2003,
      and 2002

o     Consolidated Statements of Changes in Shareholders' Equity, Years ended
      December 31, 2004, 2003, and 2002

o     Consolidated Statements of Comprehensive Income, Years ended December 31,
      2004, 2003, and 2002

o     Consolidated Statements of Cash Flows, Years ended December 31, 2004,
      2003, and 2002

o     Notes to Consolidated Financial Statements, December 31, 2004

o     Management's Report on Internal Control over Financial Reporting

o     Report of Independent Registered Public Accounting Firm

Quarterly Selected Data (Unaudited) for 2004 and 2003 are contained on page 67.


                                       37
<PAGE>

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CONDITION
(In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                                                                         December 31,     December 31,
                                                                                                 2004             2003
----------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>              <C>
Cash and due from banks                                                                   $   118,345      $   103,923

Available-for-sale investment securities                                                    1,446,695        1,190,882
Held-to-maturity investment securities                                                        137,644          138,652
----------------------------------------------------------------------------------------------------------------------
  Total investment securities (fair value of $1,582,873 and $1,327,120, respectively)       1,584,339        1,329,534

Loans                                                                                       2,358,493        2,128,509
Allowance for loan losses                                                                      31,778           29,095
----------------------------------------------------------------------------------------------------------------------
  Net loans                                                                                 2,326,715        2,099,414

Core deposit intangibles, net                                                                  35,351           33,998
Goodwill                                                                                      195,163          159,596
Other intangibles, net                                                                          1,986            2,517
----------------------------------------------------------------------------------------------------------------------
  Intangible assets, net                                                                      232,500          196,111

Premises and equipment, net                                                                    63,510           61,705
Accrued interest receivable                                                                    27,947           25,851
Other assets                                                                                   40,475           38,859
----------------------------------------------------------------------------------------------------------------------
     Total assets                                                                         $ 4,393,831      $ 3,855,397
======================================================================================================================

Liabilities:
   Non-interest bearing deposits                                                          $   567,106      $   498,195
   Interest bearing deposits                                                                2,361,872        2,227,293
----------------------------------------------------------------------------------------------------------------------
      Total deposits                                                                        2,928,978        2,725,488
  Federal funds purchased                                                                      13,200           36,300
  Borrowings                                                                                  826,865          551,096
  Subordinated debt held by unconsolidated subsidiary trusts                                   80,446           80,390
  Accrued interest and other liabilities                                                       69,714           57,295
----------------------------------------------------------------------------------------------------------------------
     Total liabilities                                                                      3,919,203        3,450,569
----------------------------------------------------------------------------------------------------------------------

Commitments and contingencies (See Note N)

Shareholders' equity:
  Preferred stock $1.00 par value, 500,000 shares authorized, 0 shares issued
  Common stock, $1.00 par value, 50,000,000 shares authorized;
     32,041,591 and 28,746,612 shares issued in 2004 and 2003, respectively                    32,042           28,747
  Additional paid-in capital                                                                  190,769          130,066
  Retained earnings                                                                           248,295          218,628
  Accumulated other comprehensive income                                                       34,200           35,958
  Treasury stock, at cost (1,400,000 and 416,300 shares, respectively)                        (30,199)          (8,490)
  Employee stock plan - unearned                                                                 (479)             (81)
----------------------------------------------------------------------------------------------------------------------
     Total shareholders' equity                                                               474,628          404,828
----------------------------------------------------------------------------------------------------------------------
     Total liabilities and shareholders' equity                                           $ 4,393,831      $ 3,855,397
======================================================================================================================
</TABLE>

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


                                       38
<PAGE>

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per-Share Data)

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                            ------------------------------------
                                                                               2004         2003          2002
----------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>          <C>           <C>
Interest income:
  Interest and fees on loans                                                $ 137,077    $ 125,256     $ 130,860
  Interest and dividends on taxable investments                                52,744       47,047        57,133
  Interest and dividends on non-taxable investments                            22,974       18,826        17,100
----------------------------------------------------------------------------------------------------------------
     Total interest income                                                    212,795      191,129       205,093
----------------------------------------------------------------------------------------------------------------

Interest expense:
  Interest on deposits                                                         34,587       38,288        53,878
  Interest on short-term borrowings                                             7,242        2,685         2,586
  Interest on subordinated debt held by unconsolidated subsidiary trusts        5,750        5,632         5,985
  Interest on long-term borrowings                                             14,173       12,696        14,794
----------------------------------------------------------------------------------------------------------------
     Total interest expense                                                    61,752       59,301        77,243
----------------------------------------------------------------------------------------------------------------

Net interest income                                                           151,043      131,828       127,850
Less: provision for loan losses                                                 8,750       11,195        12,222
----------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses                           142,293      120,633       115,628
----------------------------------------------------------------------------------------------------------------

Non-interest income:
  Deposit service fees                                                         25,201       23,121        16,480
  Other banking services                                                        2,431        1,906         2,061
  Trust, investment and asset management fees                                   7,443        6,682         8,003
  Benefit plan administration, consulting and actuarial fees                    9,298        6,220         3,845
  Gain (loss) on investment securities & debt extinguishments                      72       (2,698)        1,673
----------------------------------------------------------------------------------------------------------------
Total non-interest income                                                      44,445       35,231        32,062
----------------------------------------------------------------------------------------------------------------

Operating expenses:
  Salaries and employee benefits                                               61,146       53,164        47,864
  Occupancy                                                                    10,177        9,297         8,154
  Equipment and furniture                                                       8,636        7,828         7,538
  Amortization of intangible assets                                             7,414        5,093         5,953
  Legal and professional fees                                                   4,578        3,183         3,272
  Data processing                                                               7,737        6,800         6,574
  Office supplies                                                               2,232        1,996         2,321
  Acquisition expenses                                                          1,704          498           700
  Other                                                                        16,275       14,852        12,910
----------------------------------------------------------------------------------------------------------------
     Total operating expenses                                                 119,899      102,711        95,286
----------------------------------------------------------------------------------------------------------------

Income before income taxes                                                     66,839       53,153        52,404
Income taxes                                                                   16,643       12,773        13,887
----------------------------------------------------------------------------------------------------------------
Net income                                                                  $  50,196    $  40,380     $  38,517
================================================================================================================

Basic earnings per share                                                    $    1.68    $    1.54     $    1.48
Diluted earnings per share                                                  $    1.64    $    1.49     $    1.46
Dividends declared per share                                                $    0.68    $    0.61     $    0.56
</TABLE>

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


                                       39
<PAGE>

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2003 and 2004
(In Thousands, Except Share Data)

<TABLE>
<CAPTION>
                                     Common Stock                                 Accumulated
                                ----------------------   Additional                  Other                     Employee
                                   Shares      Amount     Paid-In     Retained   Comprehensive    Treasury    Stock Plan
                                Outstanding    Issued     Capital     Earnings       Income         Stock      -Unearned    Total
                                ---------------------------------------------------------------------------------------------------
<S>                              <C>           <C>       <C>          <C>            <C>          <C>            <C>       <C>
Balance at December 31,
2001, as previously reported     12,902,812    $12,903    $77,710     $170,472        $7,281            $0       ($386)    $267,980
Two-for-one stock split          12,902,812     12,904    (12,904)                                                                0
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,          25,805,624     25,807     64,806      170,472         7,281             0        (386)     267,980
  2001, as restated
Net income                                                              38,517                                               38,517
Other comprehensive income,
  net of tax                                                                          31,270                                 31,270
Dividends declared:
  Common, $0.56 per share                                              (14,506)                                             (14,506)
Common stock issued under
   employee stock plan,
   including tax benefits
   of $219                          151,484        151      1,273                                                  353        1,777
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002     25,957,108    $25,958    $66,079     $194,483       $38,551            $0        ($33)    $325,038
Net income                                                              40,380                                               40,380
Other comprehensive loss,
  net of tax                                                                          (2,593)                                (2,593)
Dividends declared:
  Common, $0.61 per share                                              (16,235)                                             (16,235)
Common stock issued under
  employee stock plan,
  including tax benefits
  of $1,410                         495,322        495      5,913                                                  (48)       6,360
Stock issued for acquisition      2,294,182      2,294     58,074                                                            60,368
Treasury stock purchased           (416,300)                                                        (8,490)                  (8,490)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31,          28,330,312    $28,747   $130,066     $218,628       $35,958       ($8,490)       ($81)    $404,828
                                                                                                                               2003
Net income                                                              50,196                                               50,196
Other comprehensive loss,
  net of tax                                                                          (1,758)                                (1,758)
Dividends declared:
  Common, $0.68 per share                                              (20,529)                                             (20,529)
Common stock issued under
  employee stock plan,
  including tax benefits
  of $3,165                         702,766        703      8,576                                                 (398)       8,881
Stock and options issued
  for acquisition                 2,592,213      2,592     52,127                                                            54,719
Treasury stock purchased           (983,700)                                                       (21,709)                 (21,709)
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2004     30,641,591    $32,042   $190,769     $248,295       $34,200      ($30,199)      ($479)    $474,628
===================================================================================================================================
</TABLE>

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


                                       40
<PAGE>

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In Thousands)

<TABLE>
<CAPTION>
                                                                                   Years Ended December 31,
                                                                              ----------------------------------
                                                                                2004         2003         2002
----------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>          <C>          <C>
Other comprehensive (loss) income, before tax:
  Change in minimum pension liability adjustment                              $      0     $     92     $  4,919
  Unrealized (losses) gains on securities:
     Unrealized holding (losses) gains arising during period                    (3,031)      (5,727)      49,796
     Reclassification adjustment for (gains) losses included in net income         (72)          54       (2,598)
----------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income, before tax                                   (3,103)      (5,581)      52,117
Income tax benefit (expense) related to other comprehensive (loss) income        1,345        2,988      (20,847)
----------------------------------------------------------------------------------------------------------------
Other comprehensive (loss) income, net of tax                                   (1,758)      (2,593)      31,270
Net income                                                                      50,196       40,380       38,517
----------------------------------------------------------------------------------------------------------------
Comprehensive income                                                          $ 48,438     $ 37,787     $ 69,787
================================================================================================================
</TABLE>

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


                                       41
<PAGE>

COMMUNITY BANK SYSTEM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands of Dollars, except Share Data)

<TABLE>
<CAPTION>
                                                                                                     Years Ended December 31,
                                                                                               -----------------------------------
                                                                                                  2004         2003         2002
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                            <C>          <C>          <C>
Operating activities:
  Net income                                                                                   $  50,196    $  40,380    $  38,517
  Adjustments to reconcile net income to net cash provided by operating activities
     Depreciation                                                                                  8,025        7,139        6,596
     Amortization of intangible assets                                                             7,414        5,093        5,953
     Net amortization of premiums and discounts on securities and loans                            1,392        2,303        3,256
     Amortization of unearned compensation and discount on subordinated debt                         439          172          443
     Provision for loan losses                                                                     8,750       11,195       12,222
     Provision for deferred taxes                                                                  1,286          898        4,458
     (Gain) loss on investment securities and debt extinguishments                                   (72)       2,698       (1,673)
     Loss (gain) on loans and other assets                                                           211          350          (28)
     Proceeds from the sale of loans held for sale                                                     0       67,482        9,103
     Origination of loans held for sale                                                                0      (61,036)     (14,858)
     Change in other operating assets and liabilities                                              7,823       (3,604)     (11,815)
----------------------------------------------------------------------------------------------------------------------------------
       Net cash provided by operating activities                                                  85,464       73,070       52,174
----------------------------------------------------------------------------------------------------------------------------------
Investing activities:
  Proceeds from sales of available-for-sale investment securities                                 51,889       41,227       96,294
  Proceeds from maturities of held-to-maturity investment securities                               4,852        5,229        4,521
  Proceeds from maturities of available-for-sale investment securities                           127,222      242,614      197,928
  Purchases of held-to-maturity investment securities                                             (3,991)    (133,517)      (4,577)
  Purchases of available-for-sale investment securities                                         (395,252)    (141,658)    (383,598)
  Net increase in loans outstanding                                                              (26,278)    (151,520)     (77,906)
  Cash received (paid) for acquisition, net of cash (paid) acquired of ($7,023), $23,986, $0      21,939       (9,630)           0
  Capital expenditures                                                                            (7,377)      (8,322)      (8,831)
----------------------------------------------------------------------------------------------------------------------------------
       Net cash used by investing activities                                                    (226,996)    (155,577)    (176,169)
----------------------------------------------------------------------------------------------------------------------------------
Financing activities:
  Net change in demand deposits, NOW accounts, and savings accounts                               25,068       39,745       25,005
  Net change in time deposits                                                                    (66,203)     (68,220)     (65,619)
  Net change in federal funds purchased                                                          (23,100)       3,300       18,800
  Net change in short-term borrowings                                                             87,328      147,356      202,976
  Change in long-term borrowings (net of payments of $177, $30,000 and $252,000)                 168,865      (30,000)     (37,000)
  Issuance of common stock                                                                         5,344        4,819        1,151
  Purchase of treasury stock                                                                     (21,709)      (8,490)           0
  Cash dividends paid                                                                            (19,543)     (15,466)     (14,228)
  Other financing activities                                                                         (96)        (145)        (113)
----------------------------------------------------------------------------------------------------------------------------------
       Net cash provided by financing activities                                                 155,954       72,899      130,972
----------------------------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents                                                               14,422       (9,608)       6,977
Cash and cash equivalents at beginning of year                                                   103,923      113,531      106,554
----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                                       $ 118,345    $ 103,923    $ 113,531
==================================================================================================================================
Supplemental disclosures of cash flow information:
  Cash paid for interest                                                                       $  59,644    $  60,062    $  79,250
  Cash paid for income taxes                                                                   $   9,422    $  13,095    $   6,429
Supplemental disclosures of non-cash financing and investing activities:
  Dividends declared and unpaid                                                                $   5,515    $   4,529    $   3,760
  Gross change in unrealized gains on available-for-sale investment securities                   ($3,103)     ($5,673)   $  47,198
  Acquisitions:
     Fair value of assets acquired, excluding acquired cash and intangibles                    $ 258,416    $ 260,902    $       0
     Fair value of liabilities assumed                                                         $ 268,611    $ 257,532    $       0
     Common stock and options issued                                                           $  54,719    $  60,368    $       0
</TABLE>

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


                                       42
<PAGE>

COMMUNITY BANK SYSTEM, INC.

NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Community Bank System, Inc. is a single bank holding company which wholly-owns
four consolidated subsidiaries: Community Bank, N.A. (the Bank), Benefit Plans
Administrative Services, Inc. (BPAS), CFSI Closeout Corp. (CFSICC), and First of
Jermyn Realty Co. (FJRC). BPAS owns two subsidiaries, Benefit Plans
Administrative Services LLC and Harbridge Consulting Group LLC. BPAS provides
administration, consulting and actuarial services to sponsors of employee
benefit plans. CFSICC and FJRC are inactive companies.

The Bank operates 125 customer facilities throughout 22 counties of Upstate New
York and five counties of Northeastern Pennsylvania. The Bank owns the following
subsidiaries: Community Investment Services, Inc. (CISI), CBNA Treasury
Management Corporation (TMC), CBNA Preferred Funding Corporation (PFC), Elias
Asset Management, Inc. (EAM) and First Liberty Service Corp. (FLSC). CISI
provides broker-dealer and investment advisory services. TMC operates the cash
management, investment, and treasury functions of the Bank. PFC primarily is an
investor in residential real estate loans. EAM provides asset management
services to individuals, corporate pension and profit sharing plans, and
foundations. FLSC provides banking-related services to the Pennsylvania branches
of the Bank.

The Company wholly-owns three unconsolidated subsidiary business trusts formed
for the purpose of issuing mandatorily redeemable preferred securities which are
considered Tier I capital under regulatory capital adequacy guidelines (see Note
H).

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. All inter-company accounts and transactions have
been eliminated in consolidation. Certain prior period amounts have been
reclassified to conform with the current period presentation.

Critical Accounting 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.
Critical accounting estimates include the allowance for loan losses, actuarial
assumptions associated with the pension, post-retirement and other employee
benefit plans, the provision for income taxes, and the carrying value of
goodwill and other intangible assets.

Risk and Uncertainties

In the normal course of its business, the Company encounters economic and
regulatory risks. There are three main components of economic risk: interest
rate risk, credit risk and market risk. The Company is subject to interest rate
risk to the degree that its interest-bearing liabilities mature or reprice at
different speeds, or on different basis, from its interest-earning assets. The
Company's primary credit risk is the risk of default on the Company's loan
portfolio that results from the borrowers' inability or unwillingness to make
contractually required payments. Market risk reflects potential changes in the
value of collateral underlying loans, the fair value of investment securities,
and loans held for sale.

The Company is subject to regulations of various governmental agencies. These
regulations can and do change significantly from period to period. The Company
also undergoes periodic examinations by the regulatory agencies which may
subject it to further changes with respect to asset valuations, amounts of
required loan loss allowances, and operating restrictions resulting from the
regulators' judgements based on information available to them at the time of
their examinations.

Revenue Recognition

The Company recognizes income on an accrual basis. CISI recognizes fee income
when investment and insurance products are sold to customers. EAM provides asset
management services to brokerage firms and clients and recognizes income ratably
over the contract period during which service is performed. Revenue from BPA's
administration and


                                       43
<PAGE>

recordkeeping services is recognized ratably over the service contract period.
Revenue from consulting and actuarial services is recognized when services are
rendered. All inter-company revenue and expense among related entities are
eliminated in consolidation.

Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, amounts due from banks and highly liquid investments with original
maturities of less than ninety days. The carrying amounts reported in the
balance sheet for cash and cash equivalents approximate those assets' fair
values.

Investment Securities

The Company has classified its investments in debt and equity securities as
held-to-maturity or available-for-sale. 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, which is adjusted for amortization of premiums and
accretion of discounts. Securities not classified as held-to-maturity are
classified as available-for-sale and are reported at fair market value with net
unrealized gains and losses reflected as a separate component of shareholders'
equity, net of applicable income taxes. None of the Company's investment
securities has been classified as trading securities. Equity securities are
stated at cost and include restricted stock of the Federal Reserve Bank of New
York and Federal Home Loan Bank of New York. Investment securities are reviewed
regularly for other than temporary impairment. Where there is other than
temporary impairment, the carrying value of the investment security is reduced
to the estimated fair value, with the impairment loss recognized in the
consolidated statements of income as other expense.

The average cost method is used in determining the realized gains and losses on
sales of investment securities. Premiums and discounts on securities are
amortized and accreted, respectively, on a systematic basis over the period to
maturity, estimated life, or earliest call date of the related security.

Fair values for investment securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.

Loans

Loans are stated at unpaid principal balances, net of unearned income. Mortgage
loans held for sale are carried at the lower of cost or fair value and are
included in loans as the balance of such loans was not significant. Fair values
for variable rate loans that reprice frequently are based on carrying values.
Fair values for fixed rate loans are estimated using discounted cash flows and
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality. The carrying amount of accrued interest approximates
its fair value.

Interest on loans is accrued and credited to operations based upon the principal
amount outstanding. Unearned discount on installment loans is recognized as
income over the term of the loan, principally by the interest method.
Non-refundable loan fees and related direct costs are included in the loan
balances and are deferred and amortized over the life of the loan as an
adjustment to loan yield using the effective interest method. Premiums and
discounts on purchased loans are amortized on an accelerated method over the
life of the loans.

Impaired and Other Nonaccrual Loans

The Company places a loan on nonaccrual status when the loan becomes ninety days
past due (or sooner, if management concludes collection is doubtful), except
when, in the opinion of management, it is well-collateralized and in the process
of collection. A loan may be placed on nonaccrual status earlier than ninety
days past due if there is deterioration in the financial position of the
borrower or if other conditions of the loan so warrant. When a loan is placed on
nonaccrual status, uncollected accrued interest is reversed against interest
income and the deferral and amortization of non-refundable loan fees and related
direct costs is discontinued. Interest income during the period the loan is on
nonaccrual status is recorded on a cash basis after recovery of principal is
reasonably assured. Nonaccrual loans are returned to accrual status when
management determines that the borrower's performance has improved and that both
principal and interest are collectible. This generally requires a sustained
period of timely principal and interest payments.

Commercial loans greater than $500,000 are evaluated individually for impairment
in accordance with FASB No. 114, "Accounting by Creditors for Impairment of a
Loan." 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. The measurement of impaired loans is generally based upon
the present value of expected future cash flows or the fair value of the
collateral, if the loan is collateral-dependent.


                                       44
<PAGE>

The Company's charge-off policy by loan type is as follows:

o     Commercial loans are generally charged-off to the extent outstanding
      principal exceeds the fair value of estimated proceeds from collection
      efforts, including liquidation of collateral. The charge-off is recognized
      when the loss becomes reasonably quantifiable.

o     Consumer installment loans are generally charged-off to the extent
      outstanding principal balance exceeds the fair value of collateral, and
      are recognized by the end of the month in which the loan becomes 120 days
      past due.

o     Loans secured by 1-4 family residential real estate are generally
      charged-off to the extent outstanding principal exceeds the fair value of
      the property, and are recognized when the loan becomes 180 days past due.

Allowance for Loan Losses

Management continually evaluates the credit quality of the Company's loan
portfolio, and performs a formal review of the adequacy of the allowance for
loan losses on a quarterly basis. The allowance reflects management's best
estimate of probable losses inherent in the loan portfolio. Determination of the
allowance is subjective in nature and requires significant estimates. The
Company's allowance methodology consists of two broad components, general and
specific loan loss allocations.

The general loan loss allocation is composed of two calculations that are
computed on four main loan segments: commercial, consumer direct, consumer
indirect and residential real estate. The first calculation determines an
allowance level based on the latest three years of historical net charge-off
data for each loan category (commercial loans exclude balances with specific
loan loss allocations). The second calculation is qualitative and takes into
consideration five major factors affecting the level of loan loss risk:
portfolio risk migration patterns (internal credit quality trends); the growth
of the segments of the loan portfolio; economic and business environment trends
in the Company's markets (includes review of bankruptcy, unemployment,
population, consumer spending and regulatory trends); industry, geographical and
product concentrations in the portfolio; and the perceived effectiveness of
managerial resources and lending practices and policies. These two calculations
are added together to determine the general loan loss allocation. The specific
loan loss allocation relates to individual commercial loans that are both
greater than $0.5 million and in a non-accruing status with respect to interest.
Specific losses are based on discounted estimated cash flows, including any cash
flows resulting from the conversion of collateral.

Loan losses are charged off against the allowance, while recoveries of amounts
previously charged off are credited to the allowance. A provision for loan loss
is charged to operations based on management's periodic evaluation of factors
previously mentioned.

Intangible Assets

Intangible assets include core deposit intangibles, customer relationship
intangibles and goodwill arising from acquisitions. Core deposit intangibles and
customer relationship intangibles are amortized on either an accelerated or
straight-line basis over periods ranging from 7 to 20 years. Goodwill is
evaluated at least annually for impairment. The carrying value of goodwill and
other intangible assets is based upon discounted cash flow modeling techniques
that require management to make estimates regarding the amount and timing of
expected future cash flows. It also requires use of a discount rate that
reflects the current return requirements of the market in relation to present
risk-free interest rates, required equity market premiums, and company-specific
risk indicators.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation.
Computer software costs that are capitalized only include external direct costs
of obtaining and installing the software. The annual provision for depreciation
is computed using the straight-line method over the assets' estimated useful
lives. Maintenance and repairs are charged to expense as incurred.

Long-lived depreciable assets are evaluated periodically for impairment when
events or changes in circumstances indicate the carrying amount may not be
recoverable. Impairment exists when the expected undiscounted future cash flows
of a long-lived asset are less than its carrying value. In that event, the
Company recognizes a loss for the difference between the carrying amount and the
estimated fair value of the asset based on a quoted market price, if applicable,
or a discounted cash flow analysis. Impairment losses are recorded in other
expenses on the income statement.


                                       45
<PAGE>

Other Real Estate

Properties acquired through foreclosure, or by deed in lieu of foreclosure, are
carried at the lower of the unpaid loan balance or fair value less estimated
costs of disposal. Subsequent changes in value are reported as adjustments to
the carrying amount, not to exceed the initial carrying value of the asset at
the time of transfer. Changes in value subsequent to transfer are recorded in
operating expenses on the income statement. Gains or losses not previously
recognized resulting from the sale of other real estate are recognized as an
expense on the date of sale. At December 31, 2004 and 2003, other real estate,
included in other assets, amounted to $1,645,000 and $1,077,000, respectively.

Mortgage Servicing Rights

Originated mortgage servicing rights are recorded at their allocated fair value
at the time of sale of the underlying loan, and are amortized in proportion to
and over the period of estimated net servicing income or loss. 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 includes estimates of the
servicing cost per loan, the discount rate, and prepayment speeds. The carrying
value of the originated mortgage servicing rights is periodically evaluated for
impairment using these same market assumptions.

Deposits

The fair value of deposit obligations are based on current market rates for
alternative funding sources, principally the Federal Home Loan Bank of New York.
The carrying value of accrued interest approximates fair value.

Borrowings

The carrying amounts of federal funds purchased and short-term borrowings
approximate their fair values. Fair values for long-term borrowings are
estimated using discounted cash flows and interest rates currently being offered
on similar borrowings.

Since the Company considers debt extinguishments to be a component of its
interest rate risk management, any related gains or losses are not deemed
extraordinary and are presented in the non-interest income section of the
consolidated statements of income.

Treasury Stock

On June 9, 2003, the Company announced a twelve-month authorization to
repurchase up to 1,400,000 of its outstanding shares in open market or privately
negotiated transactions. As of December 31, 2004, the Company has repurchased
all of the shares at an aggregate cost of $30,199,000 or $21.57 per share. The
repurchases were for general corporate purposes, including those related to
acquisition and stock plan activities.

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 financial
statements. Deferred tax assets and liabilities are reported in the 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.

Retirement Benefits

The Company provides defined benefit pension benefits and post-retirement health
and life insurance benefits to eligible employees. The Company also provides
deferred compensation and supplemental executive retirement plans for selected
current and former employees and officers. Expense under these plans is charged
to current operations and consists of several components of net periodic benefit
cost based on various actuarial assumptions regarding future experience under
the plans, including discount rate, rate of future compensation increases and
expected return on plan assets.

Assets Under Management or Administration

Assets held in fiduciary or agency capacities for customers are not included in
the accompanying consolidated statements of condition as they are not assets of
the Company. Substantially all fees associated with providing asset management
services are recorded on an accrual basis of accounting and are included in
non-interest income. Assets


                                       46
<PAGE>

under management or administration at December 31, 2004 and 2003 were
$2,102,000,000 and $1,807,000,000, respectively.

Earnings Per Share

Basic earnings per share are computed based on the weighted-average common
shares outstanding for the period. Diluted earnings per share are based on the
weighted-average shares outstanding adjusted for the dilutive effect of the
assumed exercise of stock options during the year. The dilutive effect of
options is calculated using the treasury stock method of accounting. The
treasury stock method determines the number of common shares that would be
outstanding if all the dilutive options (average market price is greater than
the exercise price) were exercised and the proceeds were used to repurchase
common shares in the open market at the average market price for the applicable
time period.

At a special meeting of the shareholders held on March 26, 2004, the
shareholders approved an amendment to the certificate of incorporation of the
Company to increase the number of authorized shares of common stock to 50
million. This amendment was effected in connection with the previously announced
two-for-one stock split of the Company's common stock. The stock split was
effected in the form of a 100 percent stock dividend, and was paid on April 12,
2004 to shareholders of record on March 17, 2004. Accordingly, all share, option
and per-share amounts have been adjusted in the consolidated financial
statements to reflect the stock split.

Stock-Based Compensation

The Company accounts for stock-based awards issued to directors, officers and
key employees using the intrinsic value method. This method requires that
compensation expense be recognized to the extent that the fair value of the
underlying stock exceeds the exercise price of the stock award at the grant
date. The Company generally does not recognize compensation expense related to
stock awards because the stock awards generally have fixed terms and exercise
prices that are equal to or greater than the fair value of the Company's common
stock at the grant date.

SFAS 123, "Accounting for Stock-Based Compensation," requires companies that use
the "intrinsic value method" to account for stock compensation plans to provide
pro forma disclosures of the net income and earnings per share effect of stock
options using the "fair value method." Under this method, the fair value of the
option on the date of grant is recognized ratably as compensation expense over
the vesting period of the option.

Management estimated the fair value of options granted using the Black-Scholes
option-pricing model. This model was originally developed to estimate the fair
value of exchange-traded equity options, which (unlike employee stock options)
have no vesting period or transferability restrictions. As a result, the
Black-Scholes model is not necessarily a precise indicator of the value of an
option, but it is commonly used for this purpose. The Black-Scholes model
requires several assumptions, which management developed based on historical
trends and current market observations. These assumptions include:

<TABLE>
<CAPTION>
                                                2004            2003             2002
----------------------------------------------------------------------------------------
<S>                                         <C>             <C>               <C>
Weighted-average expected life (in years)      7.33-7.43       7.55-8.76            6.74
Future dividend yield                               3.00%           3.00%           3.00%
Share price volatility                      26.88%-27.02%   25.59%-27.58%          27.82%
Weighted average risk-free interest rate      4.02%-4.45%     3.82%-4.03%     3.81%-5.16%
========================================================================================
</TABLE>

If these assumptions are not accurate, the estimated fair value used to derive
the information presented in the following table also will be inaccurate.
Moreover, the model assumes that the estimated fair value of an option is
amortized over the option's vesting period and would be included in salaries and
employee benefits on the income statement.


                                       47
<PAGE>

The pro forma impact of applying the fair value method of accounting for the
periods shown below may not be indicative of the pro forma impact in future
years.

<TABLE>
<CAPTION>
(000's omitted except per share amounts)                                             2004        2003        2002
------------------------------------------------------------------------------------------------------------------
<S>                                                                                <C>         <C>         <C>
Net income, as reported                                                            $50,196     $40,380     $38,517
Stock-based compensation expense included in net income, as reported                   228          64         216
Stock-based compensation expense determined under fair value method, net of tax       (886)       (738)       (555)
------------------------------------------------------------------------------------------------------------------
     Pro forma net income                                                          $49,538     $39,706     $38,178
==================================================================================================================

Earnings per share:
   As reported:
      Basic                                                                        $  1.68     $  1.54     $  1.48
      Diluted                                                                      $  1.64     $  1.49     $  1.46
   Pro forma:
      Basic                                                                        $  1.66     $  1.51     $  1.47
      Diluted                                                                      $  1.61     $  1.47     $  1.45
</TABLE>

Fair Values of Financial Instruments

The Company determines fair values based on quoted market values where available
or on estimates using present values 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 107, "Disclosures about Fair Value of Financial Instruments,"
excludes certain financial instruments and all non-financial instruments from
its disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company. The fair values
of investment securities, loans, deposits, and borrowings have been disclosed in
footnotes C, D, G, and H, respectively.

New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board revised SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS 123R establishes accounting
requirements for share-based compensation to employees and carries forward prior
guidance on accounting for awards to non-employees. The provisions of this
statement will become effective July 1, 2005 for all equity awards granted after
the effective date. SFAS 123R requires an entity to recognize compensation
expense based on an estimate of the number of awards expected to actually vest,
exclusive of awards expected to be forfeited. Management does not expect the
impact of the adoption of this pronouncement to be materially different from the
pro forma impacts disclosed under SFAS No. 123.

NOTE B: ACQUISITIONS

Dansville Branch Acquisition

On December 3, 2004, the Company completed the purchase of a branch office in
Dansville, N.Y. from HSBC Bank USA, N.A with deposits of $32.6 million.

First Heritage Bank

On May 14, 2004, the Company acquired First Heritage Bank ("Heritage"), a
closely held bank headquartered in Wilkes-Barre, PA with three branches in
Luzerne County, Pennsylvania. First Heritage's three branches operate as part of
First Liberty Bank & Trust, a division of Community Bank, N.A. Consideration
included 2,592,213 shares of common stock with a fair value of $52 million,
employee stock options with a fair value of $3.0 million, and $7.0 million of
cash (including capitalized acquisition costs of $1.0 million).

Grange National Banc Corp.

On November 24, 2003, the Company acquired Grange National Banc Corp.
("Grange"), a $280 million-asset bank holding company based in Tunkhannock, Pa.
Grange's 12 branches operate as part of First Liberty Bank & Trust, a division
of Community Bank, N.A. The Company issued 2,294,182 shares of its common stock
to certain of the former shareholders at a cost of $23.97 per share. The
remaining shareholders received $21.25 in cash or approximately $20.9 million.
In addition, Grange stock options representing $5.4 million of fair value were
exchanged for options of the Company.


                                       48
<PAGE>

Peoples Bankcorp Inc.

On September 5, 2003, the Company acquired Peoples Bankcorp, Inc. ("Peoples"), a
$29-million-asset savings and loan holding company based in Ogdensburg, New
York. Peoples' single branch is being operated as a branch of the Bank's network
of branches in Northern New York.

Harbridge Consulting Group

On July 31, 2003, the Company acquired PricewaterhouseCoopers' Upstate New York
Global Human Resource Solutions consulting group. This practice was renamed
Harbridge Consulting Group ("Harbridge") and is a leading provider of retirement
and employee benefits consulting services throughout Upstate New York, and is
complementary to Benefit Plans Administrative Services, LLC., the Company's
defined contribution plan administration subsidiary.

Acquisition Expenses

The Company incurred certain expenses in connection with the above acquisitions.
The following table shows the components of acquisition expenses that are
presented in the consolidated statements of income for the years ended December
31:

(000's omitted)                                      2004        2003       2002
--------------------------------------------------------------------------------
Severance and employee benefits                     $1,044       $  0       $ 97
Legal and professional fees                            491        213        455
Data processing                                        130        191         16
Other                                                   39         94        132
--------------------------------------------------------------------------------
     Total                                          $1,704       $498       $700
================================================================================

NOTE C: INVESTMENT SECURITIES

The amortized cost and estimated fair value of investment securities as of
December 31 are as follows:

<TABLE>
<CAPTION>
                                                   2004                                              2003
                               ----------------------------------------------    ----------------------------------------------
                                              Gross      Gross      Estimated                   Gross      Gross      Estimated
                                Amortized  Unrealized  Unrealized     Fair        Amortized  Unrealized  Unrealized     Fair
(000's omitted)                   Cost        Gains      Losses       Value          Cost       Gains      Losses       Value
---------------------------    ----------------------------------------------    ----------------------------------------------
<S>                            <C>           <C>         <C>       <C>           <C>           <C>         <C>       <C>
Held-to-Maturity Portfolio:
U.S. treasury and agency
  securities                   $  127,490    $   356     $1,940    $  125,906    $  127,635    $   235     $2,867    $  125,003
Obligations of state and
  political subdivisions            6,576        120          2         6,694         7,459        218          0         7,677
Other securities                    3,578          0          0         3,578         3,558          0          0         3,558
---------------------------    ----------------------------------------------    ----------------------------------------------
Total held-to-maturity
  portfolio                       137,644        476      1,942       136,178       138,652        453      2,867       136,238

Available-for-Sale
Portfolio:
U.S. treasury and agency
  securities                      630,058     20,917        208       650,767       456,913     22,638         97       479,454
Obligations of state and
  political subdivisions          545,698     27,899         46       573,551       443,930     26,291         11       470,210
Corporate securities               40,443      3,460          5        43,898        27,712      2,539          0        30,251
Collateralized mortgage
  obligations                      70,986      1,680        222        72,444        89,566      3,987          1        93,552
Mortgage-backed securities         50,347      2,351         34        52,664        76,628      3,668        119        80,177
---------------------------    ----------------------------------------------    ----------------------------------------------
  Sub-total                     1,337,532     56,307        515     1,393,324     1,094,749     59,123        228     1,153,644
Equity securities                  53,371          0          0        53,371        37,238          0          0        37,238
---------------------------    ----------------------------------------------    ----------------------------------------------
Total available-for-sale
  portfolio                     1,390,903    $56,307     $  515    $1,446,695     1,131,987    $59,123     $  228    $1,190,882
Net unrealized gain on
  available-for-sale
  portfolio                        55,792                                   0        58,895                                   0
---------------------------    ----------                          ----------    ----------                          ----------
     Total                     $1,584,339                          $1,582,873    $1,329,534                          $1,327,120
===========================    ==========                          ==========    ==========                          ==========
</TABLE>


                                       49
<PAGE>

A summary of investment securities as of December 31, 2004 that have been in a
continuous unrealized loss position for less than or greater than twelve months
is as follows:

<TABLE>
<CAPTION>
                                           Less than 12 Months   12 Months or Longer          Total
                                          ---------------------  --------------------  --------------------
                                                       Gross                 Gross                 Gross
                                           Fair      Unrealized   Fair     Unrealized   Fair     Unrealized
(000's omitted)                            Value       Losses     Value      Losses     Value      Losses
-------------------------------------     ---------------------  --------------------  --------------------
<S>                                       <C>          <C>       <C>         <C>       <C>        <C>
Held-to-Maturity Portfolio:
  U.S. treasury and agency securities          $0         $0     $88,060    ($1,940)    88,060     (1,940)
  Obligations of state and political
    subdivisions                            1,567         (2)          0          0      1,567         (2)
-------------------------------------     ---------------------  --------------------  --------------------
     Total held-to-maturity portfolio      $1,567        ($2)    $88,060    ($1,940)   $89,627    ($1,942)
=====================================     =====================  ====================  ====================

Available-for-Sale Portfolio:
  U.S. treasury and agency securities     $22,633      ($208)         $0         $0    $22,633      ($208)
  Obligations of state and political
    subdivisions                            7,731        (46)          0          0      7,731        (46)
  Corporate securities                      1,061         (5)          0          0      1,061         (5)
  Collateralized mortgage obligations       7,915       (222)          0          0      7,915       (222)
  Mortgage-backed securities                  950        (17)      1,197        (17)     2,147        (34)
-------------------------------------     ---------------------  --------------------  --------------------
    Total available-for-sale portfolio    $40,290      ($498)     $1,197       ($17)   $41,487      ($515)
=====================================     =====================  ====================  ====================
</TABLE>

Management does not believe any individual unrealized loss as of December 31,
2004 represents an other than temporary impairment. The unrealized losses
reported for the agency and mortgage-backed securities relate primarily to
securities issued by FHLB, FNMA and FHLMC and are currently rated AAA by Moody's
Investor Services and Standards & Poor. The unrealized losses in the portfolios
are primarily attributable to changes in interest rates. The Company has both
the intent and ability to hold these securities for the time necessary to
recover the amortized cost. The unrealized losses of $3,095,000 as of December
31, 2003 were less than 12 months old.

The amortized cost and estimated fair value of debt securities at December 31,
2004, by contractual maturity, are shown below. 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.

<TABLE>
<CAPTION>
                                              Held-to-Maturity           Available-for-Sale
                                          ------------------------    ------------------------
                                           Carrying        Fair        Carrying        Fair
(000's omitted)                              Value        Value          Value        Value
--------------------------------------    ------------------------    ------------------------
<S>                                       <C>           <C>           <C>           <C>
Due in one year or less                   $    4,387    $    4,395    $    5,263    $    5,414
Due after one through five years               1,959         2,044        55,927        57,916
Due after five years through ten years        99,596        98,533       712,168       736,972
Due after ten years                           31,702        31,206       442,841       467,914
--------------------------------------    ------------------------    ------------------------
     Sub-total                               137,644       136,178     1,216,199     1,268,216
Collateralized mortgage obligations                0             0        70,986        72,444
Mortgage-backed securities                         0             0        50,347        52,664
--------------------------------------    ------------------------    ------------------------
     Total                                $  137,644    $  136,178    $1,337,532    $1,393,324
======================================    ========================    ========================
</TABLE>

Cash flow information on investment securities for the years ended December 31
is as follows:

<TABLE>
<CAPTION>
(000's omitted)                                                           2004        2003        2002
--------------------------------------------------------------------------------------------------------
<S>                                                                     <C>         <C>         <C>
Proceeds from the sales of investment securities                        $ 51,889    $ 41,227    $ 96,294
Gross gains on sales of investment securities                                187          11       2,593
Gross losses on sales of investment securities                               115          65           0
Proceeds from the sales of mortgage-backed securities and CMO's            3,679      20,823      56,451
Proceeds from the maturities of mortgage-backed securities and CMO's      51,652     204,746     174,524
Purchases of mortgage-backed securities and CMO's                       $ 10,915    $ 27,092    $ 25,664
</TABLE>

Investment securities with a carrying value of $699,806,000 and $563,341,000 at
December 31, 2004 and 2003, respectively, were pledged to collateralize certain
deposits and borrowings.


                                       50
<PAGE>

NOTE D: LOANS

Major classifications of loans at December 31 are summarized as follows:

(000's omitted)                                           2004            2003
--------------------------------------------------------------------------------
Consumer mortgage                                     $  801,412      $  739,593
Business lending                                         831,244         689,436
Consumer direct and indirect                             725,885         699,562
--------------------------------------------------------------------------------
  Gross loans                                          2,358,541       2,128,591
Unearned discount                                             48              82
--------------------------------------------------------------------------------
  Net loans                                            2,358,493       2,128,509
Allowance for loan losses                                 31,778          29,095
--------------------------------------------------------------------------------
Loans, net of allowance for loan losses               $2,326,715      $2,099,414
================================================================================

The estimated fair value of loans at December 31, 2004 and 2003 was $2.4 billion
and $2.1 billion, respectively. Non-accrual loans of $11,798,000 and $11,940,000
and accruing loans ninety days past due of $1,158,000 and $1,307,000 at December
31, 2004 and 2003, respectively, are included in net loans.

Changes in loans to directors and officers and other related parties for the
years ended December 31 are summarized as follows:

(000's omitted)                                        2004              2003
-------------------------------------------------------------------------------
Balance at beginning of year                         $ 14,838          $ 15,735
New loans                                               9,796             3,313
Payments                                               (1,481)           (4,210)
-------------------------------------------------------------------------------
Balance at end of year                               $ 23,153          $ 14,838
===============================================================================

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 $107,155,000, $126,324,000, and $103,663,000 at
December 31, 2004, 2003, and 2002, respectively. Custodial escrow balances
maintained in connection with the foregoing loan servicing, and included in
demand deposits, were approximately and $813,000 and $773,000 at December 31,
2004 and 2003, respectively. At December 31, 2004 and 2003, mortgage servicing
rights, included in other assets, amounted to $459,000 and $456,000
respectively.

Changes in the allowance for loan losses for the years ended December 31 are
summarized as follows:

(000's omitted)                            2004           2003           2002
-------------------------------------------------------------------------------
Balance at beginning of year             $ 29,095       $ 26,331       $ 23,901
Provision for loan losses                   8,750         11,195         12,222
Reserve on acquired loans                   2,357          1,832              0
Charge offs                               (11,780)       (13,111)       (12,015)
Recoveries                                  3,356          2,848          2,223
-------------------------------------------------------------------------------
Balance at end of year                   $ 31,778       $ 29,095       $ 26,331
===============================================================================

As of December 31, 2004 and 2003, the Company had impaired loans of $2,271,000
and $5,682,000, respectively. The specifically allocated allowance for loan loss
recognized on these impaired loans was $900,000 and $1,825,000 at December 31,
2004 and 2003, respectively. For the years ended December 31, 2004 and 2003 the
Company had average impaired loans of $2,399,000 and $7,100,000. There was no
interest income recognized on these loans in 2004 or 2003.


                                       51
<PAGE>

NOTE E: PREMISES AND EQUIPMENT

Premises and equipment consist of the following at December 31:

(000's omitted)                                         2004            2003
-------------------------------------------------------------------------------
Land and land improvements                            $   9,340       $   8,616
Bank premises owned                                      57,519          53,560
Equipment and construction in progress                   46,010          42,146
-------------------------------------------------------------------------------
  Premises and equipment, gross                         112,869         104,322
Less: Accumulated depreciation                          (49,359)        (42,617)
-------------------------------------------------------------------------------
  Premises and equipment, net                         $  63,510       $  61,705
===============================================================================

NOTE F: INTANGIBLE ASSETS

The gross carrying amount and accumulated amortization for each type of
intangible asset are as follows:

<TABLE>
<CAPTION>
                                               As of December 31, 2004                     As of December 31, 2003
                                        ---------------------------------------       ---------------------------------------
                                         Gross                           Net           Gross                           Net
                                        Carrying     Accumulated       Carrying       Carrying      Accumulated      Carrying
(000's omitted)                          Amount      Amortization       Amount         Amount      Amortization       Amount
---------------------------------       ---------------------------------------       ---------------------------------------
<S>                                     <C>            <C>             <C>            <C>            <C>             <C>
Amortizing intangible assets:
  Core deposit intangibles               $63,691       ($28,340)        $35,351        $55,455       ($21,457)        $33,998
  Other intangibles                        2,750           (764)          1,986          2,750           (233)          2,517
---------------------------------       ---------------------------------------       ---------------------------------------
     Total amortizing intangibles         66,441        (29,104)         37,337         58,205        (21,690)         36,515
Non-amortizing intangible assets:
  Goodwill                               195,163              0         195,163        159,596              0         159,596
---------------------------------       ---------------------------------------       ---------------------------------------
     Total intangible assets, net       $261,604       ($29,104)       $232,500       $217,801       ($21,690)       $196,111
=================================       =======================================       =======================================
</TABLE>

The increases in the gross carrying amount of core deposit intangibles and
goodwill relate to the 2004 acquisition of First Heritage Bank ($30,946,000 in
goodwill), a branch acquisition in Dansville, NY ($4,191,000 in goodwill) and
$430,000 of goodwill adjustments mainly related to adjusting certain real
property from the 2003 acquisitions to fair value. No goodwill impairment
adjustments were recognized in 2004 and 2003.

The estimated aggregate amortization expense for each of the five succeeding
fiscal years ended December 31 is as follows:

                  2005                                             $ 7,243
                  2006                                               6,047
                  2007                                               5,657
                  2008                                               5,335
                  2009                                               4,836
            Thereafter                                               8,219
--------------------------------------------------------------------------
                 Total                                             $37,337
==========================================================================

NOTE G: DEPOSITS

Deposits consist of the following at December 31:

(000's omitted)                                    2004                  2003
--------------------------------------------------------------------------------
Demand                                          $  567,106            $  498,195
Interest checking                                  313,639               294,563
Savings                                            536,460               470,166
Money market                                       321,461               288,212
Time                                             1,190,312             1,174,352
--------------------------------------------------------------------------------
  Total deposits                                $2,928,978            $2,725,488
================================================================================


                                       52
<PAGE>

The estimated fair value of deposits at December 31, 2004 and 2003 was
approximately $2.7 billion and $2.5 billion, respectively.

At December 31, 2004 and 2003, time certificates of deposit in denominations of
$100,000 and greater totaled $179,534,000 and $168,241,000 respectively. The
approximate maturities of time deposits at December 31, 2004 are as follows:

(000's omitted)                                                         Amount
--------------------------------------------------------------------------------
2005                                                                  $  920,488
2006                                                                     132,051
2007                                                                      78,405
2008                                                                      30,727
2009                                                                      28,053
Thereafter                                                                   588
--------------------------------------------------------------------------------
  Total                                                               $1,190,312
================================================================================

NOTE H: BORROWINGS

Outstanding borrowings at December 31 are as follows:

<TABLE>
<CAPTION>
(000's omitted)                                                     2004         2003
---------------------------------------------------------------------------------------
<S>                                                               <C>          <C>
Short-term borrowings:
  Federal funds purchased                                         $ 13,200     $ 36,300
  Federal Home Loan Bank advances                                  636,000      361,000
  Commercial loans sold with recourse                                   74            0
  Capital lease obligations                                              0           96
---------------------------------------------------------------------------------------
     Total short-term borrowings                                   649,274      397,396

Long-term borrowings:
  Federal Home Loan Bank advances                                  190,000      190,000
  Commercial loans sold with recourse                                  791            0
  Subordinated debt held by unconsolidated subsidiary trusts,
    net of discount of $1,463 and $1,519                            80,446       80,390
---------------------------------------------------------------------------------------
       Total long-term borrowings                                  271,237      270,390
---------------------------------------------------------------------------------------
        Total borrowings                                          $920,511     $667,786
=======================================================================================
</TABLE>

The weighted-average interest rates on short-term borrowings for the years ended
December 31, 2004 and 2003 were 1.64% and 1.26%, respectively. Federal Home Loan
Bank advances are collateralized by a blanket lien on the Company's residential
real estate loan portfolio and various investment securities.


                                       53
<PAGE>

Long-term borrowings at December 31, 2004 have maturity dates as follows:

                                                                      Weighted
(000's omitted, except rate)                         Amount         Average Rate
--------------------------------------------------------------------------------
October 3, 2007                                     $    236            3.00%
January 23, 2008 (callable)                           10,000            5.44%
January 28, 2008 (callable)                            5,000            5.48%
April 14, 2010 (callable)                             25,000            6.35%
September 27, 2010 (callable)                         50,000            5.88%
October 12, 2010 (callable)                           50,000            5.84%
November 1, 2010 (callable)                           50,000            5.77%
October 30, 2012                                         258            3.00%
October 16, 2013                                         193            3.00%
November 23, 2014                                         56            2.75%
November 29, 2014                                         48            3.00%
February 3, 2027 (callable)                           30,779            9.75%
July 16, 2031 (callable)                              25,110            5.38%
July 31, 2031 (callable)                              24,557            5.12%
--------------------------------------------------------------------------------
   Total                                            $271,237            6.19%
================================================================================

The estimated fair value of long-term borrowings at December 31, 2004 and 2003
was approximately $319.0 million and $314.0 million, respectively.

In December 2003, the Company prepaid $25.0 million of Federal Home Loan Bank
("FHLB") advances with maturity dates ranging from January 30, 2008 to February
4, 2008 and a weighted-average rate of 5.31%. In December 2002, the Company
prepaid $11.0 million of FHLB advances with maturity dates ranging from December
15, 2003 to December 31, 2004 and a weighted-average rate of 6.17%. As a result
of these prepayments, the Company incurred penalties of $2.6 million in 2003 and
$925,000 in 2002. These penalties have been reflected in the consolidated
statements of income as gain (loss) on investment securities and debt
extinguishments.

The Company sponsors three business trusts, Community Capital Trust I, Community
Capital Trust II, and Community Statutory Trust III, of which 100% of the common
stock is owned by the Company. The trusts were formed for the purpose of issuing
company-obligated mandatorily redeemable preferred securities to third-party
investors and investing the proceeds from the sale of such preferred securities
solely in junior subordinated debt securities of the Company. The debentures
held by each trust are the sole assets of that trust. Distributions on the
preferred securities issued by each trust are payable semi-annually at a rate
per annum equal to the interest rate being earned by the trust on the debentures
held by that trust. The preferred securities are subject to mandatory
redemption, in whole or in part, upon repayment of the debentures. The Company
has entered into agreements which, taken collectively, fully and unconditionally
guarantee the preferred securities subject to the terms of each of the
guarantees. The terms of the preferred securities of each trust are as follows:

<TABLE>
<CAPTION>
       Issuance                         Interest               Maturity           Call                           Call
         Date     Amount                  Rate                   Date           Provision                        Price
------------------------------------------------------------------------------------------------------------------------------------
<S>   <C>         <C>      <C>                                <C>        <C>                      <C>
I      2/3/1997   30,000   9.75%                              2/03/2027  10 year beginning 2007   104.5400% declining to par in 2017
II    7/16/2001   25,000   6 month LIBOR plus 3.75% (5.74%)   7/16/2031   5 year beginning 2006   107.6875% declining to par in 2011
III   7/31/2001   24,450   3 month LIBOR plus 3.58% (5.74%)   7/31/2031   5 year beginning 2006   107.5000% declining to par in 2011
====================================================================================================================================
</TABLE>

In the fourth quarter 2003, as a result of applying the provisions of FIN 46,
the Company de-consolidated these subsidiary trusts from its financial
statements. The de-consolidation of the net assets and results of operations of
the trusts had an immaterial impact on the Company's financial statements. The
Company continues to be obligated to repay the debentures held by the trusts and
guarantees repayment of the preferred securities issued by the trusts. The
preferred securities held by the trusts qualify as Tier I capital for the
Company under Federal Reserve Board guidelines.


                                       54
<PAGE>

NOTE I: INCOME TAXES

The provision for income taxes for the years ended December 31 is as follows:

(000's omitted)                           2004            2003            2002
--------------------------------------------------------------------------------
Current:
     Federal                             $14,677         $11,534         $ 9,268
     State                                   680             341             161
Deferred:
     Federal                               1,229             758           3,764
     State                                    57             140             694
--------------------------------------------------------------------------------
Total income taxes                       $16,643         $12,773         $13,887
================================================================================

Components of the net deferred tax liability, included in other
assets/liabilities, as of December 31 are as follows:

(000's omitted)                                        2004              2003
-------------------------------------------------------------------------------
Allowance for loan losses                            $ 10,644          $ 10,537
Employee and director benefits                          2,599             2,118
Other                                                   1,478             1,501
-------------------------------------------------------------------------------
  Deferred tax asset                                   14,721            14,156
-------------------------------------------------------------------------------

Investment securities                                  23,273            24,216
Intangible assets                                       8,145             4,910
Loan origination costs                                  3,998             3,324
Depreciation                                            5,264             3,526
Pension                                                   531             1,586
Mortgage servicing rights                                 177               178
-------------------------------------------------------------------------------
  Deferred tax liability                               41,388            37,740
-------------------------------------------------------------------------------
Net deferred tax liability                           ($26,667)         ($23,584)
===============================================================================

The Company has determined that no valuation allowance is necessary as it is
more likely than not that deferred tax assets will be realized through carryback
of future deductions to taxable income in prior years, future reversals of
existing temporary differences, and through future taxable income.

A reconciliation of the differences between the federal statutory income tax
rate and the effective tax rate for the years ended December 31 is shown in the
following table:

                                                    2004       2003       2002
------------------------------------------------------------------------------
Federal statutory income tax rate                   35.0%      35.0%      35.0%
Increase (reduction) in taxes resulting from:
     Tax-exempt interest                           (11.3%)    (11.2%)     (9.9%)
     State income taxes, net of federal benefit      0.6%       0.1%       0.6%
     Other                                           0.6%       0.1%       0.8%
------------------------------------------------------------------------------
Effective income tax rate                           24.9%      24.0%      26.5%
==============================================================================


                                       55
<PAGE>

NOTE J: LIMITS ON DIVIDENDS AND OTHER REVENUE SOURCES

The Company's ability to pay dividends to its shareholders is largely dependent
on the Bank's ability to pay dividends to the Company. In addition to state law
requirements and the capital requirements discussed below, the circumstances
under which the Bank may pay dividends are limited by federal statutes,
regulations, and policies. For example, as a national bank, the Bank must obtain
the approval of the Office of the Comptroller of the Currency (OCC) for payments
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 undivided profits then on hand after deducting its losses and
bad debts, as defined by applicable regulations. At December 31, 2004, the Bank
had approximately $27,758,000 in undivided profits legally available for the
payments of dividends.

In addition, the Federal Reserve Board and the OCC 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 Federal Reserve
Board has indicated that banking organizations should generally pay dividends
only out of current operating earnings.

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 assets purchases. Such transfer by the Bank to the Company
generally is limited in amount to 10% of the Bank's capital and surplus, or 20%
in the aggregate. Furthermore, such loans and extensions of credit are required
to be collateralized in specific amounts.

NOTE K: BENEFIT PLANS

Pension and post-retirement plans

The Company provides defined benefit pension and other post-retirement health
and life insurance benefits to qualified employees and retirees. Using a
measurement date of December 31, the following table shows the funded status of
the Company's plans reconciled with amounts reported in the Company's
consolidated statements of condition:

<TABLE>
<CAPTION>
                                                        Pension Benefits        Post-retirement Benefits
                                                     ----------------------     ------------------------
(000's omitted)                                        2004          2003          2004          2003
------------------------------------------------     ----------------------      ----------------------
<S>                                                  <C>           <C>           <C>           <C>
Change in benefit obligation:
  Benefit obligation at the beginning of year        $ 42,739      $ 34,864      $  5,083      $  4,159
  Service cost                                          2,557         1,831           311           275
  Interest cost                                         2,433         2,157           325           260
  Participant contributions                                 0             0           227           186
  Plan amendment/acquisition                             (881)          493            95           220
  Other loss                                                0         1,218             0             0
  Deferred actuarial loss                               2,209         3,521           902           391
  Benefits paid                                        (1,444)       (1,345)         (573)         (408)
------------------------------------------------     ----------------------      ----------------------
Benefit obligation at end of year                      47,613        42,739         6,370         5,083
------------------------------------------------     ----------------------      ----------------------

Change in plan assets:
  Fair value of plan assets at beginning of year       36,784        29,133             0             0
  Actual return of plan assets                          3,907         6,815             0             0
  Participant contributions                                 0             0           227           186
  Employer contributions                                2,500         2,181           346           222
  Benefits paid                                        (1,444)       (1,345)         (573)         (408)
------------------------------------------------     ----------------------      ----------------------
Fair value of plan assets at end of year               41,747        36,784             0             0
------------------------------------------------     ----------------------      ----------------------

Unfunded status                                        (5,866)       (5,955)       (6,370)       (5,083)
Unrecognized actuarial loss                            14,454        14,057         1,480           615
Unrecognized prior service (benefit) cost                (783)          899           331           361
Unrecognized transition liability                           0             0           328           369
------------------------------------------------     ----------------------      ----------------------
Prepaid (accrued) benefit cost                       $  7,805      $  9,001      ($ 4,231)     ($ 3,738)
================================================     ======================      ======================
</TABLE>

In 2004, the Company amended its defined benefit pension plan to allow for a
cash balance option. Participants in the plan as of December 31, 2003 were given
an option to continue to have their benefits calculated under the traditional


                                       56
<PAGE>

plan formula or have their benefits determined as an account balance under a
cash balance formula. All new participants to the plan will automatically
participate in the cash balance option. In addition, the plan was amended to
provide for the payment of certain benefits formerly accrued and payable under
the Deferred Compensation Plan for Certain Executive Employees.

The Company has unfunded supplemental pension plans for certain key executives.
The projected benefit obligation and accrued benefit cost included in the
preceding table related to these plans was $3,128,000 and $2,798,000 for 2004
and $2,606,000 and $2,245,000 for 2003, respectively. The accumulated benefit
obligation for the defined benefit pension was $40,659,000 and $35,025,000 as of
December 31, 2004 and 2003, respectively.

The weighted-average assumptions used to determine the benefit obligations as of
December 31 are as follows:

                                    Pension Benefits    Post-retirement Benefits
                                    ----------------    ------------------------
                                    2004        2003        2004        2003
------------------------------      ----------------    ------------------------
Discount rate                       5.60%       5.90%       5.60%       5.90%
Expected return on plan assets      8.75%       8.75%       0.00%       0.00%
Rate of compensation increase       4.00%       4.00%       0.00%       0.00%
==============================      ================    ========================

The net periodic benefit cost as of December 31 is as follows:

<TABLE>
<CAPTION>
                                              Pension Benefits               Post-retirement Benefits
                                      -------------------------------     -----------------------------
(000's omitted)                        2004        2003        2002        2004       2003       2002
----------------------------------    -------------------------------     -----------------------------
<S>                                   <C>         <C>         <C>         <C>        <C>        <C>
Service cost                          $ 2,557     $ 1,831     $ 1,415     $   311    $   275    $   159
Interest cost                           2,433       2,157       1,926         325        260        241
Expected return on plan assets         (3,160)     (2,567)     (2,268)          0          0          0
Net amortization and deferral           1,066       1,142         403          37          8          0
Amortization of prior service cost        155         129         131          30         30         30
Amortization of transition (asset)
obligation                                  0          (4)        (19)         41         41         41
Other expense                               0       1,218           0           0          0          0
----------------------------------    -------------------------------     -----------------------------
Net periodic benefit cost             $ 3,051     $ 3,906     $ 1,588     $   744    $   614    $   471
==================================    ===============================     =============================
</TABLE>

Other expense represents a $1.2 million adjustment recorded in the fourth
quarter of 2003 to reflect the proper actuarial impact of indexing salary levels
associated with certain benefits frozen in 1988. The weighted-average
assumptions used to determine the net periodic pension cost for the years ended
December 31 are as follows:

                                   Pension Benefits    Post-retirement Benefits
                                 --------------------  ------------------------
                                 2004    2003    2002    2004    2003    2002
------------------------------   --------------------    --------------------
Discount rate                    5.90%   6.10%   6.75%   5.90%   6.10%   6.75%
Expected return on plan assets   8.75%   9.00%   9.00%   0.00%   0.00%   0.00%
Rate of compensation increase    4.00%   4.00%   4.00%   0.00%   0.00%   0.00%
==============================   ====================    ====================

The amount of benefit payments that are expected to be paid over the next ten
years are as follows:

                                               Pension           Post-retirement
(000's omitted)                               Benefits              Benefits
--------------------------------------------------------------------------------
           2005                                $ 2,866               $   289
           2006                                  2,666                   308
           2007                                  3,278                   332
           2008                                  4,607                   350
           2009                                  3,302                   383
      2010-2014                                $21,541               $ 2,577
================================================================================

The payments reflect future service and are based on various assumptions
including retirement age and form of payment (lump-sum versus annuity). Actual
results may differ from these estimates.


                                       57
<PAGE>

The expected long-term rate of return was estimated by taking into consideration
asset allocation, reviewing historical returns on type of assets held and
current economic factors. The asset allocation for the defined benefit pension
plan as of December 31, by asset category, is as follows:

                                                              2004         2003
-------------------------------------------------------------------------------
Equity securities                                               69%          70%
Debt securities                                                 19%          20%
Cash                                                            12%          10%
-------------------------------------------------------------------------------
   Total                                                       100%         100%
===============================================================================

Plan assets include $2,571,000 (6%) and $2,230,000 (6%) of Community Bank
System, Inc. stock at December 31, 2004 and 2003, respectively.

The investment objective for the defined benefit pension plan is to achieve an
average annual total return over a five-year period equal to the assumed rate of
return used in the actuarial calculations. At a minimum performance level, the
portfolio should earn the return obtainable on high quality intermediate-term
bonds. The Company's perspective regarding portfolio assets combines both
preservation of capital and moderate risk-taking. Asset allocation favors
equities, with a target allocation of approximately 75% equity securities, 20%
fixed income securities and 5% cash. No more than 10% of the portfolio can be in
stock of the Company. Due to the volatility in the market, the target allocation
is not always desirable and asset allocations will fluctuate between acceptable
ranges. Prohibited transactions include purchase of securities on margin,
uncovered call options, short sale transactions, and use of real estate,
unlisted limited partnerships, derivative products or venture capital loans as
fixed income investment vehicles.

The Company makes contributions to its funded qualified pension plan as required
by government regulation or as deemed appropriate by management after
considering the fair value of plan assets, expected return on such assets, and
the value of the accumulated benefit obligation. Based upon current information,
the Company does not expect to make contributions to the funded qualified
pension plan in 2005. The Company funds the payment of benefit obligations for
the supplemental pension and post-retirement plans because such plans do not
hold assets for investment.

The assumed health care cost trend rate used in the post-retirement health plan
at December 31,2004 was 9.0% for medical costs and 13.0% for prescription drugs.
The rate to which the cost trend rate is assumed to decline (the ultimate trend
rate) and the year that the rate reaches the ultimate trend rate is 5.0% and
2013, respectively.

Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plan. A one-percentage-point increase in the trend
rate would increase the service and interest cost components by $35,000 and
increase the benefit obligation by $264,000. A one-percentage-point decrease in
the trend rate would decrease the service and interest cost components by $8,000
and decrease the benefit obligation by $141,000.

401(k) Employee Stock Ownership Plan

The Company has a 401(k) Employee Stock Ownership Plan in which employees can
contribute from 1% to 90% of eligible compensation, with up to 6% being eligible
for matching contributions in the form of Company common stock. The Plan also
permits the Company to distribute a discretionary profit-sharing component in
the form of Company common stock to all participants except certain executive
employees. The expense recognized under this plan for the years ended December
31, 2004, 2003 and 2002 was $1,583,000, $1,309,000 and $1,026,000, respectively.

Deferred Compensation Plan for Certain Executive Employees

The Company has a Deferred Compensation Plan for Certain Executive Employees in
which participants may contribute up to 15% of their eligible compensation less
any amounts contributed to the 401(k) Employee Stock Ownership Plan. Any
discretionary profit-sharing amounts that the executive receives from the
Company must be contributed to the Deferred Compensation Plan in the form of
Company common stock. The expense recognized under this plan for the years ended
December 31, 2004, 2003 and 2002 was $159,000, $119,000 and $68,000,
respectively.

Other Deferred Compensation Arrangements

In addition to the supplemental pension plans for certain executives, the
Company has nonqualified deferred compensation for several former directors,
officers, and key employees. All benefits provided under these plans are
unfunded and payments to plan participants are made by the Company. At December
31, 2004 and 2003, the Company has recorded a liability of $5,373,000 and
$3,775,000, respectively. The expense recognized under these plans for the years
ended December 31, 2004, 2003, and 2002 was $1,727,000, $947,000 and $398,000,
respectively.


                                       58
<PAGE>

Deferred Compensation Plan for Directors

Directors may defer all or a portion of their director fees under the Deferred
Compensation Plan for Directors. Under this plan, there is a separate account
for each participating director which is credited with the amount of shares
which could have been purchased with the director's fees as well as any
dividends on such shares. On the distribution date, the director will receive
common stock equal to the accumulated share balance in his account. As of
December 31, 2004 and 2003, there were 65,090 and 56,901 shares credited to the
participants' accounts, for which a liability of $1,097,000 and $894,000 was
accrued, respectively. The expense recognized under the plan for the years ended
December 31, 2004, 2003 and 2002, was $206,000, $113,000, and $106,000,
respectively.

Director Stock Balance Plan

The Company has a Stock Balance Plan for non-employee directors who have
completed six months of service. The Plan is a nonqualified, noncontributory
defined benefit plan. The Plan provides benefits for service prior to January 1,
1996 based on a predetermined formula and benefits for service after January 1,
1996 based on the performance of the Company's common stock. Participants become
fully vested after six years of service. The directors can elect to receive
offset stock options that may reduce the Company's liability under the Plan.
These options vest immediately and expire one year after the date the director
retires or two years in the event of death. Benefits are payable in the form of
cash and/or Company stock (as elected by the director) on January 1st of the
year after the director retires from the Board. As of December 31, 2004 and
2003, the accrued pension liability was $287,000 and $251,000, respectively. The
expense recognized under this plan for the years ended December 31, 2004, 2003
and 2002, was $36,000, $38,000 and $69,000, respectively. The expense and
related liability were calculated using a dividend rate of 3.00%, stock price
appreciation of 6.00%, and a discount rate of 5.6% for 2004, 5.9% for 2003, and
6.10% for 2002.

NOTE L: STOCK-BASED COMPENSATION PLANS

The Company has a long-term incentive program for directors, officers, and key
employees. Under this program the Company authorized 4,024,000 shares of Company
common stock for the grant of incentive stock options, restricted stock awards,
nonqualified stock options, retroactive stock appreciation rights, and offset
options to its Stock Balance Plan (see Note K). The offset options vest and
become exercisable immediately and expire one year after the date the director
retires or two years in the event of death. The remaining options have a
ten-year term. They vest and become exercisable on a grant-by-grant basis,
ranging from immediate vesting to ratably over a five-year period. Option
activity in this plan is as follows:

                                                        Weighted
                                                         Average
                                                     Exercise Price
                                          Options       of Shares      Shares
                                        Outstanding    Outstanding   Exercisable
--------------------------------------------------------------------------------
December 31, 2001                        1,901,488      $   12.67     1,300,700
Granted                                    413,404          13.20
Exercised                                 (173,286)          8.94
Forfeited                                   (4,278)         12.62
--------------------------------------------------------------------------------
December 31, 2002                        2,137,328      $   13.07     1,411,006
--------------------------------------------------------------------------------
Granted                                    843,138          10.89
Exercised                                 (545,158)         10.99
Forfeited                                   (7,826)         14.22
--------------------------------------------------------------------------------
December 31, 2003                        2,427,482      $   12.78     1,519,893
================================================================================
Granted                                    669,139          18.37
Exercised                                 (685,143)          8.35
Forfeited                                  (10,546)         16.13
--------------------------------------------------------------------------------
December 31, 2004                        2,400,932      $   15.59     1,383,369
================================================================================

Approximately 222,000 and 390,000 options were exchanged in 2004 and 2003 in
connection with the Heritage and Grange acquisitions, respectively.


                                       59
<PAGE>

At December 31, 2004 the range of exercise prices and other information relating
to the Company's stock options is as follows:

<TABLE>
<CAPTION>
                              Options Outstanding                Options Exercisable
                   ------------------------------------------  -----------------------
                                  Weighted        Weighted                   Weighted
                                   Average         Average                    Average
    Range of                      Exercise        Remaining                  Exercise
 Exercise Price      Shares        Price         Life (years)    Shares        Price
---------------    ------------------------------------------  -----------------------
<S>                <C>           <C>                 <C>       <C>           <C>
$3.65 - $5.15         76,044     $    4.12           1.7          76,044     $    4.12
$5.15 - $7.72         40,716          6.77           0.8          40,716          6.77
$7.72 - $10.30        69,516          9.13           3.3          69,516          9.13
$10.30 - $12.87      520,454         12.12           5.6         374,419         12.09
$12.87 - $15.44      452,121         13.57           6.1         275,261         13.86
$15.44 - $18.02      782,979         16.32           7.2         489,283         16.71
$18.02 - $20.59       15,000         18.96           8.4           3,000         18.96
$20.59 - $23.17       19,008         22.62           9.4           4,008         22.95
$23.17 - $24.15      425,094         24.15           9.1          51,122         24.15
--------------------------------------------------------------------------------------
Total / Average    2,400,932     $   15.59           6.6       1,383,369     $   13.83
======================================================================================
</TABLE>

Information concerning the grants of stock options and restricted stock is as
follows:

                                                                     Weighted
                                                     Weighted        Average
                                         Awards       Average       Grant Date
                                        Granted    Exercise Price   Fair Value
------------------------------------------------------------------------------
2004:
  Option price = fair market value       446,860       $ 24.09       $  6.05
  Option price < fair market value       222,279       $  6.87       $ 13.28
  Restricted stock                        32,418       $ 23.76       $ 23.76
2003:
  Option price = fair market value       449,476       $ 15.78       $  4.12
  Option price < fair market value       393,662       $  5.31       $ 13.73
  Restricted stock                         8,000       $ 19.12       $ 19.12
2002:
  Option price = fair market value       373,404       $ 13.20       $  3.59
  Option price < fair market value        40,000       $ 13.18       $  4.33
==============================================================================

The Company used the Black-Scholes option-pricing model to estimate the weighted
average grant date fair value. The assumptions used in the model are disclosed
in Note A - Stock Based Compensation. Compensation expense related to restricted
stock recognized in the income statement for the years ended December 31, 2004,
2003, and 2002 was $372,000, $105,000 and $353,000, respectively.

On February 21, 1995, the Company adopted a Stockholder Protection Rights
Agreement. Under the Plan, each stockholder received one right, representing the
right to purchase one share of common stock for $42.50 for each share of stock
owned. All of the rights expire on February 21, 2005, but the Company may redeem
the rights earlier for $.005 per right, subject to certain limitations. Rights
will become exercisable if a person or group acquires 15% or more of the
Company's outstanding shares. Until that time, the rights will trade with the
common stock; any transfer of common stock will also constitute a transfer of
the associated right. If the rights become exercisable, they will begin to trade
apart from the common stock. If one of a number of "flip-in events" occurs, each
right will entitle the holder to purchase common stock having a market value
equivalent of two times the exercise price. In January 2005, the Board of
Directors voted to permit the agreement to expire in February 2005.


                                       60
<PAGE>

NOTE M: EARNINGS PER SHARE

The following is a reconciliation of basic to diluted earnings per share for the
years ended December 31:

                                                                           Per
                                                                          Share
(000's omitted, except per share data)             Income      Shares    Amount
-------------------------------------------------------------------------------
Year Ended December 31, 2004
  Basic EPS                                        $50,196     29,916    $  1.68
  Stock options                                                   754
---------------------------------------------------------------------
     Diluted EPS                                   $50,196     30,670    $  1.64
=====================================================================

Year Ended December 31, 2003
  Basic EPS                                        $40,380     26,299    $  1.54
  Stock options                                                   736
---------------------------------------------------------------------
     Diluted EPS                                   $40,380     27,035    $  1.49
=====================================================================

Year Ended December 31, 2002
  Basic EPS                                        $38,517     25,946    $  1.48
  Stock options                                                   388
---------------------------------------------------------------------
     Diluted EPS                                   $38,517     26,334    $  1.46
=====================================================================

There were 424,594, 0 and 469,744 anti-dilutive stock options outstanding for
the years ended December 31, 2004, 2003 and 2002, respectively.

NOTE N: COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS

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 standby letters of credit. Commitments to extend credit are agreements to
lend to customers, generally having fixed expiration dates or other termination
clauses that may require payment of a fee. These commitments consist principally
of unused commercial and consumer credit lines. Standby letters of credit
generally are contingent upon the failure of the customer to perform according
to the terms of an underlying contract with a third party. The credit risks
associated with commitments to extend credit and standby letters of credit are
essentially the same as that involved with extending loans to customers and are
subject to normal credit policies. Collateral may be obtained based on
management's assessment of the customer's creditworthiness. The fair value of
these commitments is immaterial for disclosure in accordance with FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others". The
contract amount of commitment and contingencies is as follows:

(000's omitted)                                             2004          2003
--------------------------------------------------------------------------------
Commitments to extend credit                              $429,751      $315,898
Standby letters of credit                                   22,948        19,163
--------------------------------------------------------------------------------
     Total                                                $452,699      $335,061
================================================================================

The fair value of these financial instruments approximates carrying value.

The Company has unused lines of credit of $47,000,000 at December 31, 2004. The
Company has unused borrowing capacity of approximately $134,492,000 through
collateralized transactions with the Federal Home Loan Bank and $11,325,000
through collateralized transactions with the Federal Reserve Bank.

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 period of December 23, 2004 through January 5, 2005 was
$58,779,000 of which $2,000,000 was required to be on deposit with the Federal
Reserve Bank of New York. The remaining $56,779,000 was represented by cash on
hand.


                                       61
<PAGE>

NOTE O: LEASES

The Company leases buildings and office space under agreements that expire in
various years. Rental expense included in operating expenses amounted to
$2,486,000, $1,940,000 and $1,896,000 in 2004, 2003 and 2002, respectively. The
future minimum rental commitments as of December 31, 2004 for all non-cancelable
operating leases are as follows:

2005                                                                     $ 2,204
2006                                                                       2,022
2007                                                                       1,788
2008                                                                       1,280
2009                                                                       1,002
Thereafter                                                                 4,374
--------------------------------------------------------------------------------
  Total                                                                  $12,670
================================================================================

NOTE P: REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements
administered by the 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
Company and the Bank must meet specific capital guidelines that involve
quantitative measures of the Company's and the Bank's assets, liabilities, and
certain off-balance sheet items as calculated under regulatory accounting
practices. The Company's and the Bank's capital amounts and classification 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 Company and Bank to maintain minimum total core capital to risk
weighted assets of 8%, and tier I capital to risk weighted assets and tier I
capital to average assets of 4%. Management believes, as of December 31, 2004,
that the Company and Bank meet all capital adequacy requirements to which they
are subject.

As of December 31, 2004 and 2003, the most recent notification from the Office
of the Comptroller of the Currency categorized the Company and Bank as "well
capitalized" under the regulatory framework for prompt corrective action. To be
categorized as "well capitalized," the Company and Bank must maintain minimum
total core capital to risk weighted assets of 10%, tier I capital to risk
weighted assets of 6% and tier I capital to average assets of 5%. There are no
conditions or events since that notification that management believes have
changed the institution's category. In addition, there were no significant
capital requirements imposed or agreed to during the regulatory approval process
of any of our acquisitions.

The capital ratios and amounts of the Company and the Bank as of December 31 are
presented below:

<TABLE>
<CAPTION>
                                                    2004                    2003
                                            --------------------    --------------------
(000's omitted)                              Company      Bank       Company      Bank
--------------------------------------      --------------------    --------------------
<S>                                         <C>         <C>         <C>         <C>
Tier 1 capital to average assets
  Amount                                    $284,928    $276,654    $249,641    $245,809
  Ratio                                         6.94%       6.74%       7.26%       7.28%
  Minimum required amount                   $164,229    $164,069    $137,607    $134,977

Tier 1 capital to risk weighted assets
  Amount                                    $284,928    $276,654    $249,641    $245,809
  Ratio                                        11.93%      11.61%      11.76%      11.63%
  Minimum required amount                   $ 95,536    $ 95,337    $ 84,916    $ 84,576

Total core capital to risk weighted assets
  Amount                                    $314,783    $306,447    $276,177    $272,339
  Ratio                                        13.18%      12.86%      13.01%      12.88%
  Minimum required amount                   $191,072    $190,675    $169,831    $169,151
</TABLE>


                                       62
<PAGE>

NOTE Q: PARENT COMPANY STATEMENTS

The condensed balance sheets of the parent company at December 31 is as follows:

(000's omitted)                                             2004          2003
--------------------------------------------------------------------------------
Assets:
  Cash                                                    $ 11,772      $ 24,429
  Investment securities                                      2,885         2,885
  Investment in and advances to subsidiaries               548,781       482,407
  Other assets                                               3,562         3,023
--------------------------------------------------------------------------------
     Total assets                                         $567,000      $512,744
================================================================================

Liabilities and shareholders' equity:
  Accrued interest and other liabilities                  $  8,926      $  7,526
  Borrowings                                                83,446       100,390
  Shareholders' equity                                     474,628       404,828
--------------------------------------------------------------------------------
     Total liabilities and shareholders' equity           $567,000      $512,744
================================================================================

The condensed statements of income of the parent company for the years ended
December 31 is as follows:

<TABLE>
<CAPTION>
(000's omitted)                                           2004       2003       2002
--------------------------------------------------------------------------------------
<S>                                                      <C>        <C>        <C>
Revenues:
  Dividends from subsidiaries                            $41,500    $42,771    $29,587
  Interest on investments                                    179          6         10
  Other income                                                28          0          0
--------------------------------------------------------------------------------------
        Total revenues                                    41,707     42,777     29,597
--------------------------------------------------------------------------------------

Expenses:
  Interest on long term notes and debentures               6,061      5,765      6,112
  Other expenses                                              13         84          9
--------------------------------------------------------------------------------------
        Total expenses                                     6,074      5,849      6,121
--------------------------------------------------------------------------------------

Income before tax benefit and equity in undistributed
  net income of subsidiaries                              35,633     36,928     23,476
Income tax benefit                                         1,461      1,364      1,572
--------------------------------------------------------------------------------------
Income before equity in undistributed net income
  of subsidiaries                                         37,094     38,292     25,048
Equity in undistributed net income of subsidiaries        13,102      2,088     13,469
--------------------------------------------------------------------------------------
Net income                                               $50,196    $40,380    $38,517
======================================================================================
</TABLE>


                                       63
<PAGE>

The statements of cash flows of the parent company for the years ended December
31 is as follows:

<TABLE>
<CAPTION>
(000's omitted)                                                              2004         2003         2002
-------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>          <C>          <C>
Operating activities:
  Net income                                                               $ 50,196     $ 40,380     $ 38,517
  Adjustments to reconcile net income to net cash provided by operating
    activities
    Equity in undistributed net income of subsidiaries                      (13,102)      (2,088)     (13,469)
    Net change in other assets and other liabilities                          3,157        1,633         (886)
-------------------------------------------------------------------------------------------------------------
       Net cash provided by operating activities                             40,251       39,925       24,162
-------------------------------------------------------------------------------------------------------------
Investing activities:
  Purchase of investment securities                                               0         (227)         (76)
  Capital contributions to subsidiaries                                           0      (33,131)        (831)
-------------------------------------------------------------------------------------------------------------
       Net cash used in investing activities                                      0      (33,358)        (907)
-------------------------------------------------------------------------------------------------------------
Financing activities:
  Net change in borrowings                                                  (17,000)      20,000       (6,100)
  Issuance of common stock                                                    5,344        4,819        1,151
  Purchase of treasury stock                                                (21,709)      (8,490)           0
  Cash dividends paid                                                       (19,543)     (15,466)     (14,228)
-------------------------------------------------------------------------------------------------------------
       Net cash (used) provided by financing activities                     (52,908)         863      (19,177)
-------------------------------------------------------------------------------------------------------------
Change in cash and cash equivalents                                         (12,657)       7,430        4,078
Cash and cash equivalents at beginning of year                               24,429       16,999       12,921
-------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                   $ 11,772     $ 24,429     $ 16,999
=============================================================================================================

Supplemental disclosures of cash flow information:
  Cash paid for interest                                                   $  5,943     $  5,841     $  6,412
Supplemental disclosures of non-cash financing activities
  Dividends declared and unpaid                                            $  5,515     $  4,529     $  3,760
</TABLE>


                                       64
<PAGE>

Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a - 15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2004.

Our management's assessment of the effectiveness of our internal control over
financial reporting as of December 31, 2004 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which is included herein.

Community Bank System, Inc.

Date: March 14, 2005


/s/ Sanford A. Belden
---------------------------
Sanford A. Belden,
President, Chief Executive Officer and Director


/s/ Scott A. Kingsley
---------------------------
Scott A. Kingsley,
Treasurer and Chief Financial Officer


                                       65
<PAGE>

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Community Bank System, Inc.

We have completed an integrated audit of Community Bank System, Inc.'s 2004
consolidated financial statements and of its internal control over financial
reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.

Consolidated financial statements

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Community Bank System, Inc. and its subsidiaries at December 31, 2004 and 2003,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2004 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 audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
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 of financial statements 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 audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing under Item 8, that the
Company maintained effective internal control over financial reporting as of
December 31, 2004 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
Syracuse, New York
March 11, 2005


                                       66
<PAGE>

                  TWO YEAR SELECTED QUARTERLY DATA (Unaudited)

<TABLE>
<CAPTION>
2004 Results                                               4th         3rd         2nd         1st
(000's omitted, except per share data)                   Quarter     Quarter     Quarter     Quarter       Total
-----------------------------------------------------------------------------------------------------------------
<S>                                                      <C>         <C>         <C>         <C>         <C>
Net interest income                                      $ 38,575    $ 39,057    $ 37,457    $ 35,954    $151,043
Provision for loan losses                                   2,100       2,300       2,300       2,050       8,750
-----------------------------------------------------------------------------------------------------------------
  Net interest income after provision for loan losses      36,475      36,757      35,157      33,904     142,293
Non-interest income                                        10,832      12,164      10,919      10,530      44,445
Operating expenses                                         30,442      29,926      29,775      29,756     119,899
-----------------------------------------------------------------------------------------------------------------
Income before income taxes                                 16,865      18,995      16,301      14,678      66,839
Income taxes                                                4,199       4,761       4,160       3,523      16,643
-----------------------------------------------------------------------------------------------------------------
Net income                                               $ 12,666    $ 14,234    $ 12,141    $ 11,155    $ 50,196
=================================================================================================================

Basic earnings per share                                 $   0.41    $   0.47    $   0.41    $   0.39    $   1.68
Diluted earnings per share                               $   0.40    $   0.45    $   0.40    $   0.38    $   1.64
=================================================================================================================

<CAPTION>
2003 Results                                               4th         3rd         2nd         1st
(000's omitted, except per share data)                   Quarter     Quarter     Quarter     Quarter       Total
-----------------------------------------------------------------------------------------------------------------
<S>                                                      <C>         <C>         <C>         <C>         <C>
Net interest income                                      $ 34,703    $ 32,539    $ 32,102    $ 32,484    $131,828
Provision for loan losses                                   3,093       2,029       2,673       3,400      11,195
-----------------------------------------------------------------------------------------------------------------
  Net interest income after provision for loan losses      31,610      30,510      29,429      29,084     120,633
Non-interest income                                         7,698       9,779       8,947       8,807      35,231
Operating expenses                                         27,879      25,206      25,179      24,447     102,711
-----------------------------------------------------------------------------------------------------------------
Income before income taxes                                 11,429      15,083      13,197      13,444      53,153
Income taxes                                                2,759       3,354       3,165       3,495      12,773
-----------------------------------------------------------------------------------------------------------------
Net income                                               $  8,670    $ 11,729    $ 10,032    $  9,949    $ 40,380
=================================================================================================================

Basic earnings per share                                 $   0.32    $   0.45    $   0.38    $   0.38    $   1.54
Diluted earnings per share                               $   0.31    $   0.44    $   0.38    $   0.38    $   1.49
=================================================================================================================
</TABLE>

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None

Item 9A. Controls and Procedures

Under the supervision and with the participation of our management, including
our chief executive officer and chief financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a - 15(e) under the Securities Exchange Act of 1934. Based upon
this evaluation, our chief executive officer and our chief financial officer
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this annual report. Management's annual report on
internal control over financial reporting is included under the heading "Report
on Internal Control Over Financial Reporting" at Item 8 of this Annual Report on
Form 10-K. The attestation report of the registered public accounting firm is
included under the heading "Report of the Independent Registered Public
Accounting Firm" at Item 8 of this Annual Report on Form 10-K.

The Company continually assesses the adequacy of its internal control over
financial reporting and enhances its controls in response to internal control
assessments, and internal and external audit and regulatory recommendations. No
change in internal control over financial reporting during the quarter ended
December 31, 2004 or through the date of this Annual Report on Form 10-K have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.

Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate due to changes in conditions, or that the degree of compliance with
the policies or procedures may deteriorate.

Item 9B. Other Information

None


                                       67
<PAGE>

                                    Part III

Item 10. Directors and Executive Officers of the Registrant

The information concerning Directors of the Company required by this Item 10 is
incorporated herein by reference to the sections entitled "Nominees for Director
and Directors Continuing in Office" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement. The information
concerning executive officers of the Company required by this Item 10 is
incorporated by reference to Item 4A of this Annual Report on Form 10-K. The
Company has adopted a code of ethics that applies to its principal executive
officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. The text of the code of
ethics is posted on the Company's web-site at www.communitybankna.com. The
Company intends to satisfy the requirements under Item 5.05 of Form 8-K
regarding an amendment to, or a waiver from, the code of ethics that relates to
certain elements thereof, by posting such information on its web-site referenced
above. In addition, information concerning Audit Committee and Audit Committee
Financial Expert is included in the Proxy Statement under the caption "Audit
Committee Report" and is incorporated herein by reference.

Item 11. Executive Compensation

The information required by this Item 11 is incorporated herein by reference to
the section entitled "Compensation of Executive Officers" in the Company's Proxy
Statement.

Item 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item 12 is incorporated herein by reference to
the section entitled "Nominees for Director and Directors Continuing in Office"
in the Company's Proxy Statement.

Item 13. Certain Relationships and Related Transactions

The information required by this Item 13 is incorporated herein by reference to
the section entitled "Transactions with Management" in the Company's Proxy
Statement.

Item 14. Principal Accounting Fees and Services

The information required by this Item 14 is incorporated herein by reference to
the section entitled "Audit Fees" in the Company's Proxy Statement.


                                       68
<PAGE>

                                     Part IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K

A.    Documents Filed

      1.    The following consolidated financial statements of Community Bank
            System, Inc. and subsidiaries are included in Item 8:

            -     Consolidated Statements of Condition, December 31, 2004 and
                  2003

            -     Consolidated Statements of Income, Years ended December 31,
                  2004, 2003, and 2002

            -     Consolidated Statements of Changes in Shareholders' Equity,
                  Years ended December 31, 2004, 2003, and 2002

            -     Consolidated Statements of Comprehensive Income, Years ended
                  December 31, 2004, 2003, and 2002

            -     Consolidated Statement of Cash Flows, Years ended December 31,
                  2004, 2003, and 2002

            -     Notes to Consolidated Financial Statements, December 31, 2004

            -     Report of Independent Registered Public Accounting Firm

            -     Quarterly selected data, Years ended December 31, 2004 and
                  2003 (unaudited)

      2.    Schedules are omitted since the required information is either not
            applicable or shown elsewhere in the financial statements.

      3.    The exhibits filed as part of this report and exhibits incorporated
            herein by reference to other documents are listed below:

            2.1 Agreement and Plan of Merger, dated January 6, 2004 and amended
            March 11, 2004, by and among Community Bank System, Inc., Community
            Bank, N.A., and First Heritage Bank. Incorporated by reference to
            Annex A to the proxy statement/prospectus included in Registration
            Statement on Form S-4 filed on March 12, 2004, as amended
            (Registration No. 333-113581).

            2.2 Amended and Restated Agreement and Plan of Merger, dated June 7,
            2003, by and between Community Bank System, Inc. and Grange National
            Banc Corp. Incorporated by reference to Annex A to the proxy
            statement/prospectus included in the Registration Statement on Form
            S-4 filed on August 20, 2003, as amended (Registration No.
            333-107949).

            2.3 Agreement and Plan of Merger, dated May 6, 2003, by and among
            the Registrant, PB Acquisition Corp. and Peoples Bankcorp, Inc.
            Incorporated by reference to Exhibit 2.1 to the Current Report on
            Form 8-K of the Registrant filed on May 8, 2003 (Registration No.
            001-13695).

            2.4 Agreement and Plan of Merger, dated November 29, 2000, by and
            between Community Bank System, Inc. and First Liberty Bank Corp.
            Incorporated by reference to Exhibit No. 2.1 to the Current Report
            on Form 8-K filed on December 20, 2000 (Registration No. 001-13695).

            2.5 Agreement regarding the Agreement and Plan of Merger, dated
            September 26, 2000, by and between Community Bank, N.A. and The
            Citizens National Bank of Malone. Incorporated by reference to
            Exhibit No. 10.1 to the Registration Statement on Form S-4 filed on
            October 20, 2000 (Registration No. 333-48374).


                                       69
<PAGE>

            2.6 Purchase and Assumption Agreement, dated December 6, 1994, by
            and between Community Bank System, Inc. and The Chase Manhattan
            Bank, N.A. Incorporated by reference to Exhibit No. 10.01 to the
            Registration Statement on Form S-2 filed on April 11, 1995
            (Registration No. 033-58539).

            3.1 Certificate of Amendment of Certificate of Incorporation of
            Community Bank System, Inc. Incorporated by reference to Exhibit No.
            3.1 to the Quarterly Report on Form 10-Q filed on May 5, 2004
            (Registration No. 001-13695).

            3.2 Bylaws of Community Bank System, Inc., as amended. Incorporated
            by reference to Exhibit No. 3.2 to the Registration Statement on
            Form S-4 filed on October 20, 2000 (Registration No. 333-48374).

            4.1 Junior Subordinated Deferrable Interest Debentures, dated as
            February 3, 1997, by and between Community Bank System, Inc. and The
            Chase Manhattan Bank. Incorporated by reference to Exhibit No. 4.1
            to the Registration Statement on Form S-4 filed on June 25, 1997
            (Registration No. 333-30045).

            4.2 Amended and Restated Declaration of Trust of Community Capital
            Trust I, dated as February 3, 1997, by and between Community Bank
            System, Inc. and The Chase Manhattan Bank. Incorporated by reference
            to Exhibit No. 4.5 to the Registration Statement on Form S-4 filed
            on June 25, 1997 (Registration No. 333-30045).

            4.3 Form of Common Stock Certificate. Incorporated by reference to
            Exhibit No. 4.1 to the Amendment No. 1 to the Registration Statement
            on Form S-3 filed on October 24, 2001 (Registration No. 333-68866).

            10.1 Employment Agreement, effective March 1, 2004, by and between
            Community Bank System, Inc. and Sanford A. Belden. Incorporated by
            reference to Exhibit No. 10.1 to the Annual Report on Form 10-K
            filed on March 12, 2004 (Registration No. 001-13695). **

            10.2 Post-2004 Supplemental Retirement Agreement, effective January
            1, 2005, by and between Community Bank System, Inc., Community Bank
            N.A. and Sanford Belden. * **

            10.3 Pre-2005 Supplemental Retirement Agreement, effective December
            31, 2004, by and between Community Bank System, Inc., Community Bank
            N.A. and Sanford Belden. * **

            10.4 Employment Agreement, effective March 8, 2004, by and between
            Community Bank System, Inc. and Mark E. Tryniski. Incorporated by
            reference to Exhibit No. 10.4 to the Annual Report on Form 10-K
            filed on March 12, 2004 (Registration No. 001-13695). **

            10.5 Supplemental Retirement Plan Agreement, effective July 1, 2003,
            by and between Community Bank System Inc. and Mark E. Tryniski.
            Incorporated by reference to Exhibit No. 10.5 to the Annual Report
            on Form 10-K filed on March 12, 2004 (Registration No. 001-13695).
            **

            10.6 Employment Agreement, effective August 2, 2004, by and between
            Community Bank System, Inc., Community Bank, N.A. and Scott A.
            Kingsley. Incorporated by reference to Exhibit No. 10.3 to the
            Quarterly Report on Form 10-Q filed on August 4, 2004 (Registration
            No. 001-13695). **

            10.7 Supplemental Retirement Plan Agreement, effective August 2,
            2004, by and between Community Bank System Inc. and Scott A.
            Kingsley. Incorporated by reference to Exhibit No. 10.4 to the
            Quarterly Report on Form 10-Q filed on August 4, 2004 (Registration
            No. 001-13695). **

            10.8 Agreement dated December 23, 2002, by and between Community
            Bank System, Inc., Community Bank N.A. and David G. Wallace.
            Incorporated by reference to Exhibit 10.2 to the Annual Report on
            Form 10-K filed on March 23, 2003 (Registration No. 001-13695). **

            10.9 Employment Agreement, effective August 1, 2004, by and between
            Community Bank System, Inc., Community Bank, N.A. and Brian D.
            Donahue. Incorporated by reference to Exhibit No. 10.1 to the
            Quarterly Report on Form 10-Q filed on November 8, 2004
            (Registration No. 001-13695). **

            10.10 Employment Agreement, effective March 20, 2003, by and between
            Community Bank System, Inc. and Michael A. Patton. Incorporated by
            reference to Exhibit No. 10.8 to the Annual Report on Form 10-K
            filed on March 12, 2004 (Registration No. 001-13695). **


                                       70
<PAGE>

            10.11 Supplemental Retirement Plan Agreement, effective February 1,
            2004, by and between Community Bank System Inc. and Michael A.
            Patton. Incorporated by reference to Exhibit No. 10.9 to the Annual
            Report on Form 10-K filed on March 12, 2004 (Registration No.
            001-13695). **

            10.12 Employment Agreement, effective March 20, 2003, by and between
            Community Bank System, Inc. and James A. Wears. Incorporated by
            reference to Exhibit No. 10.6 to the Annual Report on Form 10-K
            filed on March 12, 2004 (Registration No. 001-13695). **

            10.13 Supplemental Retirement Plan Agreement, effective February 1,
            2004, by and between Community Bank System Inc. and James A. Wears.
            Incorporated by reference to Exhibit No. 10.7 to the Annual Report
            on Form 10-K filed on March 12, 2004 (Registration No. 001-13695).
            **

            10.14 Employment Agreement, effective November 21, 2003, by and
            between Community Bank System, Inc. and Thomas A. McCullough.
            Incorporated by reference to Exhibit No. 10.10 to the Annual Report
            on Form 10-K filed on March 12, 2004 (Registration No. 001-13695).
            **

            10.15 Supplemental Retirement Plan Agreement, effective March 26,
            2003, by and between Community Bank System Inc. and Thomas
            McCullough. Incorporated by reference to Exhibit No. 10.11 to the
            Annual Report on Form 10-K filed on March 12, 2004 (Registration No.
            001-13695). **

            10.16 Employment Agreement, effective May 1, 2004, by and between
            Community Bank System, Inc., Community Bank N.A. and Steven R.
            Tokach. Incorporated by reference to Exhibit No. 10.2 to the
            Quarterly Report on Form 10-Q filed on August 4, 2004 (Registration
            No. 001-13695). **

            10.17 Employment Agreement, effective September 1, 2002, by and
            between Community Bank System, Inc., Community Bank N.A. and Timothy
            J. Baker. Incorporated by reference to Exhibit No. 10.2 to the
            Quarterly Report on Form 10-Q filed on November 8, 2004
            (Registration No. 001-13695). **

            10.18 Change of Control Agreement, effective November 30, 2001 by
            and between Community Bank System, Inc., Community Bank N.A. and W.
            Valen McDaniel. * **

            10.19 Employment Agreement, effective September 1, 2002, by and
            between Community Bank System, Inc., Community Bank N.A. and Joseph
            J. Lemchak. Incorporated by reference to Exhibit No. 10.4 to the
            Quarterly Report on Form 10-Q filed on November 8, 2004
            (Registration No. 001-13695). **

            10.20 Employment Agreement, effective October 1, 2004, by and
            between Community Bank System, Inc., Community Bank N.A. and J.
            David Clark. Incorporated by reference to Exhibit No. 10.3 to the
            Quarterly Report on Form 10-Q filed on November 8, 2004
            (Registration No. 001-13695). **

            10.21 Employment Agreement, effective May 15, 2004, by and between
            Community Bank System, Inc., Community Bank N.A. and Robert P.
            Matley. * **

            10.22 Change of Control Agreement, effective August 20, 2002 by and
            between Community Bank System, Inc., Community Bank N.A. and J.
            Michael Wilson. * **

            10.23 Employment Agreement, effective April 3, 2000, by and between
            Community Bank System, Inc. and David J. Elias. Incorporated by
            reference to Exhibit No. 10.12 to the Annual Report on Form 10-K
            filed on March 12, 2004 (Registration No. 001-13695). **

            10.24 2004 Long-Term Incentive Compensation Program. Incorporated by
            reference to Appendix A to the Definitive Proxy Statement on
            Schedule 14A filed on April 15, 2004 (Registration No. 001-13695).
            **

            10.25 Stock Balance Plan for Directors, as amended. Incorporated by
            reference to Annex I to the Definitive Proxy Statement on Schedule
            14A filed on March 31, 1998 (Registration No. 001-13695).**

            10.26 Deferred Compensation Plan for Directors, as amended.
            Incorporated by reference to Annex I to the Definitive Proxy
            Statement on Schedule 14A filed on March 31, 1998 (Registration No.
            001-13695).**

            10.27 Community Bank System, Inc. Pension Plan Amended and Restated
            as of January 1, 2004. **

            21.1 Subsidiaries of Community Bank System, Inc.


                                       71
<PAGE>

                                                               Jurisdiction of
                  Name                                          Incorporation
                  ----                                         ---------------
                  Community Bank, N.A                             New York
                  Community Capital Trust I                       Delaware
                  Community Capital Trust II                      Delaware
                  Community Statutory Trust III                   Connecticut
                  Community Financial Services, Inc.              New York
                  Benefit Plans Administrative Services, Inc.     New York
                  Benefit Plans Administrative Services LLC       New York
                  Harbridge Consulting Group LLC                  New York
                  CBNA Treasury Management Corporation            New York
                  Community Investment Services, Inc.             New York
                  CBNA Preferred Funding Corp.                    Delaware
                  CFSI Close-Out Corp.                            New York
                  Elias Asset Management, Inc.                    Delaware
                  First Liberty Service Corporation               Delaware
                  First of Jermyn Realty Co.                      Delaware

            23.1 Consent of PricewaterhouseCoopers LLP. *

            31.1 Certification of Sanford A. Belden, President and Chief
            Executive Officer of the Registrant, pursuant to Rule 13a-15(e) or
            Rule 15d-15(e) under the Securities Exchange Act of 1934, as adopted
            pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

            31.2 Certification of Scott A. Kingsley, Treasurer and Chief
            Financial Officer of the Registrant, pursuant to Rule 13a-15(e) or
            Rule 15d-15(e) under the Securities Exchange Act of 1934, as adopted
            pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

            32.1 Certification of Sanford A. Belden, President and Chief
            Executive Officer of the Registrant, pursuant to 18 U.S.C. Section
            1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
            of 2002. *

            32.2 Certification of Scott A. Kingsley, Treasurer and Chief
            Financial Officer of the Registrant, pursuant to 18 U.S.C. Section
            1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
            of 2002. *

            *     Filed herewith

            **    Denotes management contract or compensatory plan or
                  arrangement

B.    Reports on Form 8-K

            o     Form 8-K related to quarterly earnings press release was filed
                  on January 25, 2005.

            o     Form 8-K related to quarterly earnings press release was filed
                  on October 25, 2004.

C.    Not applicable


                                       72
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

COMMUNITY BANK SYSTEM, INC.


By:  /s/ Sanford A. Belden
   -----------------------
   Sanford A. Belden
   President, Chief Executive Officer and Director
   March 14, 2005

Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 14th day of March 2005.


/s/ James A. Gabriel
--------------------------
James A. Gabriel, Director and
Chairman of the Board of Directors


/s/ Scott A. Kingsley
--------------------------
Scott A. Kingsley
Treasurer and Chief Financial Officer

Directors:


/s/ Brian R. Ace
--------------------------
Brian R. Ace, Director


/s/ John M. Burgess
--------------------------
John M. Burgess, Director


/s/ Paul M. Cantwell, Jr.
--------------------------
Paul M. Cantwell, Jr., Director


/s/ William M. Dempsey
--------------------------
William M. Dempsey, Director


/s/ Nicholas A. DiCerbo
--------------------------
Nicholas A. DiCerbo, Director


/s/ Lee T. Hirschey
--------------------------
Lee T. Hirschey, Director


/s/ Harold S. Kaplan
--------------------------
Harold S. Kaplan, Director


/s/ Saul Kaplan
--------------------------
Saul Kaplan, Director


/s/ Charles E. Parente
--------------------------
Charles E. Parente, Director


/s/ David C. Patterson
--------------------------
David C. Patterson, Director


/s/ Peter A. Sabia
--------------------------
Peter A. Sabia, Director


/s/ Sally A. Steele
--------------------------
Sally A. Steele, Director


                                       73
<PAGE>

NEW YORK STOCK EXCHANGE

The undersigned Chief Executive Officer of Community Bank System, Inc. certifies
to the New York Stock Exchange that, as of the date of this certification, he is
unaware of any violation by Community Bank System, Inc. of the New York Stock
Exchange's corporate governance listing standards in effect as of the date of
this certification.

Date: March 14, 2005


/s/ Sanford A. Belden
--------------------------
Sanford A. Belden,
President, Chief Executive Officer and Director


                                       74

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.2
<SEQUENCE>2
<FILENAME>d62959_ex10-2.txt
<DESCRIPTION>POST-2004 SUPPLEMENTAL RETIREMENT AGREEMENT
<TEXT>

                                                                    Exhibit 10.2

                POST-2004 SUPPLEMENTAL RETIREMENT PLAN AGREEMENT

            This sets forth the Post-2004 Supplemental Retirement Plan Agreement
made effective as of January 1, 2005 between (i) COMMUNITY BANK SYSTEM, INC., a
Delaware corporation and registered bank holding company, and COMMUNITY BANK,
N.A., a national banking association, both having offices located in Dewitt, New
York (collectively, the "Employer"), and (ii) SANFORD A. BELDEN, an individual
currently residing at 9 Lynacres Boulevard, Fayetteville, New York ("Employee").
This Agreement is entered into pursuant to paragraph 4(d) of the Employment
Agreement between the parties, effective as of March 1, 2004 and as amended
("Employment Agreement").

                                   WITNESSETH

            IN CONSIDERATION of the promises and mutual agreements and covenants
contained herein, and other good and valuable consideration, the parties agree
as follows:

      1. Supplemental Retirement Benefit.

            (a) Employer shall pay Employee an annual supplemental retirement
benefit equal to the product of (i) 5% times Employee's number of years of
service, considering only the Employee's first 10 years of service, plus 2%
times Employee's number of years of service in excess of ten years, times (ii)
Employee's final average compensation, with the product of (i) times (ii)
reduced by Employee's other retirement benefits. Notwithstanding the foregoing,
except in the event of Employee's voluntary termination of employment prior to
July 1, 2006, the product of (i) times (ii) above shall not be less than the
product that would be derived if

<PAGE>

Employee remained employed pursuant to the Employment Agreement through December
31, 2007 and received the Base Salary (including increases) and Management
Incentive Plan payments (assuming a minimum 50 percent incentive payment under
Employer's Management Incentive Plan) described in the Employment Agreement.
Subject to the adjustments described in paragraph 1(h), the benefit described in
this paragraph 1(a) initially shall be expressed as a single life annuity
(payable for Employee's life) commencing as of the date determined pursuant to
paragraph 1(g).

            (b) For purposes of this paragraph 1, and subject to paragraph 2,
"years of service" shall be credited to Employee in the same manner as years of
service are credited to Employee under the Community Bank System, Inc. Pension
Plan, as amended through December 31, 2004 ("Pension Plan"); and no more than 15
years of service will be taken into account under paragraphs 1 and 2.

            (c) For purposes of this paragraph 1, and except as provided in the
second sentence of paragraph 1(a) and in paragraph 2(a)(iii), Employee's "final
average compensation" shall be the annual average of Employee's Base Salary (as
defined in the Employment Agreement) and cash incentive payment awarded during
the five consecutive calendar years preceding Employee's termination.

            (d) For purposes of this paragraph 1, Employee's "other retirement
benefits" shall mean the sum of

                  (i) the annual benefit earned by Employee pursuant to the
Pension Plan, plus


                                      -2-
<PAGE>

                  (ii) 50 percent of the estimated annual benefit payable to
Employee pursuant to the Federal Social Security Act, plus

                  (iii) the annual benefit that could be provided by Employer
contributions (other than elective deferrals) made on Employee's behalf under
(A) the Community Bank System, Inc. 401(k) Employee Stock Ownership Plan, and
(B) the Deferred Compensation Plan for Certain Executive Employees of Community
Bank System, Inc., adjusted to reflect actual earnings, losses and expenses
credited to and charged against such Employer contributions, if such
contributions (as adjusted) were converted to a single life annuity benefit
payable at the same time as the benefit paid under this paragraph 1, using the
factors applied to determine actuarial equivalents under the Pension Plan at the
time payments begin under this paragraph 1; plus

                  (iv) the annual benefit payable to or on behalf of Employee
pursuant to the separate Pre-2005 Supplemental Retirement Plan Agreement between
Employee and Employer, when such benefit is expressed as an actuarially
equivalent single life annuity payable for Employee's life commencing as of the
date determined pursuant to paragraph 1(g) (using the factors applied to
determine actuarial equivalents under the Pension Plan at the time payments
begin).

            (e) For purposes of paragraph 1(d)(ii), Employee's Social Security
Benefit ("Benefit") will be valued by the actual Benefit Employee receives or is
qualified to receive at the time Employee elects to receive the supplemental
retirement benefit, or if Employee has not yet qualified for the Benefit, the
Benefit will be valued by the maximum benefit available to an individual equal
in age to Employee.


                                      -3-
<PAGE>

            (f) For the purposes of paragraph 1(d)(i), Employee's Pension Plan
benefit will be Employee's accrued benefit under the Pension Plan, determined as
of the earlier of (i) the date Employee begins to receive such Pension Plan
benefit, or (ii) the date Employee begins to receive the supplemental retirement
plan benefit, expressed (in either case) in the form of a single life annuity
(payable for Employee's life) commencing as of the date determined pursuant to
paragraph 1(g). In the event payments of supplemental retirement benefits
commence before payments of Employee's Pension Plan benefit commence, the
supplemental retirement benefit shall be adjusted (if necessary) to reflect any
difference between the Pension Plan benefit calculated pursuant to the preceding
sentence and the actual benefit paid to Employee pursuant to the Pension Plan.

            (g) The supplemental retirement benefit described in paragraph 1
shall be payable commencing on the first day of the seventh month that follows
the month during which Employee separates from service (or, if earlier, the
month during which Employee dies).

            (h) The supplemental retirement benefit described in this paragraph
1 shall be paid in the form of an actuarially reduced Joint and 100% Survivor
benefit (using the factors applied to determine actuarial equivalents under the
Pension Plan at the time payments begin), with Employee's spouse as survivor
annuitant.

      Notwithstanding the foregoing, if Employee dies prior to commencing
receipt of payments under this paragraph 1, Employee's surviving spouse shall
receive an actuarially reduced 100% survivor benefit determined as if Employee
retired on the day prior to his death and immediately commenced receipt of
payments under both this paragraph 1 (including any adjustment required by the
second sentence of paragraph 1(a)) and the Pension Plan in the form


                                      -4-
<PAGE>

of an actuarially reduced Joint and 100% Survivor benefit with his spouse as
survivor annuitant. If Employee has no spouse at the time of Employee's death,
no survivor benefits shall be paid pursuant to this paragraph 1.

            (i) Employer shall establish a "grantor trust" (as that term is
defined in Internal Revenue Code Section 671) to aid it in the accumulation and
payment of the supplemental retirement benefit described in this paragraph 1;
provided that the trust shall be established with the intention that the
creation and funding of the trust shall not result in the recognition of gross
income by Employee of any amount credited under the trust prior to the date the
amount is paid or made available. Assets of the trust, and any other assets set
aside by Employer to satisfy its obligations under this Agreement, shall remain
at all times subject to the claims of Employer's general creditors. Employee and
his beneficiaries shall not have any rights under this paragraph 1 that are
senior to the claims of general unsecured creditors of Employer. Notwithstanding
any other term or provision of this Agreement or the trust, within ten business
days following Employee's termination of employment with Employer due to
Employee's retirement (including Employee's voluntary early retirement),
disability or death, or, if earlier, immediately prior to the effective date of
a "Change of Control" (as defined in the Employment Agreement), Employer shall
fully fund the trust (using the same actuarial assumptions used to establish
funding in the Pension Plan) for all benefits earned pursuant to this Agreement
through the date of Employee's termination of employment or the effective date
of the Change of Control, as applicable.

            (j) The right to receive the supplemental retirement benefit
described in this paragraph 1 shall not be subject in any manner to
anticipation, alienation, sale, transfer,


                                      -5-
<PAGE>

assignment, pledge or encumbrance, nor subject to attachment, garnishment, levy,
execution or other legal or equitable process for the debts, contracts or
liabilities of Employee or his beneficiaries.

            (k) Notwithstanding the foregoing of this paragraph 1 or any other
provision of this Agreement, supplemental retirement benefits earned pursuant to
this Agreement shall be limited to those benefits earned by Employee after
December 31, 2004. Supplemental retirement benefits earned by Employee through
December 31, 2004 are determined pursuant to the separate Pre-2005 Supplemental
Retirement Plan Agreement between Employee and Employer, as such benefits are
valued in accordance with Internal Revenue Service Notice 2005-1 (Q&A 17). In no
event will retirement benefits of any type payable to Employee be duplicated.

      2. Change of Control

            (a) If Employee's employment with Employer shall cease for any
reason, including Employee's voluntary termination for "good reason," but not
including Employee's termination for "cause" or Employee's voluntary termination
without "good reason," within 2 years following a "Change of Control", (as those
quoted terms are defined in the Employment Agreement), Employer shall:

                  (i) Credit Employee under this Agreement with the greater of 3
years of service or the years of service Employee is retained as a consultant
under the terms of paragraph 6 of the Employment Agreement for purposes of
determining Employee's supplemental retirement benefit described in paragraph 1;
and


                                      -6-
<PAGE>

                  (ii) Credit Employee under this Agreement with two additional
years of service for purposes of determining Employee's supplemental retirement
benefit described in paragraph 1; and

                  (iii) Determine Employee's "final average compensation" under
paragraph 1(c) by considering the years of service Employee is retained as a
consultant under the terms of the Employment Agreement as service that precedes
Employee's termination and considering amounts paid to Employee during that
period as Base Salary and cash incentive payments to Employee.

            (b) Subject to paragraph 2(c) below, if any portion of the amounts
paid to, or value received by, Employee following a "Change of Control"
constitutes an "excess parachute payment" within the meaning of Internal Revenue
Code Section 280G, then, to the extent permitted by Internal Revenue Code
Section 409A, the parties shall negotiate a restructuring of payment dates
and/or methods (but not payment amounts) to minimize or eliminate the
application of Internal Revenue Code Section 280G. If an agreement to
restructure payments cannot be reached within 60 days of the date the first
payment is due under this Agreement, then payments shall be made without
restructuring. The amount of any payment shall be increased to the extent
necessary to hold Employee harmless from all income and excise tax liability
attributable to such payment.


                                      -7-
<PAGE>

      3. Construction and Severability.

            The invalidity of any one or more provisions of this Agreement or
any part thereof, all of which are inserted conditionally upon their being valid
in law, shall not affect the validity of any other provisions to this Agreement;
and in the event that one or more provisions contained herein shall be invalid,
as determined by a court of competent jurisdiction, this instrument shall be
construed as if such invalid provisions had not been inserted.

      4. Governing Law. This Agreement was executed and delivered in New York
and shall be construed and governed in accordance with the laws of the State of
New York.

      5. Assignability and Successors. This Agreement may not be assigned by
Employee or Employer, except that this Agreement shall be binding upon and shall
inure to the benefit of the successor of Employer through merger or corporate
reorganization.

      6. Miscellaneous. This Agreement constitutes the entire understanding and
agreement between the parties with respect to the subject matter hereof and
shall supersede all prior understandings and agreements regarding the
calculation and payment of supplemental retirement benefits earned after
December 31, 2004. This Agreement cannot be amended, modified, or supplemented
in any respect, except by a subsequent written agreement entered into by the
parties hereto.

      7. Counterparts. This Agreement may be executed in counterparts (each of
which need not be executed by each of the parties), which together shall
constitute one and the same instrument.

      8. Jurisdiction, Venue and Fees. The jurisdiction of any proceeding
between the parties arising out of, or with respect to, this Agreement shall be
in a court of competent


                                      -8-
<PAGE>

jurisdiction in New York State, and venue shall be in Onondaga County. Each
party shall be subject to the personal jurisdiction of the courts of New York
State. If Employee is a party in a proceeding to collect payments due pursuant
to this Agreement and prevails in collecting payments due in the proceeding or
settlement of the proceeding, Employer shall reimburse Employee for reasonable
attorneys' fees incurred by Employee in connection with such proceeding.


                                      -9-
<PAGE>

            The foregoing is established by the following signatures of the
parties.

                                        COMMUNITY BANK SYSTEM, INC.

                                        By: /s/ James A. Gabriel
                                            -----------------------------

                                        Its: Chairman

                                        Date: February 15, 2005


                                        COMMUNITY BANK, N.A.

                                        By: /s/ James A. Gabriel
                                            -----------------------------

                                        Its: Chairman

                                        Date: February 15, 2005


                                        /s/ Sanford A. Belden
                                        ---------------------------------
                                        SANFORD A. BELDEN

                                        Date: February 15, 2005


                                      -10-


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>3
<FILENAME>d62959_ex10-3.txt
<DESCRIPTION>PRE-2005 SUPPLEMENTAL RETIREMENT AGREEMENT
<TEXT>

                                                                    Exhibit 10.3

                 PRE-2005 SUPPLEMENTAL RETIREMENT PLAN AGREEMENT

      This sets forth an amendment and restatement of the Supplemental
Retirement Plan Agreement made effective as of March 1, 2004 between (i)
COMMUNITY BANK SYSTEM, INC., a Delaware corporation and registered bank holding
company, and COMMUNITY BANK, N.A., a national banking association, both having
offices located in Dewitt, New York (collectively, the "Employer"), and (ii)
SANFORD A. BELDEN, an individual currently residing at 9 Lynacres Boulevard,
Fayetteville, New York ("Employee"). This amended and restated Agreement
supersedes the March 1, 2004 version of this Agreement, and is entered into
pursuant to paragraph 4(d) of the Employment Agreement between the parties,
effective as of March 1, 2004 and as amended ("Employment Agreement"). This
amended and restated Agreement is effective as of December 31, 2004.

      This amended and restated Agreement is entered into by the parties in
accordance with guidance provided by the Internal Revenue Service in Internal
Revenue Service Notice 2005-1. The intent of this amended and restated Agreement
is to preserve supplemental retirement benefits earned and vested under this
Agreement (and prior versions of this Agreement) through December 31, 2004 and
to stop future accruals under this Agreement as of December 31, 2004.
Supplemental retirement benefits earned and vested through December 31, 2004
will be treated as not subject to the requirements of Internal Revenue Code
Section 409A. Supplemental retirement benefits earned after December 31, 2004,
which benefits will be subject to Internal Revenue Code Section 409A, shall be
determined and governed by the separate Post-2004 Supplemental Retirement Plan
Agreement between the parties.

<PAGE>

                                   WITNESSETH

            IN CONSIDERATION of the promises and mutual agreements and covenants
contained herein, and other good and valuable consideration, the parties agree
as follows:

      1. Supplemental Retirement Benefit.

            (a) Employer shall pay Employee an annual supplemental retirement
benefit equal to the product of (i) 5% times Employee's number of years of
service, considering only the Employee's first 10 years of service, plus 2%
times Employee's number of years of service in excess of ten years, times (ii)
Employee's final average compensation, with the product of (i) times (ii)
reduced by Employee's other retirement benefits. Notwithstanding the foregoing,
except in the event of Employee's voluntary termination of employment prior to
July 1, 2006, the product of (i) times (ii) above shall not be less than the
product that would be derived if Employee remained employed pursuant to the
Employment Agreement through December 31, 2007 and received the Base Salary
(including increases) and Management Incentive Plan payments (assuming a minimum
50 percent incentive payment under Employer's Management Incentive Plan)
described in the Employment Agreement. Subject to the adjustments described in
paragraph 1(h), the benefit described in this paragraph 1(a) initially shall be
expressed as a single life annuity (payable for Employee's life) commencing as
of the date determined pursuant to paragraph 1(g).

            (b) For purposes of this paragraph 1, and subject to paragraph 2,
"years of service" shall be credited to Employee in the same manner as years of
service are credited to Employee under the Community Bank System, Inc. Pension
Plan, as amended through


                                      -2-
<PAGE>

December 31, 2004 ("Pension Plan"); and no more than 15 years of service will be
taken into account under paragraphs 1 and 2.

            (c) For purposes of this paragraph 1, and except as provided in the
second sentence of paragraph 1(a) and in paragraph 2(a)(iii), Employee's "final
average compensation" shall be the annual average of Employee's Base Salary (as
defined in the Employment Agreement) and cash incentive payment awarded during
the five consecutive calendar years preceding Employee's termination.

            (d) For purposes of this paragraph 1, Employee's "other retirement
benefits" shall mean the sum of

                  (i) the annual benefit earned by Employee pursuant to the
Pension Plan, plus

                  (ii) 50 percent of the estimated annual benefit payable to
Employee pursuant to the Federal Social Security Act, plus

                  (iii) the annual benefit that could be provided by Employer
contributions (other than elective deferrals) made on Employee's behalf under
(A) the Community Bank System, Inc. 401(k) Employee Stock Ownership Plan, and
(B) the Deferred Compensation Plan for Certain Executive Employees of Community
Bank System, Inc., plus earnings on such Employer contributions under (A) and
(B) at an assumed rate of 8% per year, if such contributions (as adjusted) were
converted to a single life annuity benefit payable at the same time as the
benefit paid under this paragraph 1, using the factors applied to determine
actuarial equivalents under the Pension Plan at the time payments begin under
this paragraph 1.


                                      -3-
<PAGE>

            (e) For purposes of paragraph 1(d)(ii), Employee's Social Security
Benefit ("Benefit") will be valued by the actual Benefit Employee receives or is
qualified to receive at the time Employee elects to receive the supplemental
retirement benefit, or if Employee has not yet qualified for the Benefit, the
Benefit will be valued by the maximum benefit available to a then 62 year old
individual.

            (f) For the purposes of paragraph 1(d)(i), Employee's Pension Plan
benefit will be Employee's accrued benefit under the Pension Plan, determined as
of the earlier of (i) the date Employee begins to receive such Pension Plan
benefit, or (ii) the date Employee begins to receive the supplemental retirement
plan benefit, expressed (in either case) in the form of a single life annuity
(payable for Employee's life) commencing as of the date determined pursuant to
paragraph 1(g). In the event payments of supplemental retirement benefits
commence before payments of Employee's Pension Plan benefit commence, the
supplemental retirement benefit shall be adjusted (if necessary) to reflect any
difference between the Pension Plan benefit calculated pursuant to the preceding
sentence and the actual benefit paid to Employee pursuant to the Pension Plan.

            (g) The supplemental retirement benefit described in paragraph 1
shall be payable commencing on the first day of the month following the later of
(i) Employee's receipt of all payments due under the terms of his Employment
Agreement, or (ii) termination of employment as an employee of Employer.

            (h) The supplemental retirement benefit described in this paragraph
1 shall be paid in the form of an actuarially reduced Joint and 100% Survivor
benefit (using the factors applied to determine actuarial equivalents under the
Pension Plan at the time payments begin),


                                      -4-
<PAGE>

with Employee's spouse as survivor annuitant; provided, however, that, if
Employee or his beneficiaries shall receive payment of Employee's benefit under
the Pension Plan prior to Employee's attainment of age 62, then the supplement
retirement benefit under this paragraph 1 shall be subject to the same early
retirement reduction, using the factors applied to determine early retirement
benefits under the Pension Plan at the time payments begin.

      Notwithstanding the foregoing, if Employee dies prior to commencing
receipt of payments under this paragraph 1, Employee's surviving spouse shall
receive an actuarially reduced 100% survivor benefit determined as if Employee
retired on the day prior to his death and immediately commenced receipt of
payments under both this paragraph 1 (including any adjustment required by the
second sentence of paragraph 1(a)) and the Pension Plan in the form of an
actuarially reduced Joint and 100% Survivor benefit with his spouse as survivor
annuitant. If Employee has no spouse at the time of Employee's death, no
survivor benefits shall be paid pursuant to this paragraph 1.

            (i) Employer shall establish a "grantor trust" (as that term is
defined in Internal Revenue Code Section 671) to aid it in the accumulation and
payment of the supplemental retirement benefit described in this paragraph 1;
provided that the trust shall be established with the intention that the
creation and funding of the trust shall not result in the recognition of gross
income by Employee of any amount credited under the trust prior to the date the
amount is paid or made available. Assets of the trust, and any other assets set
aside by Employer to satisfy its obligations under this Agreement, shall remain
at all times subject to the claims of Employer's general creditors. Employee and
his beneficiaries shall not have any rights under this paragraph 1 that are
senior to the claims of general unsecured creditors of Employer.


                                      -5-
<PAGE>

Notwithstanding any other term or provision of this Agreement or the trust,
within ten business days following Employee's termination of employment with
Employer due to Employee's retirement (including Employee's voluntary early
retirement), disability or death, or, if earlier, immediately prior to the
effective date of a "Change of Control" (as defined in the Employment
Agreement), Employer shall fully fund the trust (using the same actuarial
assumptions used to establish funding in the Pension Plan) for all benefits
earned pursuant to this Agreement through the date of Employee's termination of
employment or the effective date of the Change of Control, as applicable.

            (j) The right to receive the supplemental retirement benefit
described in this paragraph 1 shall not be subject in any manner to
anticipation, alienation, sale, transfer, assignment, pledge or encumbrance, nor
subject to attachment, garnishment, levy, execution or other legal or equitable
process for the debts, contracts or liabilities of Employee or his
beneficiaries.

            (k) Notwithstanding the foregoing of this paragraph 1 or any other
provision of this Agreement, Employee's supplemental retirement benefit
determined pursuant to this Agreement shall not be greater than the benefit
determined as of December 31, 2004 in accordance with Internal Revenue Service
Notice 2005-1 (Q&A 17). Employee shall not earn supplement retirement benefits
pursuant to this Agreement after December 31, 2004. Supplemental retirement
benefits earned by Employee after December 31, 2004 shall be determined and
governed by the separate Post-2004 Supplemental Retirement Plan Agreement
between the parties. In no event will retirement benefits of any type payable to
Employee be duplicated.


                                      -6-
<PAGE>

      2. Change of Control

            (a) If Employee's employment with Employer shall cease for any
reason, including Employee's voluntary termination for "good reason," but not
including Employee's termination for "cause" or Employee's voluntary termination
without "good reason," within 2 years following a "Change of Control", (as those
quoted terms are defined in the Employment Agreement), Employer shall:

                  (i) Credit Employee under this Agreement with the greater of 3
years of service or the years of service Employee is retained as a consultant
under the terms of paragraph 6 of the Employment Agreement for purposes of
determining Employee's supplemental retirement benefit described in paragraph 1;
and

                  (ii) Credit Employee under this Agreement with two additional
years of service for purposes of determining Employee's supplemental retirement
benefit described in paragraph 1; and

                  (iii) Determine Employee's "final average compensation" under
paragraph 1(c) by considering the years of service Employee is retained as a
consultant under the terms of the Employment Agreement as service that precedes
Employee's termination and considering amounts paid to Employee during that
period as Base Salary and cash incentive payments to Employee.

            (b) Subject to paragraph 2(c) below, if any portion of the amounts
paid to, or value received by, Employee following a "Change of Control"
constitutes an "excess parachute payment" within the meaning of Internal Revenue
Code Section 280G, then the parties shall negotiate a restructuring of payment
dates and/or methods (but not payment amounts) to


                                      -7-
<PAGE>

minimize or eliminate the application of Internal Revenue Code Section 280G. If
an agreement to restructure payments cannot be reached within 60 days of the
date the first payment is due under this Agreement, then payments shall be made
without restructuring. The amount of any payment shall be increased to the
extent necessary to hold Employee harmless from all income and excise tax
liability attributable to such payment.

            (c) Notwithstanding the foregoing of this paragraph 2, if the Board
of Directors of Employer elects to make a single lump sum payment to Employee
pursuant to paragraph 6(a)(vi) of the Employment Agreement, Employer shall pay
all benefits due Employee pursuant to this Agreement in an actuarial equivalent
single lump sum payment within 90 days following a Change of Control and
Employee's termination of employment with Employer. In the event a single lump
sum payment is made pursuant to the foregoing sentence, the amount of the
payment shall be increased to the extent necessary to hold Employee harmless
from all income and excise tax liability attributable to such single lump sum
payment.

      3. Construction and Severability.

            The invalidity of any one or more provisions of this Agreement or
any part thereof, all of which are inserted conditionally upon their being valid
in law, shall not affect the validity of any other provisions to this Agreement;
and in the event that one or more provisions contained herein shall be invalid,
as determined by a court of competent jurisdiction, this instrument shall be
construed as if such invalid provisions had not been inserted. This Agreement
shall be interpreted and applied in all circumstances in a manner that is
consistent with the intent of the parties that the amount earned and vested
pursuant to this Agreement


                                      -8-
<PAGE>

through December 31, 2004 shall not be subject to the requirements of Internal
Revenue Code Section 409A.

      4. Governing Law. This Agreement was executed and delivered in New York
and shall be construed and governed in accordance with the laws of the State of
New York.

      5. Assignability and Successors. This Agreement may not be assigned by
Employee or Employer, except that this Agreement shall be binding upon and shall
inure to the benefit of the successor of Employer through merger or corporate
reorganization.

      6. Miscellaneous. This Agreement constitutes the entire understanding and
agreement between the parties with respect to the subject matter hereof and
shall supersede all prior understandings and agreements regarding supplemental
retirement benefits earned through December 31, 2004, including the March 1,
2004 version of this Agreement. This Agreement cannot be amended, modified, or
supplemented in any respect, except by a subsequent written agreement entered
into by the parties hereto.

      7. Counterparts. This Agreement may be executed in counterparts (each of
which need not be executed by each of the parties), which together shall
constitute one and the same instrument.

      8. Jurisdiction, Venue and Fees. The jurisdiction of any proceeding
between the parties arising out of, or with respect to, this Agreement shall be
in a court of competent jurisdiction in New York State, and venue shall be in
Onondaga County. Each party shall be subject to the personal jurisdiction of the
courts of New York State. If Employee is a party in a proceeding to collect
payments due pursuant to this Agreement and prevails in collecting payments due
in the proceeding or settlement of the proceeding, Employer shall reimburse


                                      -9-
<PAGE>

Employee for reasonable attorneys' fees incurred by Employee in connection with
such proceeding.

            The foregoing is established by the following signatures of the
parties.

                                        COMMUNITY BANK SYSTEM, INC.

                                        By: /s/ James A. Gabriel
                                            -----------------------------

                                        Its: Chairman

                                        Date: February 15, 2005


                                        COMMUNITY BANK, N.A.

                                        By: /s/ James A. Gabriel
                                            -----------------------------

                                        Its: Chairman

                                        Date: February 15, 2005


                                        /s/ Sanford A. Belden
                                        ---------------------------------
                                        SANFORD A. BELDEN

                                        Date: February 15, 2005


                                      -10-


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.18
<SEQUENCE>4
<FILENAME>d62959_ex10-18.txt
<DESCRIPTION>CHANGE OF CONTROL
<TEXT>

                                                                   Exhibit 10.18

                           CHANGE OF CONTROL AGREEMENT

                  This CHANGE OF CONTROL AGREEMENT is dated as of November 30,
2001 between COMMUNITY BANK SYSTEM, INC., a Delaware Corporation and registered
bank holding company ("CBSI"), and COMMUNITY BANK, N.A., a wholly-owned
subsidiary of CBSI, having an office in DeWitt, New York ("CBNA") (CBSI and CBNA
are referred to collectively in this Agreement as the "Employer"), and W. Valen
McDaniel ("Employee").

                                    Recitals

      A.    Employee is currently employed by CBNA in a senior management
            capacity.

      B.    Employer desires to retain the services of Employee and to induce
            Employee to remain with CBNA.

      C.    In consideration of the agreements of the parties contained in this
            Agreement, and intending to be legally bound by the terms of this
            Agreement, the parties agree as follows:

                                      Terms

1. Term of Agreement.

      The term of this Agreement shall be for the period from the date of the
Agreement to December 31, 2005 and shall automatically expire effective December
31, 2005.

<PAGE>

2. Change of Control.

      (a) Subject to the limitations described in paragraphs 2(d), (e), (f) and
(g), if Employee's employment by CBNA shall cease for any reason, including
Employee's voluntary termination, but not including Employee's termination for
"cause" (as defined in paragraph 3), within 1 year following a "Change of
Control" that occurs during the term of this Agreement, Employer shall:

            (i) Pay to Employee an aggregate severance benefit equal to (A) the
greater of 150 percent of Employee's then current Base Salary or the severance
benefit otherwise due Employee, plus (B) an amount equal to the Management
Incentive paid to Employee in the year previous to the year during which the
"Change of Control" occurs; and

            (ii) Treat as immediately exercisable all options granted by CBSI to
Employee to acquire CBSI common stock that are not exercisable or that have not
been exercised, so as to permit Employee to purchase the balance of CBSI stock
not yet purchased until the end of the exercise period provided in the original
grant of the option right; and

            (iii) Treat as immediately vested all restricted CBSI stock held by
Employee; and

            (iv) Provide Employee with continuation of life and health insurance
benefits, under the same terms and conditions (including cost) that Employer
provides such insurance to its active employees, until payments under paragraph
2(a)(i) above have been paid in full.

      (b) The severance benefit payable under paragraph 2(a)(i) above shall be
payable in substantially equal installments over a period of eighteen months or
longer if provided for under Employer's established severance policy.

<PAGE>

      (c) The provision of health insurance to Employee during the period
described in paragraph 2(a)(iv) shall not be credited towards Employer's
obligation to provide continuation of health insurance coverage under the
Consolidated Omnibus Reconciliation Act of 1985 ("COBRA"). Accordingly, upon
expiration of the period described in paragraph 2(a)(iv), Employee (and
Employee's qualified beneficiaries) shall be eligible to commence continuation
coverage under the COBRA provisions of Employer's group health plan(s).

      (d) In no event shall the aggregate of all amounts paid to, or value
received by, Employee following a "Change of Control" (whether paid or received
pursuant to this paragraph 2 or otherwise) exceed the maximum aggregate amount
or value that could be paid to, or received by, Employee without such aggregate
amount being treated as a "parachute payment" within the meaning of Internal
Revenue Code Section 280G.

      (e) Employer shall not be obligated to provide or continue the payments
specified in paragraph 2(a)(i) above, if Employer, within the one-year period
following such Change of Control, provides Employee, and Employee accepts, a
position within Employer's organization of comparable responsibility and
compensation. Employer shall allow Employee to maintain such alternative
position for a period of not less than one year from the date of acceptance.

      (f) As provided in paragraph 2(a) above, Employee may voluntarily
terminate his employment with CBNA within 1 year following a Change of Control,
and receive all of the payments and benefits specified in 2(a) above. In the
event of such a voluntary termination, the payments specified in paragraph
2(a)(i) shall be reduced by any non-Employer related wages or self-employment
income derived by Employee during the period payments are made under paragraph
2(a)(i).

<PAGE>

      (g) Payments made and benefits provided pursuant to this paragraph 2 shall
be subject to withholding for income, employment and other similar taxes
Employer may be required to withhold.

      (h) For purposes of paragraph 2(a), a "Change of Control," shall be deemed
to have occurred if:

            (i) any "person," including a "group" as determined in accordance
with the Section 13(d)(3) of the Securities Exchange Act of 1934 ("Exchange
Act"), is or becomes the beneficial owner, directly or indirectly, of securities
of CBSI or CBNA representing 30% or more of the combined voting power of CBSI's
or CBNA's then outstanding securities;

            (ii) as a result of, or in connection with, any tender offer or
exchange offer, merger or other business combination (a "Transaction"), the
persons who were directors of CBSI or CBNA before the Transaction shall cease to
constitute a majority of the Board of Directors of CBSI or CBNA or any successor
to either;

            (iii) CBSI or CBNA is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 70% of the
outstanding voting securities of the surviving or resulting corporation shall
then be owned in the aggregate by the former stockholders of CBSI or CBNA, other
than (A) affiliates within the meaning of the Exchange Act, or (B) any party to
the merger or consolidation;

            (iv) a tender offer or exchange offer is made and consummated for
the ownership of securities of CBSI or CBNA representing 30% or more of the
combined voting power of CBSI's or CBNA's then outstanding voting securities; or

            (v) CBSI or CBNA transfers substantially all of its assets to
another corporation which is not controlled by CBSI or CBNA.

<PAGE>

3. Termination "For Cause"

      (a) Notwithstanding any contrary provision contained in paragraph 2, CBSI
or CBNA may terminate this Agreement "for cause" (defined below) at any time,
effective upon receipt by Employee of written notice of termination. Upon
termination of employment "for cause," Employee shall be entitled only to the
salary due Employee from Employer to the date of receipt by Employee of written
notice of termination and Employee shall forfeit any and all stock options
granted by CBSI or CBNA that remain unexercised as of the date of the written
termination notice and any and all shares of restricted CBSI stock that are not
vested as of the date of the written termination notice.

      (b) Termination "for cause" for purposes of this Agreement shall include,
but not be limited to, any of the following:

            (i) any act of dishonesty or fraud, acts of moral turpitude, or the
commission of a felony; or

            (ii) breach of duty or obligation to CBSI or CBNA or receipt of
financial or other economic profit or gain as a result of or in any way arising
out of Employee's position with CBNA and failure to account to CBSI or CBNA for
such profits or other gains; or

            (iii) disclosure of confidential or private Employer information or
aiding a competitor of Employer (or any affiliate of Employer) to the detriment
of Employer (or any affiliate of Employer).

4. Miscellaneous.

      (a) Notices. Any and all notices with respect to this Agreement shall be
sufficient if furnished personally in writing or sent by certified mail, return
receipt requested, to the last known address or other address designated by the
parties to this Agreement.

<PAGE>

      (b) Entire Agreement: Release From Prior Agreements. This Agreement
represents the entire agreement between the parties and specifically supersedes
any and all oral or written agreements previously entered into by the parties,
and each party releases the other party of all obligations and liabilities with
respect to any prior employment agreements between the parties.

      (c) Governing Law. This Agreement, having been made and duly executed
within the State of New York, shall be construed and governed in accordance with
and pursuant to New York law.

      (d) Waiver. In the event that any breach of this Agreement by Employee or
Employer is waived by act or failure to act, such waiver shall not constitute a
waiver of any subsequent breach by either party.

      (e) Severability. If any provision of this Agreement shall be held invalid
or unenforceable, such invalidity or unenforceability shall affect only that
particular provision and shall not affect or render invalid or unenforceable any
other provision of this Agreement, and this Agreement shall be carried out as if
any such invalid or unenforceable provision were not a part of the Agreement.

      (f) Binding Effect. This Agreement shall be binding upon and shall inure
to the benefit of the successors, assigns, legal representatives and heirs of
the parties.

      (g) Arbitration and Fees. Any dispute between the parties relating to the
terms of this Agreement, or any interpretation, construction or enforcement
hereof, shall first be submitted to non-binding arbitration in Syracuse, New
York in accordance with the rules and regulations of the American Arbitration
Association then in effect. Each party shall be responsible for its own costs
and expenses in pursuing non-binding arbitration, and any arbitration fees or
costs shall be shared equally between the parties. However, if Employee is a
party in an arbitration to collect

<PAGE>

payments due pursuant to this Agreement and prevails in collecting payments due
in the arbitration or settlement of the arbitration. Employer shall reimburse
Employee for reasonable attorneys' fees incurred by Employee in connection with
such arbitration.

      (h) Personal Qualifications. It is hereby agreed that this Agreement and
the employment of Employee pursuant hereto is personal in nature, and that
Employee possesses highly specialized skills and abilities. For such reason and
in accordance with applicable provisions of New York State law, this agreement
may not be assigned by Employee, and as to the obligations to be performed by
Employee, other than the rendering or personal service as an employee ofCBNA,
this Agreement shall be binding upon Employee's heirs and/or administrators and
executors.

<PAGE>

      IN WITNESS WHEREOF, the parties have signed this Agreement after full
opportunity to read and discuss the provisions of the Agreement, and both
parties voluntarily assent to this Agreement with full understanding of its
provisions.

                                        EMPLOYEE

                                        /s/ W. Valen McDaniel                  .
                                        ---------------------------------------
                                        W. Valen McDaniel


                                        COMMUNITY BANK SYSTEM, INC.

                                        By: /s/ Sanford A. Belden              .
                                        ---------------------------------------
                                        Sanford A. Belden


                                        COMMUNITY BANK, N.A.

                                        By: /s/ Sanford A. Belden              .
                                        ---------------------------------------
                                        Sanford A. Belden


</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.21
<SEQUENCE>5
<FILENAME>d62959_ex10-21.txt
<DESCRIPTION>EMPLOYMENT AGREEMENT
<TEXT>

                                                                   Exhibit 10.21

                              EMPLOYMENT AGREEMENT

            This Employment Agreement is between (i) COMMUNITY BANK SYSTEM,
INC., a Delaware corporation and registered bank holding company, and COMMUNITY
BANK, N.A., a national banking association, both having offices located in
Dewitt, New York (collectively, the "Employer"), and (ii) ROBERT P. MATLEY, an
individual currently residing in Dallas, Pennsylvania ("Employee"). This
Agreement shall become effective upon the closing of the merger of Community
Bank, N.A. and First Heritage Bank ("Merger").

                               W I T N E S S E T H

            IN CONSIDERATION of the promises and mutual agreements and covenants
contained herein, and other good and valuable consideration, the parties agree
as follows:

            1. Employment.

                  (a) Term. Employer shall employ Employee, and Employee shall
serve, as Executive Vice President and Senior Lending Officer, Pennsylvania
Banking, for Community Bank System, Inc. and Community Bank, N.A. for the period
that begins on the date of the closing of the Merger and that ends on December
31, 2007 ("Period of Employment"), subject to termination as provided in
paragraph 3 hereof.

                  (b) Salary. From the effective date of this Agreement through
December 31, 2004, Employer shall pay Employee a base salary at the annual rate
of not less than $140,000 ("Base Salary"). Employee's Base Salary for calendar
years after 2004 shall be

<PAGE>

reviewed and may be increased (but not decreased) annually in accordance with
Employer's regular payroll practices for executive employees.

                  (c) Incentive Compensation. During the Period of Employment,
Employee shall be entitled to annual incentive compensation pursuant to the
terms of the Management Incentive Plan which has been approved by the Board of
Directors of Employer to cover Employee and other key personnel of Employer.
Upon termination of Employee's employment pursuant to subparagraph 3(a), 3(b),
3(c) or 6, Employee shall be entitled to a pro rata portion (based on Employee's
complete months of employment in the applicable year) of the annual incentive
award that is payable with respect to the year during which the termination
occurs or, if the annual award for such year is not determinable at the
termination date, then the immediately prior year's award shall be used to
determine such pro rata portion.

                  (d) Signing Bonus. Employer shall pay Employee $125,000 (less
applicable withholding), as a one-time signing bonus on the closing date of the
Merger and the commencement of Employee's employment with Employer. Employee
acknowledges that the payment made pursuant to this paragraph 1(d) is in
satisfaction of and replaces all bonuses to which Employee may have become
entitled, pursuant to employment and/or stock option agreements between Employee
and First Heritage Bank, upon the exercise of certain options to acquire common
stock of First Heritage Bank. Upon receipt of the payment described in this
paragraph 1(d), Employee agrees that he will not make any claim for any bonus
related to the exercise of any stock option of any type.

            2. Duties during the Period of Employment. Employee shall be
designated as Employer's second-in-command in Pennsylvania and shall have full
responsibility, subject to the control of Employer's President, Pennsylvania
Banking, and/or the authorized designee of


                                       2
<PAGE>

Employer's Board of Directors, for the supervision of substantially all aspects
of Employer's credit operations in the Commonwealth of Pennsylvania, and the
discharge of such other duties and responsibilities to Employer, not
inconsistent with such position, as may from time to time be reasonably assigned
to Employee by Employer's President, Pennsylvania Banking, and/or the authorized
designee of Employer's Board of Directors. Employee shall report to Employer's
President, Pennsylvania Banking, and to Employer's Chief Credit Officer.
Employee shall devote Employee's best efforts to the affairs of Employer, serve
faithfully and to the best of Employee's ability and devote all of Employee's
working time and attention, knowledge, experience and skill to the business of
Employer, except that Employee may provide services to or affiliate with
professional associations, and business, civic and charitable organizations,
provided that such services and affiliations do not unreasonably interfere with
the performance of Employee's duties under this Agreement.

            3. Termination. Employee's employment by Employer shall be subject
to termination as follows:

                  (a) Expiration of the Term. This Agreement shall terminate
automatically at the expiration of the Period of Employment unless the parties
enter into a written agreement extending Employee's employment, except for the
continuing obligations of the parties as specified hereunder.

                  (b) Termination Upon Death. This Agreement shall terminate
upon Employee's death. In the event this Agreement is terminated as a result of
Employee's death, Employer shall continue payments of Employee's Base Salary for
a period of 90 days following Employee's death to the beneficiary designated by
Employee on the "Beneficiary Designation Form" attached to this Agreement as
Appendix A. Employee's beneficiary shall be free to


                                       3
<PAGE>

dispose of any restricted stock previously granted to Employee by Employer.
Additionally, Employer shall treat as immediately exercisable all unexpired
stock options issued by Employer and held by Employee that are not exercisable
or that have not been exercised, so as to permit the Beneficiary to purchase the
balance of Community Bank System, Inc. ("CBSI") Stock not yet purchased pursuant
to said options until the end of the full exercise period provided in the
original grant of the option right, determined without regard to Employee's
death or termination of employment.

                  (c) Termination Upon Disability. Employer may terminate this
Agreement upon Employee's disability. For the purpose of this Agreement,
Employee's inability to perform substantially all of Employee's duties under
this Agreement by reason of physical or mental illness or injury for a period of
26 successive weeks (the "Disability Period") shall constitute disability. The
determination of disability shall be made by a physician selected by Employer
and a physician selected by Employee; provided, however, that if the two
physicians so selected shall disagree, the determination of disability shall be
submitted to arbitration in accordance with the rules of the American
Arbitration Association and the decision of the arbitrator shall be binding and
conclusive on Employee and Employer. During the Disability Period, Employee
shall be entitled to 100% of Employee's Base Salary otherwise payable during
that period, reduced by any other income replacement benefits to which Employee
may be entitled for the Disability Period on account of such disability
(including, but not limited to, benefits provided under any disability insurance
policy or program, worker's compensation law, or any other benefit program or
arrangement). Upon termination pursuant to this disability provision, Employee
shall be free to dispose of any restricted stock granted to Employee.
Additionally, Employer shall treat as immediately exercisable all unexpired
stock options issued


                                       4
<PAGE>

by Employer and held by Employee that are not exercisable or that have not been
exercised, so as to permit the Employee to purchase the balance of CBSI Stock
not yet purchased pursuant to said options until the end of the full exercise
period provided in the original grant of the option right, determined without
regard to Employee's disability or termination of employment.

                  (d) Termination for Cause. Employer may terminate Employee's
employment immediately for "Cause" by written notice to Employee. For purposes
of this Agreement, a termination shall be for "Cause" if the termination results
from any of the following events:

                        (i) Material breach of this Agreement which is not cured
within 60 days after Employer gives Employee written notice of such breach;

                        (ii) Documented misconduct of Employee engaging in any
act of dishonesty or criminal conduct;

                        (iii) Continued neglect or refusal to perform the duties
assigned to Employee under or pursuant to this Agreement, unless cured within 60
days after Employer gives Employee written of such neglect or refusal;

                        (iv) Conviction of a felony;

                        (v) Adjudication as a bankrupt, which adjudication has
not been contested in good faith, unless bankruptcy is caused directly by
Employer's unexcused failure to perform its obligations under this Agreement;

                        (vi) Intentional refusal to follow the reasonable,
written instructions of Employer's President, Pennsylvania Banking, the
Employer's Chief Credit Officer and/or the Board of Directors of Employer,
provided that the instructions do not require Employee to engage in unlawful
conduct; or


                                       5
<PAGE>

                        (vii) Any documented intentional violation by Employee
of the rules or regulations of the Office of the Comptroller of the Currency or
of any other regulatory agency.

            Notwithstanding any other term or provision of this Agreement to the
contrary, if Employee's employment is terminated for Cause, Employee shall
forfeit all rights to payments and benefits otherwise provided pursuant to this
Agreement; provided, however, that Base Salary shall be paid through the date of
termination.

                  (e) Termination For Reasons Other Than Cause. If Employer
terminates Employee's employment for reasons other than Cause, or if Employee
voluntarily terminates his employment for "Good Reason" (as defined in paragraph
6(c) below), in either case on or after the first anniversary of the closing of
the Merger and prior to December 31, 2007, then Employee shall be entitled to a
severance benefit equal to the greater of (i) the sum of the annual Base Salary
in effect at the time of termination and the most recent payment to Employee
under the Management Incentive Plan, payable in equal biweekly installments over
the 12-month period following Employee's termination, or (ii) amounts of Base
Salary and expected Management Incentive Plan payments that otherwise would have
been payable through the balance of the unexpired term of this Agreement,
payable in biweekly installments through the balance of the unexpired term of
this Agreement. In addition, Employer shall: (iii) permit Employee to dispose of
any restricted stock granted to Employee; and (iv) treat as immediately
exercisable all unexpired stock options held by Employee that are not
exercisable or that have not been exercised, so as to permit Employee to
purchase the balance of CBSI Stock not yet purchased pursuant to said options
until the end of the full exercise period provided in the original grant of the
option right determined without regard to Employee's termination of employment.


                                       6
<PAGE>

                  Notwithstanding the foregoing, if Employer terminates Employee
for reasons other than Cause, or if Employee voluntarily terminates his
employment for Good Reason, in either case on or after the first anniversary of
the closing of the Merger and prior to December 31, 2007, then amounts payable
under clauses (i) or (ii) of this paragraph 3(e) shall be reduced by any
payments made to Employee under paragraphs 6(a)(i) and (ii). If Employee's
employment terminates prior to the first anniversary of the closing of the
Merger, Employee's sole and exclusive right to payments (if any) shall be
governed by paragraph 3(f).

                  (f) First Heritage Employment Agreement. Employer acknowledges
that Employee could have become entitled to certain severance payments pursuant
to Section 9 of the Employment Agreement between Employee and First Heritage
Bank effective July 1, 1999 ("First Heritage Employment Agreement") as a result
of the Merger, which payments Employee has agreed to waive in connection with
the Merger and the execution of this Agreement. In consideration of such waiver,
(i) in the event that Employee elects to terminate his employment with Employer
prior to this first anniversary of the closing of the Merger, Employer shall pay
to Employee, in equal biweekly installments over a period of one year, an amount
equal to the annual base salary rate in effect on November 1, 2003 and payable
to Employee by First Heritage Bank, and (ii) in the event Employer elects to
terminate Employee's employment with Employer for reasons other than Cause prior
to the first anniversary of the closing of the Merger, Employer shall pay to
Employee, in a single sum at the time of termination, an amount equal to twice
the annual base salary rate in effect on November 1, 2003 and payable to
Employee by First Heritage Bank. Employee shall be required to mitigate the
amount of any payment required under paragraph 3(f)(i) by seeking other
employment.


                                       7
<PAGE>

Notwithstanding any other term or provision in this Agreement, Employer and
Employee intend that this paragraph 3(f) shall provide the sole and exclusive
basis for payments to be made by Employer to Employee if Employee's employment
under this Agreement is terminated voluntarily by Employee, or involuntarily by
Employer for reasons other than Cause, prior to the first anniversary of the
closing of the Merger. By way of example, and not limitation, Employee shall not
be entitled to payments under the other subparagraphs of paragraph 3, or under
the provisions of paragraph 6, if benefits are payable pursuant to this
subparagraph 3(f).

                  (g) Expiration of Term Without Renewal. In the event that
Employee's employment ends on December 31, 2007 solely because Employer chooses
not to renew or extend this Agreement beyond December 31, 2007 for reasons other
than Cause, then Employee shall be entitled to a severance benefit equal to the
sum of (i) 175 percent of the annual Base Salary in effect at the time of
termination, and (ii) the most recent payment to Employee under the Management
Incentive Plan, such sum to be payable in equal biweekly installments over the
six-month period following Employee's termination of employment. Amounts payable
under this paragraph 3(g) shall be reduced by any payments made to Employee
under paragraphs 6(a)(i) and (ii).

            4. Fringe Benefits.

                  (a) Benefit Plans. During the Period of Employment, Employee
shall be eligible to participate in any employee pension benefit plans (as that
term is defined under Section 3(2) of the Employee Retirement Income Security
Act of 1974, as amended), Employer-paid group life insurance plans, medical
plans, dental plans, long-term disability plans, business travel insurance
programs and other fringe benefit programs maintained by Employer for the
benefit of or which are applicable to its executive employees. Participation in
any of Employer's


                                       8
<PAGE>

benefit plans and programs shall be based on, and subject to satisfaction of,
the eligibility requirements and other conditions of such plans and programs.
Employer may require Employee to submit to an annual physical, to be performed
by a physician of his own choosing. Employee shall be reimbursed for related
expenses not covered by Employer's health insurance plan, or any other plan in
which Employee is enrolled. Employee shall not be eligible to participate in
Employer's Severance Pay Plan maintained for employees not covered by employment
agreements.

                  (b) Expenses. Upon submission to Employer of vouchers or other
required documentation, Employee shall be reimbursed for (or Employer shall pay
directly) Employee's actual out-of-pocket travel and other expenses reasonably
incurred and paid by Employee in connection with Employee's duties hereunder.
Reimbursable expenses must be submitted to the President and Chief Executive
Officer of Employer, or the President and Chief Executive Officer's designee,
for review on no less than a quarterly basis.

                  (c) Other Benefits. During the Period of Employment, Employee
also shall be entitled to receive the following benefits:

                        (i) Paid vacation of four weeks during each calendar
year (with no carry over of unused vacation to a subsequent year) and any
holidays that may be provided to all employees of Employer in accordance with
Employer's holiday policy;

                        (ii) Reasonable sick leave;

                        (iii) Employer-paid memberships for Employee at one
country club and one social (eating) club in the Dallas or
Scranton/Wilkes-Barre, Pennsylvania area, subject to the approval of the
President and Chief Executive Officer of Employer. Although it is contemplated
that the memberships shall be utilized for marketing and promotion of Employer's


                                       9
<PAGE>

business interests, in the event that any part of any membership shall be
treated as taxable compensation to Employee, Employer shall reimburse Employee
for any federal, state or local income tax owed by Employee, including any such
taxes owed as a result of any reimbursement under this subparagraph, in
connection with such membership; and

                        (iv) The use of an Employer-owned or Employer-leased
late model automobile, the selection and replacement of which shall be subject
to the approval of the President and Chief Executive Officer of Employer.

            5. Restricted Stock and Stock Options.

                  (a) Employer shall cause the Compensation Committee of the
Board of Directors of Employer to grant to Employee 2,000 shares of restricted
common stock of CBSI effective as of the closing date of the Merger, the
restrictions on which shares shall expire in increments of 500 shares on each
January 1 beginning January 1, 2005, provided that Employee remains employed by
Employer on such January 1. The foregoing grant of restricted stock shall be
issued pursuant to, and subject to all the terms and conditions of, the
Community Bank System, Inc. 1994 Long-Term Incentive Compensation Program or a
comparable successor program.

                  (b) In addition, Employer shall cause the Compensation
Committee of the Board of Directors of Employer to review whether Employee
should be granted additional shares of restricted stock and/or options to
purchase shares of common stock of CBSI. Such review may be conducted pursuant
to the terms of the Community Bank System, Inc. 1994 Long-Term Incentive
Compensation Program, a successor plan, or independently, as the Compensation
Committee shall determine. Reviews shall be conducted no less frequently than
annually.


                                       10
<PAGE>

            6. Change of Control.

                  (a) Except as provided in paragraph 3(f), if Employee's
employment with Employer shall cease for any reason, including Employee's
voluntary termination for Good Reason, but not including Employee's termination
for Cause or Employee's voluntary termination without Good Reason, on or after
the first anniversary of the closing of the Merger and within 2 years following
a "Change of Control" that occurs during the Period of Employment, Employer
shall:

                        (i) Pay to the Employee the greater of (A) 200 percent
of the sum of the annual Base Salary in effect at the time of termination and
the most recent payment to Employee under the Management Incentive Plan, payable
in equal biweekly installments over the 24-month period following Employee's
termination, or (B) amounts of Base Salary and expected Management Incentive
Plan payments that otherwise would have been payable through the balance of the
unexpired term of this Agreement, payable in biweekly installments through the
balance of the unexpired term of this Agreement;

                        (ii) Provide Employee with fringe benefits, or the cash
equivalent of such benefits (equal to Employer's cost for such benefits),
identical to those described in paragraph 4(a) for the period during which Base
Salary is payable to Employee pursuant to (i) above. To the extent the benefits
provided to Employee in this paragraph 6(a)(ii) are deemed taxable benefits,
Employer shall reimburse Employee for taxes owed by Employee on the benefits and
tax reimbursement;

                        (iii) Treat as immediately exercisable all unexpired
stock options issued by Employer and held by Employee that are not otherwise
exercisable or that have not been exercised (so as to permit Employee to
purchase the balance of CBSI Stock not yet


                                       11
<PAGE>

purchased pursuant to said options until the end of the full exercise period
provided in the original grant of the option right, determined without regard to
Employee's termination of employment) and permit Employee to dispose of any
restricted stock previously granted to Employee; and

                        (iv) Permit Employee to dispose of any shares of
restricted stock granted to Employee.

                        (v) Subject to Employer's right to make the single lump
sum payment described in paragraph 6(a)(vi) below, if any portion of the amounts
paid to, or value received by, Employee following a "Change of Control" (whether
paid or received pursuant to this paragraph 6 or otherwise) constitutes an
"excess parachute payment" within the meaning of Internal Revenue Code Section
280G, then payments to Employee pursuant to this Agreement shall be limited or
modified to the minimum extent necessary to eliminate the application of
Internal Revenue Code Sections 280G and 4999. The determination of any reduction
in payments to Employee pursuant to this paragraph 6(a)(v) shall be made by the
independent certified public accountant of Employer in consultation with
Employee.

                        (vi) Notwithstanding the foregoing of this paragraph
6(a), the Board of Directors of Employer may elect, in its sole discretion, to
pay all benefits due Employee pursuant to this paragraph 6 in a single lump sum
payment within 90 days following a Change of Control and Employee's termination
of employment with Employer. Subject to the limitation in paragraph 6(a)(v), in
the event a single lump sum payment is made pursuant to the foregoing sentence,
the amount of the payment shall be increased to the extent necessary to hold
Employee harmless from any marginal income and employment tax liability created
by the single lump sum payment (i.e., the income and employment tax liability
that exceeds the income


                                       12
<PAGE>

and employment tax liability that would have been incurred by Employee if
payments were made in the manner and during the periods otherwise described in
this paragraph 6).

                  (b) For purposes of this paragraph 6, a "Change of Control"
shall be deemed to have occurred if:

                        (i) any "person," including a "group" as determined in
accordance with the Section 13(d)(3) of the Securities Exchange Act of 1934
("Exchange Act"), is or becomes the beneficial owner, directly or indirectly, of
securities of Employer representing 30% or more of the combined voting power of
Employer's then outstanding securities;

                        (ii) as a result of, or in connection with, any tender
offer or exchange offer, merger or other business combination (a "Transaction"),
the persons who were directors of Employer before the Transaction shall cease to
constitute a majority of the Board of Directors of Employer or any successor to
Employer;

                        (iii) Employer is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 70% of the
outstanding voting securities of the surviving or resulting corporation shall
then be owned in the aggregate by the former stockholders of Employer, other
than (A) affiliates within the meaning of the Exchange Act, or (B) any party to
the merger or consolidation;

                        (iv) a tender offer or exchange offer is made and
consummated for the ownership of securities of Employer representing 30% or more
of the combined voting power of Employer's then outstanding voting securities;
or

                        (v) Employer transfers substantially all of its assets
to another corporation which is not controlled by Employer.


                                       13
<PAGE>

                  (c) For purposes of this Agreement, "Good Reason" shall mean
action taken by Employer that results in:

                        (i) An involuntary and material adverse change in
Employee's title, duties, responsibilities, or total remuneration;

                        (ii) An involuntary relocation of the office from which
Employee is expected to perform his duties to a location that is not within 50
miles of Wilkes-Barre, Pennsylvania; or

                        (iii) An involuntary and material adverse change in the
general working conditions (including travel requirements and clerical support)
applicable to Employee.

            7. Withholding. Employer shall deduct and withhold from compensation
and benefits provided under this Agreement all required income and employment
taxes and any other similar sums required by law to be withheld.

            8. Covenants.

                  (a) Confidentiality. Employee shall not, without the prior
written consent of Employer, disclose or use in any way, either during his
employment by Employer or thereafter, except to perform his services as an
employee Employer, any confidential business or technical information or trade
secret that is not in the public domain acquired in the course of Employee's
employment by Employer. Employee acknowledges and agrees that it would be
difficult to fully compensate Employer for damages resulting from the breach or
threatened breach of the foregoing provision and, accordingly, that Employer
shall be entitled to temporary preliminary injunctions and permanent injunctions
to enforce such provision. This provision with respect to injunctive relief
shall not, however, diminish Employer's right to claim and recover damages.
Employee covenants to use his best efforts to prevent the publication or


                                       14
<PAGE>

disclosure of any trade secret or any confidential information that is not in
the public domain concerning the business or finances of Employer or Employer's
affiliates, or any of its or their dealings, transactions or affairs which may
come to Employee's knowledge in the pursuance of his duties or employment.

                  (b) No Competition. Employee's employment is subject to the
condition that during the term of his employment hereunder and for the period
specified in paragraph 8(c) below, Employee shall not, within a 50 mile radius
of Wilkes-Barre, Pennsylvania, directly or indirectly, own, manage, operate,
control or participate in the ownership, management, operation or control of, or
be connected as an officer, employee, partner, director, individual proprietor,
lender, consultant or otherwise with, or have any financial interest in, or aid
or assist anyone else in the conduct of, any entity or business (a "Competitive
Operation") which competes in the banking industry or with any other business
conducted by Employer or by any group, affiliate, division or subsidiary of
Employer. Employee shall keep Employer fully advised as to any activity,
interest, or investment Employee may have in any way related to the banking
industry. It is understood and agreed that, for the purposes of the foregoing
provisions of this paragraph, (i) no business shall be deemed to be a business
conducted by Employer or any group, division, affiliate or subsidiary of
Employer unless 5% or more of Employer's consolidated gross sales or operating
revenues is derived from, or 5% or more of Employer's consolidated assets are
devoted to, such business; (ii) no business conducted by any entity by which
Employee is employed or in which he is interested or with which he is connected
or associated shall be deemed competitive with any business conducted by
Employer or any group, division, affiliate or subsidiary of Employer unless it
is one from which 2% or more of its consolidated gross sales or operating
revenues is derived, or to which 2% or


                                       15
<PAGE>

more of its consolidated assets are devoted; and (iii) no business which is
conducted by Employer at the Date of Termination and which subsequently is sold
by Employer shall, after such sale, be deemed to be a Competitive Operation
within the meaning of this paragraph. Ownership of not more than 5% of the
voting stock of any publicly held corporation shall not constitute a violation
of this paragraph.

                  (c) Non-Competition Period. If Employee's employment with
Employer shall cease for any reason during the Period of Employment as defined
in paragraph 1(a) of this Agreement, the "non-competition period" shall begin on
the date the first payment is made pursuant to the terms of this Agreement and
shall end on the earlier of (i) the date that is 12 months after the date the
final payment is made pursuant to the terms of this Agreement, or (ii) December
31, 2007; provided, however, that the date determined pursuant to (i) above
shall be the date the final payment is made pursuant to the terms of this
Agreement, if Employer terminates Employee during the Period of Employment for
reasons other than Cause or if Employee voluntarily terminates his employment
during the Period of Employment for Good Reason.

                  (d) Termination of Payments. Upon the breach by Employee of
any covenant under this paragraph 8, Employer shall cease all payments to
Employee and may offset immediately any and all amounts payable to Employee
under this Agreement against any damages to which Employer is legally entitled
in addition to any and all other remedies available to Employer under the law or
in equity.

            9. Notices. Any notice which may be given hereunder shall be
sufficient if in writing and mailed by overnight mail, or by certified mail,
return receipt requested, to Employee at his residence and to Employer at 5790
Widewaters Parkway, Dewitt, New York


                                       16
<PAGE>

13214, or at such other addresses as either Employee or Employer may, by similar
notice, designate.

            10. Rules, Regulations and Policies. Employee shall abide by and
comply in all material respects with all of the rules, regulations, and policies
of Employer, including without limitation Employer's policy of strict adherence
to, and compliance with, any and all requirements of the banking, securities,
and antitrust laws and regulations.

            11. No Prior Restrictions. Employee represents and warrants that
Employee is under no obligations to any former employer or other third party
which is in any way inconsistent with, or which imposes any restriction upon,
the employment of Employee by Employer, or Employee's undertakings under this
Agreement.

            12. Return of Employer's Property. After Employee has received
notice of termination or at the end of the Period of Employment, whichever first
occurs, Employee shall promptly return to Employer all documents and other
property in his possession belonging to Employer.

            13. Construction and Severability. The invalidity of any one or more
provisions of this Agreement or any part thereof, all of which are inserted
conditionally upon their being valid in law, shall not affect the validity of
any other provisions to this Agreement; and in the event that one or more
provisions contained herein shall be invalid, as determined by a court of
competent jurisdiction, the court shall have authority to modify such provision
in a manner that most closely reflects the intent of the parties and is valid.

            14. Governing Law. This Agreement was executed and delivered in New
York and shall be construed and governed in accordance with the laws of the
State of New York.


                                       17
<PAGE>

            15. Assignability and Successors. This Agreement may not be assigned
by Employee or Employer, except that this Agreement shall be binding upon and
shall inure to the benefit of the successor of Employer through merger or
corporate reorganization. Any attempted assignment in violation of this
paragraph 15 shall be null and void and of no effect,

            16. Miscellaneous. This Agreement constitutes the entire
understanding and agreement between the parties with respect to the subject
matter hereof and shall supersede all prior understandings and agreements,
including the First Heritage Employment Agreement. Employee hereby waives all
claims Employee may have under the First Heritage Employment Agreement and any
related agreement, plan or program of First Heritage Bank. This Agreement cannot
be amended, modified, or supplemented in any respect, except by a subsequent
written agreement entered into by the parties hereto. The services to be
performed by Employee are special and unique; it is agreed that any breach of
this Agreement by Employee shall entitle Employer (or any successor or assigns
of Employer), in addition to any other legal remedies available to it, to apply
to any court of competent jurisdiction to enjoin such breach. The provisions of
paragraphs 6 and 8 hereof shall survive the termination of this Agreement.

            17. Counterparts. This Agreement may be executed in counterparts
(each of which need not be executed by each of the parties), which together
shall constitute one and the same instrument.

            18. Jurisdiction, Venue and Fees. The jurisdiction of any proceeding
between the parties arising out of, or with respect to, this Agreement shall be
in a court of competent jurisdiction in New York State, and venue shall be in
Onondaga County. Each party shall be subject to the personal jurisdiction of the
courts of New York State. If Employee is the prevailing party in a proceeding to
collect payments due pursuant to this Agreement, Employer


                                       18
<PAGE>

shall reimburse Employee for reasonable attorneys' fees incurred by Employee in
connection with such proceeding.

            The foregoing is established by the following signatures of the
parties.

                                       COMMUNITY BANK SYSTEM, INC.

                                       By: /s/ Sanford A. Belden
                                          --------------------------------------
                                           Sanford A. Belden
                                           President and Chief Executive Officer


                                       COMMUNITY BANK, N.A.

                                       By: /s/ Sanford A. Belden
                                          --------------------------------------
                                           Sanford A. Belden
                                           President and Chief Executive Officer


                                           /s/ Robert P. Matley
                                       -----------------------------------------
                                                 ROBERT P. MATLEY


                                       19
<PAGE>

                                   APPENDIX A

                          BENEFICIARY DESIGNATION FORM

            Pursuant to the Employment Agreement between (i) Community Bank
System, Inc. and Community Bank, N.A., and (ii) Robert P. Matley ("Agreement"),
I, Robert P. Matley, hereby designate Gertrude Matley, my wife, as the
beneficiary of amounts payable upon my death in accordance with paragraph 3(b)
of the Agreement. My beneficiary's current address is 18 Pheasant Run Dr.
Dallas, PA 18612.


Dated: May 14, 2004                          /s/ Robert P. Matley
                                             --------------------------
                                                 Robert P. Matley


_______________________________
           Witness


                                       20

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.22
<SEQUENCE>6
<FILENAME>d62959_ex10-22.txt
<DESCRIPTION>CHANGE OF CONTROL AGREEMENT
<TEXT>

                                                                   Exhibit 10.22

                           CHANGE OF CONTROL AGREEMENT

                  This CHANGE OF CONTROL AGREEMENT is dated as of August 20,
2002 between COMMUNITY BANK SYSTEM, INC., a Delaware Corporation and registered
bank holding company ("CBSI"), and COMMUNITY BANK, N.A., a wholly-owned
subsidiary of CBSI, having an office in DeWitt, New York ("CBNA") (CBSI and CBNA
are referred to collectively in this Agreement as the "Employer"), and James
Michael Wilson ("Employee").

                                    Recitals

      A.    Employee is currently employed by CBNA in a senior management
            capacity.

      B.    Employer desires to retain the services of Employee and to induce
            Employee to remain with CBNA.

      C.    In consideration of the agreements of the parties contained in this
            Agreement, and intending to be legally bound by the terms of this
            Agreement, the parties agree as follows:

                                      Terms

1. Term of Agreement.

      The term of this Agreement shall be for the period from the date of the
Agreement to December 31, 2005 and shall automatically expire effective December
31, 2005.

<PAGE>

2. Change of Control.

      (a) Subject to the limitations described in paragraphs 2(d), (e), (f) and
(g), if Employee's employment by CBNA shall cease for any reason, including
Employee's voluntary termination for "good reason" (as defined in paragraph 2(h)
below), but not including Employee's voluntary termination without "good reason"
or Employee's termination for "cause" (as defined in paragraph 3), within 1 year
following a "Change of Control" that occurs during the term of this Agreement,
Employer shall:

            (i) Pay to Employee an aggregate severance benefit equal to (A) the
greater of 100 percent of Employee's then current Base Salary or the severance
benefit otherwise due Employee, plus (B) an amount equal to the Management
Incentive paid to Employee in the year previous to the year during which the
"Change of Control" occurs; and

            (ii) Treat as immediately exercisable all options granted by CBSI to
Employee to acquire CBSI common stock that are not exercisable or that have not
been exercised, so as to permit Employee to purchase the balance of CBSI stock
not yet purchased until the end of the exercise period provided in the original
grant of the option right; and

            (iii) Treat as immediately vested all restricted CBSI stock held by
Employee; and

            (iv) Provide Employee with continuation of life and health insurance
benefits, under the same terms and conditions (including cost) that Employer
provides such insurance to its active employees, until payments under paragraph
2(a)(i) above have been paid in full.

<PAGE>

      (b) The severance benefit payable under paragraph 2(a)(i) above shall be
payable in substantially equal installments over a period of twelve months or
longer if provided for under Employer's established severance policy.

      (c) The provision of health insurance to Employee during the period
described in paragraph 2(a)(iv) shall not be credited towards Employer's
obligation to provide continuation of health insurance coverage under the
Consolidated Omnibus Reconciliation Act of 1985 ("COBRA"). Accordingly, upon
expiration of the period described in paragraph 2(a)(iv), Employee (and
Employee's qualified beneficiaries) shall be eligible to commence continuation
coverage under the COBRA provisions of Employer's group health plan(s).

      (d) In no event shall the aggregate of all amounts paid to, or value
received by, Employee following a "Change of Control" (whether paid or received
pursuant to this paragraph 2 or otherwise) exceed the maximum aggregate amount
or value that could be paid to, or received by. Employee without such aggregate
amount being treated as a "parachute payment" within the meaning of Internal
Revenue Code Section 280G.

      (e) Employer shall not be obligated to provide or continue the payments
specified in paragraph 2(a)(i) above, if Employer, within the one-year period
following such Change of Control, offers Employee a position within Employer's
organization of comparable responsibility and compensation. Employer shall allow
Employee to maintain such alternative position for a period of not less than one
year from the date of acceptance.

      (f) Payments made and benefits provided pursuant to this paragraph 2 shall
be subject to withholding for income, employment and other similar taxes
Employer may be required to withhold.

<PAGE>

      (g) For purposes of paragraph 2(a), a "Change of Control," shall be deemed
to have occurred if:

            (i) any "person," including a "group" as determined in accordance
with the Section 13(d)(3) of the Securities Exchange Act of 1934 ("Exchange
Act"), is or becomes the beneficial owner, directly or indirectly, of securities
of CBSI or CBNA representing 30% or more of the combined voting power of CBSI's
or CBNA's then outstanding securities;

            (ii) as a result of, or in connection with, any tender offer or
exchange offer, merger or other business combination (a "Transaction"), the
persons who were directors of CBSI or CBNA before the Transaction shall cease to
constitute a majority of the Board of Directors of CBSI or CBNA or any successor
to either;

            (iii) CBSI or CBNA is merged or consolidated with another
corporation and as a result of the merger or consolidation less than 70% of the
outstanding voting securities of the surviving or resulting corporation shall
then be owned in the aggregate by the former stockholders of CBSI or CBNA, other
than (A) affiliates within the meaning of the Exchange Act, or (B) any party to
the merger or consolidation;

            (iv) a tender offer or exchange offer is made and consummated for
the ownership of securities of CBSI or CBNA representing 30% or more of the
combined voting power of CBSI's or CBNA's then outstanding voting securities; or

            (v) CBSI or CBNA transfers substantially all of its assets to
another corporation which is not controlled by CBSI or CBNA.

      (h) For purposes of this paragraph 2, "good reason" shall mean action
taken by Employer that results in:

<PAGE>

            (i) An involuntary and material adverse change in Employee's title,
duties, responsibilities, or total remuneration;

            (ii) An involuntary and material relocation of the office from which
Employee is expected to perform Employee's duties; or

            (iii) An involuntary and material adverse change in the general
working conditions (including travel requirements) applicable to Employee.

3. Termination "For Cause"

      (a) Notwithstanding any contrary provision contained in paragraph 2, CBSI
or CBNA may terminate this Agreement and Employee's employment "for cause"
(defined below) at any time, effective upon receipt by Employee of written
notice of termination. Upon termination of employment "for cause," Employee
shall be entitled only to the salary due Employee from Employer to the date of
receipt by Employee of written notice of termination and Employee shall forfeit
any and all stock options granted by CBSI or CBNA that remain unexercised as of
the date of the written termination notice and any and all shares of restricted
CBSI stock that are not vested as of the date of the written termination notice.

      (b) Termination "for cause" for purposes of this Agreement shall include,
but not be limited to, any of the following:

            (i) any act of dishonesty or fraud, acts of moral turpitude, or the
commission of a felony; or

            (ii) breach of duty or obligation to CBSI or CBNA or receipt of
financial or other economic profit or gain as a result of or in any way arising
out of Employee's position with CBNA and failure to account to CBSI or CBNA for
such profits or other gains; or

<PAGE>

            (iii) disclosure of confidential or private Employer information or
aiding a competitor of Employer (or any affiliate of Employer) to the detriment
of Employer (or any affiliate of Employer).

4. Miscellaneous.

      (a) Notices. Any and all notices with respect to this Agreement shall be
sufficient if furnished personally in writing or sent by certified mail, return
receipt requested, to the last known address or other address designated by the
parties to this Agreement.

      (b) Entire Agreement; Release From Prior Agreements. This Agreement
represents the entire agreement between the parties and specifically supersedes
any and all oral or written agreements previously entered into by the parties,
and each party releases the other party of all obligations and liabilities with
respect to any prior employment agreements between the parties.

      (c) Governing Law. This Agreement, having been made and duly executed
within the State of New York, shall be construed and governed in accordance with
and pursuant to New York law.

      (d) Waiver. In the event that any breach of this Agreement by Employee or
Employer is waived by act or failure to act, such waiver shall not constitute a
waiver of any subsequent breach by either party.

      (e) Severability. If any provision of this Agreement shall be held invalid
or unenforceable, such invalidity or unenforceability shall affect only that
particular provision and shall not affect or render invalid or unenforceable any
other provision of this Agreement, and this Agreement shall be carried out as if
any such invalid or unenforceable provision were not a part of the Agreement.

<PAGE>

      (f) Binding Effect. This Agreement shall be binding upon and shall inure
to the benefit of the successors, permitted assigns, legal representatives and
heirs of the parties.

      (g) Arbitration and Fees. Any dispute between the parties relating to the
terms of this Agreement, or any interpretation, construction or enforcement
hereof, shall first be submitted to non-binding arbitration in Syracuse, New
York in accordance with the rules and regulations of the American Arbitration
Association then in effect. Each party shall be responsible for its own costs
and expenses in pursuing non-binding arbitration, and any arbitration fees or
costs shall be shared equally between the parties. However, if Employee is a
party in an arbitration to collect payments due pursuant to this Agreement and
prevails in collecting payments due in the arbitration or settlement of the
arbitration. Employer shall reimburse Employee for reasonable attorneys' fees
incurred by Employee in connection with such arbitration.

      (h) Personal Qualifications. It is hereby agreed that this Agreement and
the employment of Employee pursuant hereto is personal in nature, and that
Employee possesses highly specialized skills and abilities. For such reason and
in accordance with applicable provisions of New York State law, this Agreement
may not be assigned by Employee, and as to the obligations to be performed by
Employee, other than the rendering or personal service as an employee of CBNA,
this Agreement shall be binding upon Employee's heirs and/or administrators and
executors.

<PAGE>

      IN WITNESS WHEREOF, the parties have signed this Agreement after full
opportunity to read and discuss the provisions of the Agreement, and both
parties voluntarily assent to this Agreement with full understanding of its
provisions.

                                        EMPLOYEE

                                        /s/ James Michael Wilson               .
                                        ---------------------------------------
                                        James Michael Wilson


                                        COMMUNITY BANK SYSTEM, INC.

                                        By: /s/ Sanford A. Belden              .
                                        ---------------------------------------
                                        Sanford A. Belden
                                        President, CEO


                                        COMMUNITY BANK, N.A.

                                        By: /s/ Sanford A. Belden              .
                                        ---------------------------------------
                                        Sanford A. Belden
                                        President, CEO



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.27
<SEQUENCE>7
<FILENAME>d62959_ex10-27.txt
<DESCRIPTION>CBS INC. PENSION PLAN
<TEXT>

                                                                   Exhibit 10.27

                           COMMUNITY BANK SYSTEM, INC.

                                  PENSION PLAN

Amended and Restated as of January 1, 2004

<PAGE>

                                    Article I

                           HISTORY AND PURPOSE OF PLAN

      1.1 History. Community Bank System, Inc. established the Community Bank
System, Inc. Pension Plan ("Plan"), effective as of July 1, 1976, for the
benefit of covered employees and their beneficiaries. The Plan has been amended
and restated a number of times since 1976, the most recent amendment and
restatement being effective as of January 1, 2001. This document amends and
restates the Plan in its entirety, effective as of January 1, 2004, except to
the extent a different effective date is specified for certain provisions. This
amended and restated Plan document incorporates a "cash balance" design. The
Plan shall at all times be considered a defined benefit pension plan for
purposes of Code ss.ss.401(a), 411, 412 and 417.

      1.2 Purpose. The purpose of the Plan is to provide retirement and certain
survivor benefits for the Participants and their Beneficiaries. To provide such
benefits, the Employer shall make contributions to the Plan as provided herein.

      1.3 Application of Restated Plan. Unless expressly stated otherwise
herein, the amount of Accrued Benefit and the rate of accrual of benefits for
Participants (or their Beneficiaries) who have terminated employment, or whose
benefits are in pay status, as of the Restatement Effective Date shall be
determined under the terms of the predecessor(s) to this Plan in effect during
his employment or at his termination date and not under the Plan as restated by
this document.

<PAGE>

                                   Article II

                                   DEFINITIONS

      As used in this Plan, the following terms shall have the following
meanings, unless a different meaning is stated and clearly indicated by the
context:

      2.1 "Account" means the account established and maintained for a
Participant who is entitled to benefits pursuant to Paragraph 5.3. The
Administrator may establish one or more sub-Accounts as may be necessary to
administer the Plan. A Participant's Account shall include all such
sub-Accounts.

      2.2 "Accrual Computation Period" shall mean a Plan Year.

      2.3 "Accrued Benefit" means the amount of retirement benefit earned by a
Participant hereunder, and payable during the life of the Participant, expressed
in the form of an annual benefit commencing at the Participant's Normal
Retirement Date. A Participant's Accrued Benefit under the Traditional Formula
(if applicable) as of any Valuation Date shall be determined in accordance with
Paragraph 5.2, based on his credited Years of Creditable Service and his Average
Annual Compensation, both determined as of such Valuation Date. A Participant's
Accrued Benefit under the Cash Balance Formula (if applicable) as of any
Valuation Date shall be the Actuarial Equivalent of the Participant's Account
balance determined in accordance with Paragraph 5.3; provided that, for
Valuation Dates that occur prior to the Participant's Normal Retirement Date,
such Actuarial Equivalent shall be determined by projecting the value of the
Participant's Account balance to the Participant's Normal Retirement Age, using
the Interest Rate described in subparagraph 2.4(c)(1), and then converting such
projected Account balance to a single life annuity payable to the Participant
commencing at the Participant's Normal Retirement Date; provided further that
such Actuarial Equivalent (when expressed as a single lump sum) shall not be
less than the Participant's Account balance as of the applicable Valuation Date.

      2.4 "Actuarial Equivalent".

            (a) An Actuarial Equivalent benefit shall mean a form of benefit
differing in time, period or manner of payment from a specific benefit under the
Plan, but having the same present value as such specific benefit.

            (b) Except as otherwise provided in subparagraphs (c) and (d) below,
an Actuarial Equivalent benefit shall be determined by using the following
assumptions:

                  Interest Rate - 6% pre-retirement
                                  6% post-retirement

                  Mortality -     pre-retirement: 1984 Unisex Table
                                  post-retirement: 1984 Unisex Table


                                       2
<PAGE>

            (c) Effective for Plan Years beginning on or after January 1, 1995,
the following assumptions shall be used to compute a lump-sum Actuarial
Equivalent benefit:

                  (1) Interest Rate - an interest rate that is the annual
interest rate announced by the Commissioner of Internal Revenue on 30-year U.S.
Treasury securities (A) for the first full calendar month immediately preceding
the Plan Year of distribution, with respect to distributions prior to January 1,
2005, and (B) the second full calendar month immediately preceding the Plan Year
of distribution, with respect to distributions after December 31, 2004 (provided
that distributions during 2005 will be based on the interest rate in (A) or (B)
that produces the greatest benefit), which rate shall be constant during that
entire Plan Year; and

                  (2) Mortality - mortality assumptions under the prevailing
commissioners' standard table as described in Code ss.807(d)(5)(A) used to
determine reserves for group annuity contracts issued on the date as of which
the determination of present value is being made.

Notwithstanding the foregoing provisions of this subparagraph (c), a
Participant's lump sum Actuarial Equivalent benefit shall in no event be less
than the present value of the Participant's Vested Accrued Benefit earned as of
December 31, 1994, computed by taking into account the Participant's age at the
Annuity Starting Date and by using the actuarial assumptions set out in
subparagraph (b) above.

            (d) In the event this paragraph is amended so as to affect benefits
protected under Code ss.411(d)(6), the Actuarial Equivalent benefit on or after
the date of change shall be the greater of:

                  (1) the Actuarial Equivalent benefit as of the date of change
computed under the Plan provisions in effect immediately prior to such change;
or

                  (2) the Actuarial Equivalent benefit computed under the Plan
provisions in effect immediately after such change.

      2.5 "Administrator" or "Plan Administrator" shall mean the person or
entity that administers the Plan, as further described in Article XIII.

      2.6 "Affiliated Company" shall mean any corporation which is a member of a
controlled group of corporations (as defined in Code ss. 1563(a), determined
without regard to ss.ss.1563(a)(4) and (e)(3)(C), except that, with respect to
the limitations on Annual Additions in Article VIII, "50%" shall be substituted
for "80%" wherever such percentage appears in Code ss.1563(a)(1)) which includes
the Employer; any trade or business (whether or not incorporated) which is under
common control (as defined in Code ss.414(c)) with the Employer; any affiliated
service group (as defined in Code ss.414(m)) which includes the Employer; and
any other entity required to be aggregated with the Employer pursuant to
regulations under Code ss.414(o).

      2.7 "Age" shall mean age as of the nearest birthday.


                                       3
<PAGE>

      2.8 "Anniversary Date" means the first day of the Plan Year.

      2.9 "Annuity Starting Date" shall mean (i) the first day of the first
period for which an amount is paid as an annuity (whether by reason of
retirement or disability) or (ii) in the case of a benefit not payable in the
form of an annuity, the first day on which all events have occurred which
entitle the recipient to such benefit.

      2.10 "Average Annual Compensation" shall mean the average of a
Participant's annual Compensation for the 5 consecutive Years of Participation
which produce the highest average. If he has less than 5 Years of Participation
as of his termination date, the average shall be determined by averaging the
annual Compensation received during the Participant's entire Service with the
Employer.

      2.11 "Beneficiary" shall mean the person(s) or entity(s) designated by a
Participant, or otherwise designated as such under the provisions of this Plan,
to receive benefits hereunder following the Participant's death.

      2.12 "Break in Service" shall mean, for purposes of eligibility, the
failure of an Employee to complete more than 500 Hours of Service during any
Eligibility Computation Period, and for purposes of benefit accrual and vesting,
the failure of a Participant to complete more than 500 Hours of Service during
any Plan Year. The term "One-Year Break in Service" shall mean any such Break in
Service. An Employee shall not incur a Break in Service for the Plan Year in
which he becomes a Participant, dies or retires.

      2.13 "Cash Balance Formula" means the cash balance formula, including
minimum and supplemental amounts, used to determine a Participant's Accrued
Benefit pursuant to Paragraph 5.3.

      2.14 "Code" means the Internal Revenue Code of 1986, as amended from time
to time, any regulations thereunder, and any rulings issued by the Internal
Revenue Service. Reference to any Code Section shall include any successor
provision thereto.

      2.15 "Compensation".

            (a) "Compensation" shall mean the amount reportable by the Employer
on IRS Form W-2 for wages as defined in Code ss.3401(a) and other amounts
pursuant to Code ss.ss.6041(d) and 6051(a)(3), for the calendar year ending in
the Plan Year. Compensation shall include all of the Participant's elective
deferrals as defined in Code ss.402(g), amounts withheld from the Participant's
pay which are not includable in the Participant's gross income under Code
ss.ss.125, 402(e)(3), 402(h)(1)(B), 403(b), or 132(f)(4), amounts deferred under
a Code ss.457 plan, and amounts treated as employer contributions under Code
ss.414(h)(2). Compensation, however, shall not include income attributable to
the grant or exercise of stock options, the vesting of restricted stock, the
sale of stock, or any other income attributable to the acquisition or
disposition of stock or rights related to stock.


                                       4
<PAGE>

            (b) For purposes of Article VIII, Compensation shall be measured in
relation to the Limitation Year and adjusted in accordance with Treasury Regs.
ss.ss.1.415-2(d)(2) and (3), if required thereunder. In the case of an employee
of two or more Affiliated Companies, his Compensation from all such Affiliated
Companies while so affiliated shall be aggregated.

            (c) In addition to other applicable limitations set forth in the
Plan, and notwithstanding any other provision of the Plan to the contrary, the
annual Compensation of each Employee shall not exceed $150,000, as adjusted by
the Commissioner for increases in the cost of living in accordance with Code
ss.401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year
applies to any period not exceeding 12 months over which compensation is
determined ("Determination Period") beginning in such calendar year. If a
Determination Period consists of fewer than 12 months, the compensation limit
will be multiplied by a fraction, the numerator of which is the number of months
in the Determination Period, and the denominator of which is 12.

            If Compensation for any prior Determination Period is taken into
account in determining an Employee's benefits accruing in the current Plan Year,
the Compensation for that prior Determination Period is subject to the OBRA `93
Annual Compensation Limit in effect for that prior Determination Period. For
this purpose, for Determination Periods beginning before the first day of the
first Plan Year beginning on or after January 1, 1994, the OBRA `93 Annual
Compensation Limit is $150,000.

            Effective for Plan Years beginning after December 31, 1996, and
notwithstanding anything in this Plan to the contrary, an Employee who is a
Family Member of a Highly Compensated Employee shall be considered a separate
Employee and shall not be aggregated with the Highly Compensated Employee for
purposes of determining the Compensation of the Employee or the Compensation of
the Highly Compensated Employee for any purposes under this Plan.

            (d) Increase in Compensation Limit. The annual compensation of each
participant taken into account in determining benefit accruals in any Plan Year
beginning after December 31, 2001 shall not exceed $200,000, as adjusted for
cost-of-living increases in accordance with Code ss.401(a)(17)(B). Annual
compensation means compensation during the Plan Year or such other consecutive
12-month period over which compensation is otherwise determined under the Plan
(the Determination Period). For purposes of determining benefit accruals in a
Plan Year beginning after December 31, 2001, compensation for any prior
Determination Period shall not exceed the limit in effect pursuant to Code
ss.401(a)(17) for such prior Determination Period. The cost-of-living adjustment
in effect for a calendar year applies to annual compensation for the
Determination Period that begins with or within such calendar year.

      2.16 "Cost of Living Factor" shall mean the cost of living adjustment
prescribed by the Secretary of the Treasury under Code ss.415(d).

      2.17 "Defined Benefit Plan" shall mean a Retirement Plan other than a
Defined Contribution Plan.


                                       5
<PAGE>

      2.18 "Defined Benefit Plan Fraction" shall mean a fraction, the numerator
of which is the sum of the Participant's projected annual benefit (calculated in
accordance with Treasury regulations) under all the Defined Benefit Plans
(whether or not terminated) maintained by the Employer, and the denominator of
which is the lesser of (i) 125% of the dollar limitation in effect for the
Limitation Year under Code ss.415(b)(1) and (d) or (ii) 140% of the
Participant's average compensation for the 3 consecutive Years of Service that
produces the highest average, including any adjustments under Code ss.415(b).

            Notwithstanding the preceding, if the Participant participated as of
the first day of the first Limitation Year beginning after December 31, 1986, in
one or more Defined Benefit Plans maintained by the Employer which were in
existence on May 6, 1986, the denominator of this fraction will not be less than
125% of the sum of the annual benefits under such plans which the Participant
had accrued as of the close of the Limitation Year beginning before January 1,
1987, disregarding any changes in the terms and conditions of the Plan after May
5, 1986. The preceding sentence applies only if the Defined Benefit Plans
individually and in the aggregate satisfied Code ss.415 limits at the end of the
1986 Limitation Year.

            For purposes of the preceding calculation, a Participant's
"projected annual benefit" shall mean the annual retirement benefit (adjusted to
an actuarially equivalent straight life annuity if such benefit is expressed in
a form other than a straight life annuity or qualified joint and survivor
annuity) to which the Participant would be entitled under the terms of the plan
assuming:

            (a) the Participant will continue employment until normal retirement
age under the plan (or current age, if later), and

            (b) the Participant's compensation for the current Limitation Year
and all other relevant factors used to determine benefits under the Plan will
remain constant for all future Limitation Years.

      For limitation years beginning on or after December 31, 1986 the
denominator of the defined benefit fraction shall be determined using the dollar
limitation under Code ss.415 as amended by the Tax Reform Act of 1986, even if
the Plan terminated in a prior limitation year.

      2.19 "Defined Contribution Plan" shall mean a Retirement Plan which
provides for an individual account for each participant and for benefits based
solely on the amount contributed to the participant's account, and any income,
expenses, gains and losses, and any forfeitures of accounts of other
participants which may be allocated to such participant's account.

      2.20 "Defined Contribution Plan Fraction" shall mean a fraction, the
numerator of which is the Annual Additions to the Participant's Account under
the Employer's Defined Contribution Plans currently or formerly maintained by
the Employer for the current and all prior Limitation Years, including Annual
Additions attributable to the Participant's nondeductible contributions to the
Employer's Defined Benefit Plans and Annual Additions attributable to all
welfare benefit funds (defined in Code ss.419(e)) and individual medical
accounts (defined in Code ss.415(1)(2)), and the denominator of which is the sum
of the lesser of the following


                                       6
<PAGE>

amounts determined for such year and each prior year of the Participant's
Service with the Employer: (i) 125% times the dollar limitation in effect under
Code ss.415(c)(1)(A) for the pertinent year, or (ii) 140% times the amount that
could be contributed under the percentage limitation of Code ss.415(c)(1)(B) for
the Participant.

            If the Employee was a participant in one or more Defined
Contribution Plans maintained by the Employer which were in existence on May 6,
1986, the numerator of this fraction shall be adjusted in accordance with Code
ss.4l5 if the sum of this fraction and the Defined Benefit Plan Fraction would
otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an
amount equal to the product of (1) the excess of the sum of the fractions over
1.0 times (2) the denominator of this fraction, will be permanently subtracted
from the numerator of this fraction. The adjustment is calculated using the
fractions as they would be computed as of the end of the last Limitation Year
beginning before January 1, 1987, and disregarding any changes in the terms and
conditions of the Plan made after May 5,1986, but using the Code ss.415
limitation applicable to the first Limitation Year beginning on or after January
1, 1987.

      2.21 "Determination Date" shall mean with respect to the first Plan Year
of the Plan, the last day of that Plan Year, and with respect to any subsequent
Plan Year, the last day of the preceding Plan Year.

      2.22 "Disabled" Participant shall mean one whose physical and/or mental
incapacity, disability or illness qualifies him for benefits under the
Employer's long-term disability insurance program or, in the absence of such
program, which qualifies the Participant for disability benefits under Title II
of the Social Security Act. The Administrator may require a Participant to
submit to a physician examination to make such determination.

      2.23 "Early Retirement Age" of a Participant shall mean (i) the date the
Participant attains age 55 and completes 10 Years of Vesting Service, as defined
in Paragraph 7.2 below, or (ii) the date he attains the earliest age when Social
Security benefits may be paid and completes 5 Years of Vesting Service.

      2.24 "Early Retirement Date" shall mean the first day of the month
following the date the Participant attains his Early Retirement Age.

      2.25 "Effective Date of the Restatement" or "Restatement Effective Date"
shall mean January 1, 2004. The "Effective Date" of the Plan shall mean July 1,
1976.

      2.26 "Eligibility Computation Period" for each Employee shall mean a
12-consecutive month period beginning on the date the Employee first performs an
Hour of Service with the Employer and any succeeding Eligibility Computation
Period shall mean a Plan Year beginning with the Plan Year immediately following
the Plan Year within which the Employee first performed an Hour of Service. In
the case of an Employee who has a Break in Service where Service prior to such
Break in Service is disregarded pursuant to Paragraph 3.4, the Eligibility
Computation Period shall be determined pursuant to this paragraph beginning on
the date the Employee first completes an Hour of Service with the Employer
immediately following such Break in Service.


                                       7
<PAGE>

      2.27 "Employee" shall mean any person who is employed by the Employer and
treated by the Employer for payroll and employment tax purposes as a common law
employee. For all purposes under this Plan, no independent contractor or any
other individual treated by the Employer for payroll and employment tax purposes
as a non-employee shall be considered an Employee, even if reclassified by a
court or regulatory agency as an employee of the Employer.

      2.28 "Employer" shall mean Community Bank System, Inc. and any
Participating Employer.

      2.29 "Entry Date" shall mean January 1, April 1, July 1, and October 1.

      2.30 "ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations thereunder. References
to any ERISA section shall include any successor provision thereto.

      2.31 "Fiscal Year" means the 12-month period beginning January 1 and
ending December 31.

      2.32 "Forfeiture" shall mean that portion of a Participant's Accrued
Benefit that is not Vested and which is forfeited pursuant to Article VII.

      2.33 "Highly Compensated Employee" includes Highly Compensated Active
Employees and Highly Compensated Former Employees.

            (a) A Highly Compensated Active Employee means any Employee who (i)
was a 5% owner (as defined in Code ss.416(i)(1)) of the Employer at any time
during the current or the preceding Plan Year, or (ii) for the preceding Plan
Year had compensation from the Employer in excess of $80,000 (as adjusted by the
Secretary pursuant to Code ss.415(d)).

            (b) A former Employee shall be treated as a Highly Compensated
Employee if: (i) the Employee was a Highly Compensated Employee when he
separated from Service, or (ii) the Employee was a Highly Compensated Employee
at any time after attaining age 55.

            (c) The determination of who is a Highly Compensated Employee will
be made in accordance with Code ss.414(q).

            (d) For purposes of this paragraph, the term "compensation" means
compensation within the meaning of Code ss.415(c)(3). For Plan Years beginning
on or after January 1, 2001, amounts excluded from gross income by reason of
Code ss.132(f)(4) shall be added to compensation.

            This definition of a Highly Compensated Employee is effective for
Plan Years beginning after December 31, 1996, except that, in determining
whether an Employee is a Highly Compensated Employee in 1997, this definition is
treated as having been in effect in


                                       8
<PAGE>

1996, and the family aggregation rules under Code ss.414(q)(6) shall be treated
as inapplicable beginning in 1996.

      2.34 "Hour of Service" shall mean:

            (a) each hour for which an Employee is paid or entitled to payment
for the performance of duties for the Employer;

            (b) each hour (up to 501 hours for any single continuous period,
whether or not occurring in a single computation period) for which an Employee
is paid, or entitled to payment, by the Employer during which no duties are
performed (regardless of whether the employment relationship has terminated) due
to vacation, holiday, illness, incapacity (including disability), layoff, jury
or military duty, or leave of absence. Hours under this paragraph shall be
calculated and credited pursuant to 29 C.F.R. 2530.200b-2(b) and (c) which are
incorporated herein by this reference;

            (c) for purposes other than benefit accrual, each hour (up to the
number required to avoid a Break in Service) for which an Employee would
otherwise be credited but for an unpaid parental leave beginning after December
31, 1984, or family medical leave in effect on or beginning after February 6,
1995. In any case in which such hours cannot be determined, the Employee shall
be credited with 8 Hours of Service per day of such absence. Parental leave
shall mean an authorized absence by reason of (i) the Employee's pregnancy, (ii)
birth of the Employee's child, (iii) placement of a child with the Employee
through adoption, or (iv) caring for the Employee's child immediately following
its birth or adoption. Family medical leave shall mean leave authorized under
the Family Medical Leave Act of 1993 ("FMLA"). No Hours of Service shall be
credited under this subparagraph (c) unless the Employee furnishes to the
Administrator such timely information as the Administrator shall require to
determine whether an Employee's absence constitutes a parental or family medical
leave, and the length of such absence. Hours of Service shall be credited under
this subparagraph (c) in the computation period in which the absence begins only
if such credited hours would prevent a Break in Service in such period,
otherwise in the next succeeding computation period;

            (d) if not credited under the preceding paragraphs, each hour for
which back pay, irrespective of mitigation of damages, is either awarded or
agreed to by the Employer. These hours shall be credited for the computation
period or periods to which the award or agreement pertains rather than the
computation period in which the award, agreement or payment is made;

            (e) for purposes other than benefit accrual, each hour (up to 501
hours in any Plan Year) during which an Employee performs no duties for the
Employer while on an unpaid Leave of Absence. Such hours shall be credited to
the Employee only if the additional hours awarded would prevent the Employee
from incurring a One-Year Break in Service. Hours under this subparagraph shall
be credited on the basis of 40 hours per work week or 8 hours per work day.
"Leave of Absence" shall mean any absence authorized by the Employer under the
Employer's standard personnel practices, provided that the Employee retires or
returns within the


                                       9
<PAGE>

period of authorized absence. The Employer shall treat all Employees under
similar circumstances in a consistent, non-discriminatory manner;

      (f) each hour for which a leased employee who is considered an Employee
under this Plan would be credited under the foregoing provisions.

            Unless the Employer maintains records of actual Hours of Service, a
salaried Employee who completes at least one Hour of Service during a monthly
period shall be credited with 190 Hours for each such period.

            Notwithstanding the foregoing, no credit shall be given for any
period during which no duties are performed but for which an Employee receives
payment or is entitled to payment under a plan maintained solely for the purpose
of complying with applicable worker's compensation, unemployment compensation or
disability insurance laws or where payment solely reimburses an Employee for
medical or medically related expenses incurred by the Employee. Service rendered
at overtime or other premium rates shall be credited at the rate of one Hour of
Service for each hour worked, regardless of the rate of compensation in effect
with respect to such hour.

            For purposes of eligibility and vesting, Hours of Service will be
credited to an Employee for employment with any Affiliated Company while that
company was an Affiliated Company with the Employer.

      2.35 "Interest Credit" means, with respect to any Plan Year, an addition
to an eligible Participant's Account determined pursuant to subparagraph 5.3(f).

      2.36 "Investment Manager" shall mean any person or entity who:

            (a) is registered as an investment adviser under the Investment
Advisers Act of 1940, a bank (as defined in the Investment Advisers Act of
1940), or an insurance company qualified to manage, acquire and dispose of Plan
assets under the laws of more than one state;

            (b) acknowledges in writing that it is a fiduciary with respect to
the Plan; and

            (c) is granted the power to manage, acquire or dispose of any asset
of the Plan pursuant to its provisions.

      2.37 "Key Employee" shall mean any Employee or former Employee (or such
Employee's Beneficiary) who at any time during the Plan Year including the
Determination Date or during any of the 4 preceding Plan Years is or was:

            (a) an officer of the Employer who has Top Heavy Compensation
greater than 50% of the amount in effect under Code ss.415(b)(1)(A) for the Plan
Year;


                                       10
<PAGE>

            (b) an owner (or one who is considered an owner under the provisions
of Code ss.318) of one of the 10 largest interests in the Employer if such
individual's Top Heavy Compensation exceeds the amount in effect under Code
ss.415(c)(1)(A);

            (c) a more than 5% owner of the Employer; or

            (d) a 1% owner of the Employer earning more than $150,000 in Top
Heavy Compensation from the Employer.

For purposes of subparagraph (a), not more than 50 (or, if there are less than
500 Employees, not more than the greater of three or 10% of the Employees) shall
be considered a Key Employee by virtue of being an officer. For purposes of
subparagraph (b), if 2 Employees have the same ownership percentage, the
Employee having greater Compensation shall be considered as having a larger
interest.

"Key Employee" shall mean any Employee or former Employee (including any
deceased Employee) who at any time during the Plan Year that includes the
Determination Date was an officer of the Employer having annual compensation
greater than $130,000 (as adjusted under Code ss.416(i)(1) for Plan Years
beginning after December 31, 2002), a 5-percent owner of the Employer, or a
1-percent owner of the Employer having annual compensation of more than
$150,000. For purpose, annual compensation means compensation within the meaning
of Code ss.415(c)(3). The determination of who is a Key Employee will be made in
accordance with Code ss.416(i)(1) and the applicable regulations and other
guidance of general applicability issued thereunder.

      2.38 "Late Retirement Date" shall mean the first day of the month
coinciding with or next following a Participant's delayed termination from
Service after having reached his Normal Retirement Age.

      2.39 "Non-Highly Compensated Employee" shall mean an Employee or former
Employee who is not a Highly Compensated Employee.

      2.40 "Non-Key Employee" shall mean any Employee or former Employee who is
not a Key Employee, and any Beneficiary of a Non-Key Employee.

      2.41 "Normal Retirement Age" of a Participant shall mean the later of the
Participant's 65th birthday or the 5th anniversary of the date the Participant
commenced participation in the Plan.

      2.42 "Normal Retirement Benefit" shall mean a Participant's benefit earned
for Service up to his Normal Retirement Age, and expressed in the form of an
annual benefit commencing at his Normal Retirement Date.

      2.43 "Normal Retirement Date" shall mean the first day of the month
coincident with or next following the date a Participant attains his Normal
Retirement Age, presuming he retires from Service upon attaining Normal
Retirement Age.


                                       11
<PAGE>

      2.44 "Participant" shall mean (i) an Employee who has met the eligibility
requirements for participation in the Plan and who continues to participate
("Active Participant"), and (ii) a former Employee whose Accrued Benefit
hereunder has not yet been fully distributed to him or forfeited under the terms
of the Plan ("Inactive Participant").

      2.45 "Participating Employer" shall mean any entity that adopts the Plan
in accordance with the provisions of Article XXI.

      2.46 "Permissive Aggregation Group" shall mean the Required Aggregation
Group of plans plus any other planes) of the Employer which, when considered as
a group with the Required Aggregation Group, would continue to satisfy the
requirements of Code ss.ss.401(a)(4) and 410.

      2.47 "Plan" shall mean the defined benefit plan and trust as set forth in
this document.

      2.48 "Plan Year" shall mean the 12-month period beginning January 1 and
ending December 31.

      2.49 "Predecessor Plan" means the Employer's tax-qualified pension plan
which has been restated in its entirety by this document.

      2.50 "Pre-Retirement Survivor Annuity" shall mean an annuity payable for
the life of the Participant's Spouse following the Participant's death prior to
the Participant's Annuity Starting Date, in an amount determined as follows:

            (a) For a Participant dying after his Earliest Retirement Age (as
defined in Article VI), the Pre-Retirement Survivor Annuity shall equal the
survivor annuity portion of the Qualified Joint and Survivor Annuity payable if
the Participant had begun to receive the Qualified Joint and Survivor Annuity
the day before his death.

            (b) For a Participant dying on or before his Earliest Retirement Age
(as defined in Article VI), the Pre-Retirement Survivor Annuity shall equal the
survivor annuity portion of the Qualified Joint and Survivor Annuity payable
under the Plan if the Participant had separated from service on the date of his
death (or date of separation from Service, if earlier), had survived to his
Earliest Retirement Age, had begun to receive the Qualified Joint and Survivor
Annuity at such Earliest Retirement Age, and had died the day after attaining
his Earliest Retirement Age.

      2.51 "Qualified Joint and Survivor Annuity" means an annuity for the life
of a Participant with a survivor annuity for the life of his Spouse which is 50%
of the amount of the annuity payable during the joint lives of the Participant
and his Spouse, and which is the Actuarial Equivalent of his Accrued Benefit
payable in the form of a life annuity.

      2.52 "Required Aggregation Group" shall mean each qualified plan of the
Employer or any Affiliated Company, whether or not the plan is terminated, in
which at least one Key


                                       12
<PAGE>

Employee participates (in the Plan Year containing the Determination Date or any
of the four preceding Plan Years) and any other qualified plan of the Employer
which enables any plan in which a Key Employee participates to meet the
requirements of Code ss.ss.401(a)(4) or 410.

      2.53 "Retirement Age" shall mean the date the Participant attains his
Early or Normal Retirement Age as defined herein.

      2.54 "Retirement Date" shall mean the Participant's effective date of
retirement after attaining his Retirement Age.

      2.55 "Retirement Plan" shall mean (i) any profit sharing, pension or stock
bonus plan described in Code ss.ss.401(a) and 501(a), (ii) any annuity plan or
annuity contract described in Code ss.ss.403(a) or 403(b), (iii) any qualified
bond purchase plan described in Code ss.405(a), and (iv) any individual
retirement account, individual retirement annuity or retirement bond described
in Code ss.ss.408(a), 408(b) or 409.

      2.56 "Rollover Contribution" shall mean:

            (a) an amount distributed to a Participant or directly to this Plan
on his behalf in a distribution that qualifies under Code ss.402(c)(4) as an
eligible rollover distribution; or

            (b) an amount which the Participant receives from an individual
retirement account or individual retirement annuity in a distribution described
in Code ss.408(d)(3)(A)(ii).

An amount shall not qualify as a Rollover Contribution if it includes any
after-tax contribution by the Participant or anyone else.

      2.57 "Service" means any period of time the Employee is in the employ of
the Employer, including any period the Employee is on a Leave of Absence (as
defined in the Hour of Service definition herein).

      2.58 "Service Credit" means an addition to a Participant's Account
determined pursuant to subparagraph 5.3(b) or subparagraph 5.3(c), as
applicable.

      2.59 "Social Security Taxable Wage Base" means the contribution and
benefit base in effect under Section 230 of the Social Security Act as of the
first day of each Plan Year for which Service Credits are added to Accounts
pursuant to Paragraph 5.3.

      2.60 "Spouse" shall mean the spouse or surviving spouse of the
Participant, except that a former spouse will be treated as the Spouse to the
extent specifically provided under a Qualified Domestic Relations Order as
defined in Paragraph 15.5 or to the extent required by law.

      2.61 "Super Top Heavy" shall mean that for any Plan Year, the Plan is
determined to be Top Heavy under any of the circumstances described in the
definition of "Top Heavy" herein, except that the applicable Top Heavy Ratio
exceeds 90%.


                                       13
<PAGE>

      2.62 "Termination of Employment" shall mean termination of employment with
the Employer other than by reason of a Participant's death, his becoming
Disabled, or retirement after attaining Retirement Age.

      2.63 "Top Heavy" shall mean that for any Plan Year:

            (a) this Plan is not a part of any Required Aggregation Group or
Permissive Aggregation Group of plans, and the Top Heavy Ratio for this Plan
exceeds 60%;

            (b) this Plan is a part of a Required Aggregation Group of plans but
not a part of a Permissive Aggregation Group, and the Top Heavy Ratio for the
Required Aggregation Group exceeds 60%; or

            (c) this Plan is a part of a Permissive Aggregation Group of plans
and the Top Heavy Ratio for the Plan exceeds 60% and the Top Heavy Ratio for the
Permissive Aggregation Group exceeds 60%.

      2.64 "Top Heavy Compensation" means compensation as defined in Code
ss.415(c)(3), including any amount that is excludable from the Employee's gross
income under ss.ss.125, 402(e)(3), 402(b), 403(b), or, for Plan Years beginning
on or after January 1, 2001, ss.132(f)(4).

      2.65 "Top Heavy Ratio" shall mean the ratio determined as follows:

            (a) If the Employer maintains one or more defined benefit plans and
the Employer has never maintained any defined contribution plan which has
covered or could cover a Participant in this Plan, the Top Heavy Ratio is a
fraction, the numerator of which is the sum of the present values of the accrued
benefits of all Key Employees under such planes) as of the Determination Date
(including any part of any accrued benefit distributed in the five year period
ending on the Determination Date), and the denominator of which is the sum of
the present values of the accrued benefits (including any part of any accrued
benefit distributed in the five year period ending on the Determination Date) of
all participants in such planes) as of the Determination Date. Both the
numerator and denominator of the Top Heavy Ratio shall be adjusted to reflect
any benefit which is accrued but unpaid as of the Determination Date.

            (b) If the Employer maintains one or more defined benefit plans and
maintains or has maintained one or more defined contribution plans (including
any Simplified Employee Pension Plan) which have covered or could cover a
Participant in this Plan, the Top Heavy Ratio is a fraction, the numerator of
which is the sum of the present values of the accrued benefits under the defined
benefit planes) for all Key Employees and the sum of the account balances under
the defined contribution planes) for all Key Employees as of the Determination
Date, and the denominator of which is the sum of the present values of the
accrued benefits under the defined benefit planes) for all Participants and the
sum of the account balances under the defined contribution planes) for all
Participants as of the Determination Date(s). Both the numerator and denominator
of the Top Heavy Ratio are adjusted for any distribution of an


                                       14
<PAGE>

account balance or distribution of an accrued benefit made in the five year
period ending on the Determination Date and any contribution due but unpaid as
of the Determination Date.

            (c) For purposes of (a) and (b) above, the present value of a
Participant's Accrued Benefit in this Plan and all other defined benefit plans
included in the Required or Permissive Aggregation Group shall be determined (i)
by taking into account all benefits derived from Employer and Employee
contributions other than deductible employee contributions and (ii) by using the
actuarial assumptions set forth in Paragraph 2.3.

            (d) For purposes of (a) and (b) above, the value of account balances
and the Present Value of accrued benefits will be determined as of the most
recent Valuation Date that falls within or ends with the twelve month period
ending on the Determination Date. The account balances and accrued benefits of a
Participant who is not a Key Employee but who was a Key Employee in a prior year
will be disregarded. The account balances and accrued benefits of a participant
who has not performed any service for the Employer at any time during the five
year period ending on the Determination Date will be disregarded; however, if
the participant returns to Service, his account balances and accrued benefits
will again be considered. The calculation of the Top Heavy Ratio, and the extent
to which distributions, rollovers, and transfers are taken into account will be
made in accordance with Code ss.416. When aggregating plans the value of account
balances and accrued benefits will be calculated with reference to the
Determination Dates that fall within the same calendar year. Effective January
1, 1987, the accrued benefit of a Non-Key Employee shall be determined under the
method that uniformly applies for accruing benefits under all defined benefit
plans maintained by the Employer or any Affiliated Employer, and if none, as if
such benefit accrued not more rapidly than the slowest accrual rate allowed
under Code ss.411(b)(1)(C).

            (e) Determination of present values and amounts. This subparagraph
(e) shall apply for purposes of determining the present values of Accrued
Benefits and the amounts of account balances of employees as of the
Determination Date.

                  (1) Distributions during year ending on the Determination
Date. The present values of Accrued Benefits and the amounts of account balances
of an Employee as of the Determination Date shall be increased by the
distributions made with respect to the Employee under the Plan and any plan
aggregated with the Plan under Code ss.416(g)(2) during the 1-year period ending
on the Determination Date. The preceding sentence shall also apply to
distributions under a terminated plan which, had it not been terminated, would
have been aggregated with the plan under Code ss.416(g)(2)(A)(i). In the case of
a distribution made for a reason other than separation from Service, death, or
disability, this provision shall be applied by substituting "5-year period" for
1-year period."

                  (2) Employees not performing services during year ending on
the Determination Date. The Accrued Benefits and accounts of any individual who
has not performed services for the Employer during the 1-year period ending on
the Determination Date shall not be taken into account.


                                       15
<PAGE>

      2.66 "Top Heavy Year" shall mean a particular Plan Year for which the Plan
has been determined to be Top Heavy and for which the benefit accrual and
vesting requirements described in Code ss.416 and in this Plan must be met.

      2.67 "Traditional Formula" means the formula, including minimum and
supplemental amounts, used to determine a Participant's Accrued Benefit pursuant
to Paragraph 5.2.

      2.68 "Trust" shall mean the trust created by the Employer by establishing
this Plan and thereby declaring the trust upon which the Trustee will receive,
manage and administer contributions hereunder, which Trust is upon all the terms
and conditions set out in this instrument.

      2.69 "Trust Fund" shall mean all property of every kind held or acquired
by the Trustee under the Plan.

      2.70 "Trustee" or "Trustees" shall mean the person or persons named to act
as trustees, and each duly appointed additional or successor Trustee or Trustees
acting hereunder.

      2.71 "Valuation Date" shall mean the first day of the Plan Year or any
other day agreed upon by the Employer, Plan Administrator and Trustee.

      2.72 "Vested" shall mean that portion of a Participant's Accrued Benefit
which is nonforfeitable.

      2.73 "Vesting Computation Period" shall mean the Plan Year or, for periods
of Service prior to the Effective Date of the Plan, the same 12-month period as
the Plan Year.

      2.74 "Year of Creditable Service" shall mean an Accrual Computation Period
during which the Employee completes 1000 Hours of Service.

      2.75 "Year of Participation" shall mean an Accrual Computation Period
commencing on or after the Effective Date of the Plan during which an Employee
is a Participant and completes 1000 Hours of Service.


                                       16
<PAGE>

                                   Article III

                            ELIGIBILITY REQUIREMENTS

      3.1 Eligibility Requirements and Participation.

            (a) Except as otherwise provided in this paragraph:

                  (1) any Employee employed on the Restatement Effective Date
who participated in the Predecessor Plan on the day before the Restatement
Effective Date shall continue as a Participant in the Plan;

                  (2) any other Employee employed on the Restatement Effective
Date who has completed a Year of Service shall become a Participant as of the
Restatement Effective Date, unless participation is specifically waived by the
Employee; and

                  (3) after the Restatement Effective Date, an Employee shall
become a Participant (unless he specifically waives participation) as of the
Entry Date coincident with or next following the date (prior to January 1, 2005,
the Entry Date closest to the date) on which he satisfies the requirements
described previously in this subparagraph (a), unless he is no longer employed
on such date.

            (b) (1) Notwithstanding anything herein to the contrary, leased
employees shall not be eligible to participate in this Plan.

                  (2) Effective for Plan Years beginning after December 31,
1996, for purposes of this subparagraph (b), the term "leased employee" means
any person (other than an Employee of the Employer) who pursuant to an agreement
between the Employer and any other person ("leasing organization") has performed
services for the Employer (or for the Employer and related persons determined in
accordance with Code ss.414(n)(6)) on a substantially full-time basis for a
period of at least 1 year, and such services are performed under the Employer's
primary direction or control.

            (c) Notwithstanding the foregoing, no person who is included in a
unit of employees covered by a collective bargaining agreement (as so determined
by the Secretary of Labor) between employee representatives and the Employer
shall be eligible to participate in the Plan if retirement benefits were the
subject of good faith bargaining unless such collective bargaining agreement
expressly provides for the inclusion of such persons as Participants. Any
Participant who joins such unit as a member shall immediately cease to accrue
benefits hereunder; however, his Service credited thereafter shall be counted
for vesting purposes.

            (d) Notwithstanding any other provision of this Plan, individuals
who are not contemporaneously classified as Employees of the Employer for
purposes of the Employer's payroll system (including, without limitation,
individuals employed by temporary help firms, technical help firms, staffing
firms, professional employer organizations or other staffing firms whether or
not deemed to be "common law" employees within the meaning of Code ss.414(n))
are


                                       17
<PAGE>

not considered to be eligible Employees of the Employer and shall not be
eligible to participate in the Plan. In the event any such individuals are
reclassified as Employees for any purpose, including, without limitation, common
law or statutory employees, by any action of any third party, including, without
limitation, any government agency, or as a result of any private lawsuit,
action, or administrative proceeding, such individuals shall, notwithstanding
such reclassification, remain ineligible for participation hereunder. In
addition to and not in derogation of the foregoing, the exclusive means for
individuals who are not contemporaneously classified as an Employee of the
Employer on the Employer's payroll system to become eligible to participate in
this Plan is through an amendment to this Plan, duly executed by the Employer,
which specifically renders such individuals eligible for participation
hereunder.

      3.2 Year of Service. For purposes of determining an Employee's eligibility
to participate, a "Year of Service" shall mean the Eligibility Computation
Period during which the Employee completes at least 1000 Hours of Service.
Except as may be provided in ensuing paragraphs of this Article, credit shall be
given for Years of Service completed beginning with the first year the Employee
was employed by the Employer.

      3.3 Waiver. An Employee may, subject to the approval of the Employer, make
an irrevocable election in writing not to participate in the Plan.

      3.4 Participation and Service Upon Reemployment.

            (a) A reemployed Employee who previously separated from Service with
a Vested benefit shall be eligible to resume participation effective as of his
reemployment date.

            (b) A reemployed Employee who previously separated from Service
prior to satisfying the eligibility requirements for participation shall
commence participation on the Entry Date coinciding with or next following the
date on which he meets such eligibility requirements, provided he is so employed
on such Entry Date. For this subparagraph (b), all Years of Service shall be
taken into account except those disregarded under subparagraph (e).

            (c) A reemployed Employee who had completed the eligibility
requirements for participation but who previously separated from Service prior
to becoming a Participant shall commence participation immediately upon his
reemployment, unless his prior Service is disregarded under subparagraph (e).

            (d) A reemployed Employee who had participated in the Plan but
separated from Service with no Vested benefit derived from Employer
contributions shall be eligible to resume participation effective as of his
reemployment date, unless his prior Service is disregarded under subparagraph
(e).

            (e) For purposes of subparagraphs (b)-(d), an Employee's Years of
Service before a period of at least 5 consecutive Breaks in Service shall be
disregarded if the consecutive Breaks in Service exceed the aggregate number of
the Participant's credited Years of Service before such Break period, and the
Employee shall be considered a new Employee as of his


                                       18
<PAGE>

reemployment date. For purposes of this subparagraph (e), Years of Service not
required to be taken into account by reason of any prior Break in Service shall
be disregarded.

      3.5 Forms Upon Eligibility. Each Employee who becomes eligible to
participate in the Plan shall be notified of his eligibility and shall be
provided with such information as is required by ERISA within the time
prescribed for providing such information and forms for designating one or more
Beneficiaries to receive benefits following the Employee's death.

      3.6 Change in Status.

            (a) In the event a person who has been employed in a category of
employment not eligible for participation in this Plan changes to covered
employment, he shall become a Participant immediately upon his change in status,
provided he has completed the eligibility requirements for participation. If he
has not completed the eligibility requirements, he will become a Participant on
the Entry Date coinciding with or next following the date he completes the
eligibility requirements.

            (b) In the event a Participant who has been employed in covered
employment changes to a category of employment not eligible for participation in
the Plan, he shall continue to participate in the Plan and shall receive credit
for benefit accrual purposes based upon such Participant's Compensation from the
Employer and Hours of Service from the first day of the Plan Year up to the date
of change from covered employment, provided such Participant completed the
eligibility requirements under Paragraph 3.1, treating service with an
Affiliated Company as Service with the Employer. In any subsequent Plan Year,
such Participant shall not be eligible for further benefit accruals under the
Plan, unless he returns to covered employment with the Employer.

      3.7 Improper Omission or Inclusion of Participant.

            (a) If, for any Plan Year, an Employee who should be included as a
Participant in the Plan is erroneously omitted and discovery of such error is
not made until a later year, the Employee's status as a Participant shall be
corrected and his Accrued Benefit and Vesting credited to him as if he had not
been omitted.

            (b) If an Employee who is ineligible to participate in the Plan is
erroneously included as a Participant, his Accrued Benefit for the period he is
ineligible shall be treated as a Forfeiture in the year the error is discovered.

      3.8 Service With Predecessor Employer. If the Employer maintains the plan
of a predecessor employer, whether a corporation, partnership, sole
proprietorship or other business entity, any period of service with such
employer shall be treated as Service with the Employer for eligibility purposes.
If the Plan is not the plan of a predecessor employer, service with such
predecessor employer shall not be considered Service with the Employer, except
to the extent required pursuant to Treasury regulations.


                                       19
<PAGE>

      3.9 Special Credit for Certain Employees.

            (a) With respect to any Employee who was formerly employed on June
13, 1997 by Key Bank, N.A. ("Key") and who on that date became employed by the
Employer, all of the Employee's Service with Key shall be treated as service
with the Employer for purposes of determining his eligibility to participate in
the Plan. Any such Employee who meets the service requirement specified in
Paragraph 3.1 after taking into account such service shall commence
participation on January 1, 1998.

            (b) With respect to any Employee who was formerly employed on July
18, 1997 by Fleet Bank ("Fleet") and who on that date became employed by the
Employer, all of the Employee's Service with Fleet shall be treated as service
with the Employer for purposes of determining his eligibility to participate in
the Plan. Any such Employee who meets the service requirement specified in
Paragraph 3.1 after taking into account such service shall commence
participation on January 1, 1998.

            (c) With respect to Joseph Butler who was formerly employed on June
20, 1997 by Fleet and who on that date became employed by the Employer, all of
the Employee's Service with Fleet shall be treated as service with the Employer
for purposes of determining his eligibility to participate in the Plan. Provided
that he meets the service requirement specified in Paragraph 3.1 after taking
into account such service Joseph Butler shall commence participation on January
1, 1998.

            (d) With respect to Douglas Frank who was formerly employed on
January 27, 1997 by Key and who on that date became employed by the Employer,
all of the Employee's Service with Key shall be treated as service with the
Employer for purposes of determining his eligibility to participate in the Plan.
Provided that he meets the service requirement specified in Paragraph 3.1 after
taking into account such service Douglas Frank shall commence participation on
January 1, 1998.

            (e) With respect to Brian Aldrich who was formerly employed on June
26, 1997 by Key and who on that date became employed by the Employer, all of the
Employee's Service with Key shall be treated as service with the Employer for
purposes of determining his eligibility to participate in the Plan. Provided
that he meets the service requirement specified in Paragraph 3.1 after taking
into account such service Brian Aldrich shall commence participation on January
1, 1998.

            (f) With respect to any Employee who was formerly employed on July
8, 1996 by Benefit Plans Administrators ("BPA") and who on that date became
employed by the Employer, all of the Employee's services with BPA shall be
treated as Service with the Employer for purposes of determining his eligibility
to participate in the Plan.

            (g) With respect to any Employee who was formerly employed on
October 29, 1994 by Chase Bank at the branch located in Cato, New York ("Chase")
and who on that date became employed by the Employer, all of the Employee's
services with Chase shall be


                                       20
<PAGE>

treated as Service with the Employer for purposes of determining his eligibility
to participate in the Plan.

            (h) With respect to any Employee who was formerly employed on July
15, 1995 by Chase Bank ("Chase") and who on that date became employed by the
Employer, all of the Employee's services with Chase shall be treated as Service
with the Employer for purposes of determining his eligibility to participate in
the Plan.

            (i) With respect to any Employee who was formerly employed on
January 26, 2001 by Citizens National Bank of Malone ("Citizens Bank") and who
on that date became employed by the Employer, all of the Employee's services
with Citizens Bank shall be treated as Service with the Employer for purposes of
determining his eligibility to participate in the Plan.

            (j) With respect to any Employee who was formerly employed on
November 16, 2001 by FleetBoston Financial Corporation Fleet National Bank
("FleetBoston") and who on that date became employed by the Employer, all of the
Employee's services with FleetBoston shall be treated as Service with the
Employer for purposes of determining his eligibility to participate in the Plan.

            (k) With respect to any Employee who was formerly employed on August
1, 2003 by PricewaterhouseCoopers, LLP ("PricewaterhouseCoopers") and who on
that date became employed by the Employer, all of the Employee's service with
PricewaterhouseCoopers shall be treated as service with the Employer for
purposes of determining his eligibility to participate in this Plan. Any such
Employee who meets the service requirement specified in Paragraph 3.1 after
taking into account such service shall commence participation on August 1, 2003.

            (l) With respect to any Employee who was formerly employed on
September 5, 2003 by Peoples Bankcorp, Inc. ("Peoples") and who on that date
became employed by the Employer, all of the Employee's service with Peoples
shall be treated as service with the Employer for purposes of determining his
eligibility to participate in this Plan. Any such Employee who meets the service
requirements specified in Paragraph 3.1 after taking into account such service
shall commence participation on September 5, 2003.

            (m) With respect to any Employee who was formerly employed on
November 22, 2003 by Grange National Banc Corp. ("Grange") and who on that date
became employed by the Employer, all of the Employee's service with Grange shall
be treated as service with the Employer for purposes of determining his
eligibility to participate in this Plan. Any such Employee who meets the service
requirement specified in Paragraph 3.1 after taking into account such service
shall commence participation on November 22, 2003.

            (n) With respect to any Employee who was employed by First Heritage
Bank ("First Heritage") on May 14, 2004, and who on that date became employed by
the Employer, all of the Employee's service with First Heritage shall be treated
as service with the Employer for purposes of determining the Employee's
eligibility to participate in this Plan. An Employee who


                                       21
<PAGE>

meets the eligibility requirements specified in Paragraph 3.1 after taking into
account such service shall commence participation in the Plan on May 14, 2004.

            (o) With respect to any Employee who was employed by HSBC Bank at
its branch located in Dansville, New York ("HSBC") on December 3, 2004, and who
on that date became employed by the Employer, all of the Employee's service with
HSBC shall be treated as service with the Employer for purposes of determining
the Employee's eligibility to participate in this Plan. An Employee who meets
the eligibility requirements specified in Paragraph 3.1 after taking into
account such service shall commence participation in the Plan on December 3,
2004.

      3.10 Special Credit for Elias Employees. With respect to any Employee who
was employed on April 3, 2000 by Elias Asset Management Incorporated ("Elias"),
all of the Employee's Service with Elias shall be treated as service with the
Employer for purposes of determining his eligibility to participate in this
Plan. Any such Employee who meets the service requirement specified in Paragraph
3.1 after taking into account such Service shall commence participation on April
3, 2000.


                                       22
<PAGE>

                                   Article IV

                      CREDITED SERVICE FOR BENEFIT ACCRUAL

      4.1 Benefit Accrual.

            (a) A Participant shall be credited with Service for benefit accrual
purposes for each Year of Creditable Service he completes.

            (b) Except as otherwise specifically provided in the Plan, no
employee of an Affiliated Company shall be credited with Service with the
Employer with respect to any time period prior to the date the Affiliated
Company became so affiliated with the Employer by reason of purchase, merger or
otherwise. Without limiting the generality of the prior sentence, with respect
to any Employee described in Paragraph 3.9, none of the Employee's service with
any company prior to his employment by the Employer shall be taken into account
for purposes of this Article. Notwithstanding the foregoing, for purposes of
calculating a Participant's Years of Creditable Service and Accrued Benefit,
both as of December 31, 1988, a Participant employed or formerly employed by
Nichols Bank shall be credited with Service as if he were employed by the
Employer from his hire date with Nichols Bank.

      4.2 Service Limitations.

            (a) No more than one Year of Creditable Service shall be credited to
a Participant with respect to any Accrual Computation Period.

            (b) No more than 35 Years of Creditable Service shall be credited to
any Participant.

      4.3 Loss of Service - Non-Vested Participants. In the case of a
Participant who incurs a period of five or more consecutive One-Year Breaks in
Service who did not have any Vested right to his Accrued Benefit derived from
Employer contributions at his severance date and who subsequently resumes
participation in the Plan, no Years of Creditable Service with the Employer
before the Break in Service shall be taken into account in computing his Accrued
Benefit if the number of consecutive One-Year Breaks in Service equals or
exceeds the aggregate number of Years of Creditable Service before the Break.

      4.4 Reinstatement of Creditable Service - Vested Participant. A
Participant who, at the time he incurred one or more consecutive Breaks in
Service, had a Vested right to his Accrued Benefit derived from Employer
contributions, who is reemployed by the Employer and who resumes participation
in the Plan, shall have his pre-Break Years of Creditable Service restored in
determining his Accrued Benefit unless, after his employment termination, the
Participant received a lump-sum distribution of his Vested Accrued Benefit and
upon reemployment, failed to repay the distribution within the time period
allowed and in accordance with Paragraph 7.7.


                                       23
<PAGE>

      4.5 Retention of Service. The Accrued Benefit of a Participant who
separates from Service after the Effective Date will not be reduced by
termination of employment, absences from employment, or other Breaks in Service,
except as provided under the terms of this Plan.


                                       24
<PAGE>

                                    Article V

                               RETIREMENT BENEFITS

      5.1 Choice of Traditional Formula or Cash Balance Formula.

            (a) Each Participant who is classified by the Employer as an active
Employee on October 1, 2004, may elect prior to November 1, 2004 either (1) to
have the Participant's total Accrued Benefit determined under the Traditional
Formula described in Paragraph 5.2 below, or (2) to have the Participant's
Accrued Benefit determined under the Cash Balance Formula described in Paragraph
5.3 below. An eligible Participant who fails to make an affirmative election of
either (1) or (2) above shall be deemed to have elected (2) above. An election
or deemed election shall apply to all of the Participant's recognized service
with the Employer, including recognized service rendered after a future break in
service.

            (b) A Participant who was not classified by the Employer as an
active Employee on October 1, 2004, but who thereafter returns to active
employment shall have an Accrued Benefit equal to the sum of (1) the
Participant's Accrued Benefit earned prior to October 1, 2004 under the
Traditional Formula, plus (2) the Participant's Accrued Benefit earned after
September 30, 2004 under the Cash Balance Formula.

            (c) An Employee who becomes a Participant after October 1, 2004
shall have an Accrued Benefit determined only under the Cash Balance Formula.

            (d) Except to the extent provided in subparagraph 5.3(e) (regarding
certain supplemental cash balance benefits), in no event shall a Participant be
entitled to benefits under both the Traditional Formula and the Cash Balance
Formula for the same period of service.

      5.2 Traditional Formula.

            (a) Normal Retirement Benefit. Subject to the provisions of Article
XIV and the limitations under this Paragraph and Article VIII, a Participant who
retires upon attaining his Normal Retirement Age and whose benefit is determined
in whole or in part under the Traditional Formula (see Paragraph 5.1) shall be
entitled to receive a Normal Retirement Benefit under the Traditional Formula
equal to the greater of the amount described in (1) below or the amount
described in (2) below:

                  (1) (A) an amount equal to the Participant's Accrued Benefit
earned as of December 31, 1988 under the terms of the Predecessor Plan as
modified by the terms of subparagraph 5.2(b), disregarding all Service after
December 31, 1988, but adjusted for anyone who completed one or more Hours of
Service after December 31, 1988 for changes in Compensation after December 31,
1988 by multiplying such Accrued Benefit by a fraction (not less than 1.0), the
numerator of which is his Average Annual Compensation as of the date the
computation is performed, and the denominator of which is his Average Annual
Compensation as of the Plan Year ending December 31, 1988; however, the Accrued
Benefit, as so adjusted, of any Participant or Former Participant employed by
Exchange National Bank or its predecessor


                                       25
<PAGE>

shall be reduced by his unadjusted accrued benefit earned prior to July 1, 1984
under the defined benefit pension plan sponsored by the Bank of New York; plus

                        (B) an amount equal to .9% of his Average Annual
Compensation, plus .65% of his Average Annual Compensation in excess of his
Covered Compensation, multiplied by the Participant's Years of Creditable
Service earned after December 31, 1988, not to exceed 35 years reduced by his
total Years of Creditable Service earned prior to January 1, 1989.

                  (2) An amount equal to .9% of his Average Annual Compensation,
plus .65% of his Average Annual Compensation in excess of his Covered
Compensation, multiplied by the Participant's total Years of Creditable Service,
not to exceed 35 years.

                  (3) Notwithstanding the foregoing, a Participant employed or
formerly employed by Nichols Bank shall receive under the Traditional Formula
the greater of the sum of the benefits under subparagraphs (a)(1) and (a)(2)
above, or the Actuarial Equivalent of the Participant's Accrued Benefit to which
his account balance in the former profit sharing plan sponsored by Nichols Bank
was converted as of January 1, 1988.

                  (4) Notwithstanding the foregoing, to the extent the Normal
Retirement Benefit of a Participant employed or formerly employed by First
Liberty Bank & Trust is determined under the Traditional Formula (see Paragraph
5.1) such benefit shall equal the sum of (A) the Participant's accrued benefit
determined under the First Liberty Bank & Trust Retirement Plan as of December
31, 2001, plus (B) the benefit earned by the Participant after December 31, 2001
under subparagraph (a)(2) above (taking into account only Compensation and Years
of Creditable Service earned by the Participant after December 31, 2001).

                  (5) In applying the Traditional Formula, neither the Maximum
Excess Allowance (as hereinafter defined) nor the Overall Permitted Disparity
Limits (as hereinafter defined) may be exceeded in any Plan Year with respect to
any Participant. Accordingly, at such time that a Participant's cumulative
permitted disparity reaches the Participant's applicable limit calculated in
accordance with Treas. Regs. ss.1.401(1)-5, then for each Year of Creditable
Service thereafter, the formula under subparagraph (a)(2) shall be modified such
that the Participant shall accrue a benefit at the rate of the Base Benefit
Percentage times his Average Annual Compensation.

                  (6) For all purposes under this Plan:

                        (A) "Base Benefit Percentage" means the rate, expressed
as a percentage, at which Employer-derived benefits are accrued with respect to
that amount of a Participant's Average Annual Compensation that is at or below
the Participant's Covered Compensation for the Plan Year.

                        (B) "Covered Compensation" for each Participant for a
Plan Year shall be the average of the taxable wage bases in effect under the
Social Security Act for each calendar year during the 35-year period ending with
the calendar year in which the


                                       26
<PAGE>

Participant attains or will attain his Social Security retirement age (as
defined in Code ss.415(b)(8)), rounded to the nearest multiple of $600. For this
purpose, the taxable wage base for all years after the year in which the
determination is being made is assumed to be the same as the taxable wage base
in effect for the year of determination. Covered Compensation for a participant
after the 35-year period is the same as his Covered Compensation as of his
Social Security retirement age. A Participant's Covered Compensation shall be
automatically adjusted each Plan Year.

                        (C) "Excess Benefit Percentage" means the rate,
expressed as a percentage, at which Employer-derived benefits are accrued with
respect to that amount of a Participant's Average Annual Compensation that is
above the Participant's Covered Compensation for the Plan Year, which rate
(except as otherwise provided herein) shall be 0.65%.

                        (D) "Maximum Excess Allowance" means the maximum
differential allowed under ss.404(1) and the regulations thereunder between the
Base Benefit Percentage and the Excess Benefit Percentage.

                        (E) "Overall Permitted Disparity Limits" means the
cumulative permitted disparity applicable to a Participant's benefit accrued
hereunder as of any Plan Year, which amount is based on the Participant's total
Years of Creditable Service and calculated in accordance with ss.401(1) and the
regulations thereunder.

                  (7) Except as provided in subparagraph 5.2(b), the Employer
intends that ss.401(l) and the regulations thereunder shall apply only to
benefits that accrue in Plan Years beginning after December 31, 1988 and not to
benefits that accrued under the Predecessor Plan as of December 31,1988, and the
Plan shall be construed accordingly.

                  (8) A Participant's Normal Retirement Benefit under the
Traditional Formula shall not be less than his Accrued Benefit earned under that
formula (as applicable) as of the date he attained Early Retirement Age.

                  (9) For Plan Years that begin on or after January 1, 2004, a
Participant's annual Normal Retirement Benefit under the Traditional Formula
shall equal the greater of the Normal Retirement Benefit determined under
subparagraph 5.2(a) or the following amount:

                        Participant
                        (by Employee ID No.)                       Amount
                        --------------------                       -------

                        98744                                      $ 32,232

                        68051                                      $109,812

                        93083                                      $115,944

                        Any Active Participant                     $      0
                        described in subparagraphs
                        3.9(k), (l), (m), (n), or (o)

                        All other Active Participants              $    660


                                       27
<PAGE>

Notwithstanding the dollar amounts set forth above, no Normal Retirement Benefit
shall exceed the limits set forth in Paragraph 8.1.

                  (10) For Plan Years beginning on or after January 1, 2004, and
subject to the limits set forth in Paragraph 8.1, the following Participants
shall have their annual Normal Retirement Benefit under the Traditional Formula
determined above under this subparagraph 5.2(a) increased by the following
amounts:

                        Participant
                        (by Employee ID No.)                       Amount
                        --------------------                       -------

                        4091                                       $ 6,302

                        3954                                       $15,045

                  (11) With respect to any Employee described in Section 3.9(k),
(l), (m), (n) or (o), none of the Employee's service while employed by
PricewaterhouseCoopers, LLP, Peoples Bankcorp, Inc., Grange National Banc Corp.,
First Heritage Bank or HSBC, as the case may be, shall be taken into account for
any purpose of this Article.

            (b) For purposes of determining a Participant's Accrued Benefit
earned as of December 31, 1988 ("Pre-1989 Accrued Benefit"), the terms of the
Predecessor Plan shall be followed, except as modified by the following:

                  (1) The Pre-1989 Accrued Benefit for each Employee or former
employee of Exchange National Bank shall be determined by (A) combining the
benefits earned by the Employee prior to July 1, 1984 under the defined benefit
pension plan sponsored by the Bank of New York, with the benefits accrued by the
Employee under the Predecessor Plan from July 1, 1984 through December 31, 1988,
and (B) adjusting such benefit (if necessary) such that the Base Benefit
Percentage is not less than 50% of the Excess Benefit Percentage under the Prior
Plan.

                  (2) The Pre-1989 Accrued Benefit for each Employee or former
employee of Nichols Bank shall be determined as if the employee participated in
the Predecessor Plan from his hire date at Nichols Bank.

            (c) Nonforfeitability of Normal Retirement Benefits. The Accrued
Benefit of a Participant who while in Service attains his Normal Retirement Age
prior to completing a period of 5 consecutive One-Year Breaks in Service shall
become 100% nonforfeitable.


                                       28
<PAGE>

            (d) Payment of Benefit. Unless the Participant selects a different
form, the Participant's Normal Retirement Benefit shall be payable in the manner
set forth in Paragraph 9.1. Payment shall commence on the Participant's Normal
Retirement Date or as soon thereafter as administratively feasible.

            (e) Re-Employment. If a former Participant who is entitled to
receive a Normal Retirement Benefit shall be reemployed, his Normal Retirement
Benefit payments shall continue.

      5.3 Cash Balance Formula.

            (a) The Accrued Benefit of a Participant to whom the Cash Balance
Formula applies (see Paragraph 5.1) shall be based upon the Participant's
Account balance, which Account balance shall be determined pursuant to this
Paragraph 5.3.

            (b) A Participant who elected (pursuant to Paragraph 5.1) to have
the Cash Balance Formula apply and who had an Accrued Benefit as of December 31,
2003 shall have an opening Account balance as of January 1, 2004 equal to the
present value of the Participant's Accrued Benefit determined as of December 31,
2003 under the Traditional Formula as in effect on January 1, 2004 (determined
without regard to the minimum benefit provisions of subparagraph 5.2(a)(9)),
where present value for this purpose is determined by using an interest rate of
5.5% and the 1994 Group Annuity Reserve table (projected to 2002 and weighted
equally for males and females). The Account of a Participant who elected
(pursuant to Paragraph 5.1) to have the Cash Balance Formula apply and who
completes at least 1000 Hours of Service during each Plan Year after December
31, 2003 shall be credited with a Service Credit as of the end of each
subsequent Plan Year (beginning December 31, 2004) in accordance with the
following table:

        ----------------------------------------------------------------------
                Attained Age
               On December 31*                         Service Credit**
               ---------------                         ----------------
        ----------------------------------------------------------------------
                  Under 22                                  5.00%
        ----------------------------------------------------------------------
                  22 and 23                                 5.05%
        ----------------------------------------------------------------------
                  24 and 25                                 5.10%
        ----------------------------------------------------------------------
                  26 and 27                                 5.15%
        ----------------------------------------------------------------------
                  28 and 29                                 5.20%
        ----------------------------------------------------------------------
                  30 and 31                                 5.25%
        ----------------------------------------------------------------------
                  32 and 33                                 5.30%
        ----------------------------------------------------------------------
                  34 and 35                                 5.35%
        ----------------------------------------------------------------------
                  36 and 37                                 5.40%
        ----------------------------------------------------------------------
                  38 and 39                                 5.45%
        ----------------------------------------------------------------------
                  40 and 41                                 5.50%
        ----------------------------------------------------------------------
                  42 and 43                                 5.55%
        ----------------------------------------------------------------------
                  44 and 45                                 5.60%
        ----------------------------------------------------------------------
                  46 and 47                                 5.65%
        ----------------------------------------------------------------------
                  48 and 49                                 5.70%
        ----------------------------------------------------------------------
                  50 and 51                                 5.75%
        ----------------------------------------------------------------------


                                       29
<PAGE>

        ----------------------------------------------------------------------
                Attained Age
               On December 31*                         Service Credit**
               ---------------                         ----------------
                  52 and 53                                 5.80%
        ----------------------------------------------------------------------
                  54 and 55                                 5.85%
        ----------------------------------------------------------------------
                  56 and 57                                 5.90%
        ----------------------------------------------------------------------
                  58 and 59                                 5.95%
        ----------------------------------------------------------------------
                  60 and 61                                 6.00%
        ----------------------------------------------------------------------
                  62 and 63                                 6.05%
        ----------------------------------------------------------------------
                  64 and 65                                 6.10%
        ----------------------------------------------------------------------
                   Over 65                                  6.10%
        ----------------------------------------------------------------------
            *or the last day of the Participant's employment, if the
            Participant's termination occurs prior to December 31.
        ----------------------------------------------------------------------
            **Service Credits shall be applied to the sum of the Participant's
            total Compensation for the Plan Year, plus the portion of the
            Participant's total Compensation for the Plan Year that is in excess
            of the Social Security Taxable Wage in effect for the Plan Year.
        ----------------------------------------------------------------------

            (c) The Account of a Participant to whom the Cash Balance Formula
applies (see Paragraph 5.1) but who is not entitled to Service Credits pursuant
to subparagraph (b) above shall be credited with a Service Credit as of the end
of each Plan Year during which the Participant completes at least 1000 Hours of
Service. The Service Credit, which will be added to the Participant's Account as
of December 31 of each applicable Plan Year, shall equal five percent (5%) of
the sum of the Participant's total Compensation for the Plan Year, plus the
portion of the Participant's total Compensation for the Plan Year that is in
excess of the Social Security Taxable Wage Base for the Plan Year.

            (d) (1) Notwithstanding the other provisions of this Paragraph 5.3,
for Plan Years beginning on or after January 1, 2004, the annual Normal
Retirement Benefit payable to the following Participants shall not be less than
the following amounts, except as may be limited under Article VIII:

                         Participant
                     (by Employee ID No.)                      Minimum Benefit
                     --------------------                      ---------------

                        98840                                      $283,041

                        3952                                       $100,000

                  (2) Notwithstanding the other provisions of this Paragraph
5.3, the opening Account balance on January 1, 2004 for the Plan Participant
with Employee ID No. 1026 shall be $153,548.

                  (3) Notwithstanding the other provisions of this Paragraph
5.3, the Account balance on December 31, 2004 for the Plan Participant with
Employee ID No. 3398 shall be $37,781.


                                       30
<PAGE>

                  (e) In addition to the Accrued Benefit determined pursuant to
Paragraph 5.2 or the other provisions of Paragraph 5.3, each Participant
identified below shall have a supplemental Account balance, as of October 1,
2004, determined as follows:

                                                            Supplemental Account
                         Participant                              Balance
                     (by Employee ID No.)                  As of October 1, 2004
                     --------------------                  ---------------------

                        4577                                      $ 23,943
                        98890                                     $ 20,095
                        98744                                     $ 22,315
                        1438                                      $ 23,613
                        908                                       $ 19,988
                        45999                                     $ 47,577
                        49575                                     $ 14,514
                        68051                                     $234,655
                        2996                                      $ 16,241
                        3398                                      $  9,636
                        93083                                     $212,272

The supplemental Account balance provisions in this subparagraph (e) shall apply
to each listed Participant regardless of the election (or deemed election) made
by the Participant pursuant to Paragraph 5.1. The supplemental Account balance
described in this subparagraph (e) shall not be increased by any Service Credits
described in subparagraphs 5.3(b) or (c) or by the Interest Credit described in
subparagraph 5.3(f).

            (f) Beginning December 31, 2004 and continuing on each December 31
thereafter until the Participant's employment ends, the Account of each
Participant to whom the Cash Balance Formula applies shall be credited with an
Interest Credit. The Interest Credit for Plan Years during employment shall
equal six percent (6%) of the total balance credited to the Participant's
Account as of January 1 of the same Plan Year. For the Plan Year during which
the Participant's employment ends, the Interest Credit shall be six percent
(6%), prorated based on months of employment, plus the lesser of six percent
(6%) or the Interest Rate described in subparagraph 2.4(c)(1), prorated based on
months between the date employment ends and December 31 of the Plan Year during
which employment ends. The Interest Credit described in the preceding sentence
shall be added to the Participant's Account as of December 31 of the Plan Year
during which the Participant's employment ends. As of December 31 of each Plan
Year that follows the Plan Year during which the Participant's employment ends,
the Participant's Account will be credited with an Interest Credit equal to the
lesser of six percent (6%) or the Interest Rate described in subparagraph
2.4(c)(1), times the amount credited to the Participant's Account as of January
1 of the same Plan Year. For the Plan Year during which the Participant's
Account balance is withdrawn as a lump sum or converted to annuity payments, the
Interest Credit described in the preceding sentence shall be prorated through
the date of withdrawal or conversion.


                                       31
<PAGE>

            (g) In no event will a Participant's benefit determined under the
Cash Balance Formula (if applicable) be less than the benefit the Participant
would have accrued under the Traditional Formula as of December 31, 2004.

            (h) Notwithstanding the above, the annual rate at which a
Participant accrues future Normal Retirement Benefits under the Cash Balance
Formula shall be limited to the extent necessary to ensure compliance with the
applicable accrual rate rules described in Section 411 of the Code.

      5.4 Accrued Benefits Attributable to Prior Mandatory Employee
Contributions.

            (a) If under the terms of the Predecessor Plan a Participant made
mandatory employee contributions, such Participant's Accrued Benefit as of any
Valuation Date shall equal the greater of:

                  (1) his Accrued Benefit; or

                  (2) the benefit derived from the sum of his mandatory employee
contributions accumulated with interest at the rate of 120% of the federal
mid-term rate in effect in the month preceding payment under Code ss.1274.

Upon distribution of a Participant's mandatory employee contributions plus
interest, the Accrued Benefit of such Participant shall be reduced by that
portion of the Accrued Benefit derived from that distributed amount.

            (b) Notwithstanding anything in this Plan to the contrary, a
Participant shall at all times be 100% Vested in that portion of his Accrued
Benefit derived from his or her mandatory employee contributions.

      5.5 Early Retirement.

            (a) A Participant who retires after attaining his Early Retirement
Age but prior to his Normal Retirement Age shall be entitled to receive an
annual retirement benefit determined as follows:

                  (1) If payment of such benefit commences at his Normal
Retirement Date, the amount of the benefit shall be the Participant's Accrued
Benefit, determined in accordance with the applicable provisions of Paragraph
5.2 and/or Paragraph 5.3 as of his Early Retirement Date.

                  (2) If the Participant elects to receive payment of such
benefit prior to his Normal Retirement Date, the amount of the benefit shall be
his Accrued Benefit, reduced by 3.5% for each of the first 3 years by which his
Annuity Starting Date precedes Age 65 and reduced by 5.5% for each of the next 7
years by which his Annuity Starting Date precedes Age 65.


                                       32
<PAGE>

                  (3) If a Participant who has satisfied the service requirement
for Early Retirement under this paragraph separates from Service before
satisfying the age requirement for Early Retirement, the Participant may elect,
upon satisfying such age requirement, to receive an early retirement benefit
equal to his Accrued Benefit in which he was Vested at the time of his
Termination of Employment, subject to the same reduction as provided in
subparagraph (a)(2).

            (b) Unless the Participant selects an optional form under Paragraph
9.3, a Participant's early retirement benefit shall be payable in the manner set
forth in Paragraph 9.1(a). Payment shall commence as of the date elected by the
Participant, or as soon thereafter as administratively feasible.

            (c) If a Participant who is receiving his early retirement benefit
returns to Service prior to January 1, 2005, his benefit payments shall be
suspended until he terminates Service or attains his Required Beginning Date,
whichever occurs earlier. At such date, and at each subsequent Valuation Date if
the Participant remains in Service after his Required Beginning Date, he shall
be entitled to receive an annual benefit equal to his Accrued Benefit determined
pursuant to the applicable provisions of Paragraph 5.2 and/or Paragraph 5.3 as
of the date for which the calculation is being made, reduced actuarially by the
value of benefit payments already made to the Participant; provided, however
that to the extent the Participant repays the earlier distribution(s) in
accordance with Paragraph Article XXI there shall be no actuarial reduction.
After December 31, 2004, no benefit will be suspended upon reemployment, but any
additional benefits earned during reemployment shall be reduced actuarially by
the value of benefit payments made to the Participant.

            (d) Prohibition Against Reduction in Benefit. Notwithstanding any
contrary provision contained in this Plan, no amendment to this Plan shall
reduce or eliminate a Participant's early retirement benefit accrued prior to
such restatement or amendment, determined as the day before its effective date.

      5.6 Late Retirement. A Participant who remains in Service with the
Employer after attaining his Normal Retirement Age shall have payment of
benefits suspended until the earlier of his Late Retirement Date or his Required
Beginning Date. At such date and each subsequent Valuation Date, the Participant
shall be entitled to receive an annual benefit equal to the greater of (a) the
Actuarial Equivalent of his Normal Retirement Benefit earned as of the date he
attained his Normal Retirement Age, or (b) his Accrued Benefit earned through
his Late Retirement Date using the applicable formula or formulas set out in
Paragraph 5.2 and/or Paragraph 5.3 and any limitations described therein. The
Participant's benefit determined under the foregoing shall be reduced
actuarially to reflect the value of benefit payments previously made to the
Participant hereunder.

      5.7 Disability.

            (a) Disability Retirement Benefits. A Participant who terminates
from Service because of his becoming Disabled prior to attaining his Normal
Retirement Age shall be entitled to receive a retirement benefit ("Disability
Retirement Benefit") determined as follows:


                                       33
<PAGE>

                  (1) If payment commences at his Normal Retirement Date, the
amount of the benefit shall be the Participant's Vested Accrued Benefit
determined under the applicable provisions of Paragraph 5.2 and/or Paragraph 5.3
by applying the relevant factors as of his Disability Retirement Date.

                  (2) If the Participant elects to begin payment prior to his
Normal Retirement Date, the amount of the benefit shall be the Actuarial
Equivalent of the Participant's Vested Accrued Benefit determined under the
applicable provisions of Paragraph 5.2 and/or Paragraph 5.3 based on the
relevant factors as of his Disability Retirement Date.

            (b) Unless the Participant elects an optional form under Paragraph
9.3, or defers payment under Paragraph 9.1, his Disability Retirement Benefit
shall be payable in the normal form in accordance with Paragraph 9.1(a). Payment
shall commence on his Retirement Date or (if he so elects) on his Disability
Retirement Date, or as soon thereafter as practicable.

            (c) If a Participant who is receiving or has received disability
benefits under this Plan resumes Service, he shall resume participation in this
Plan, and payments of his disability benefits shall cease. In addition, his
Years of Creditable Service and Years of Vesting Service for the period prior to
his becoming Disabled shall be reinstated, and he shall be treated in the same
manner as any other rehired Employee, except that the Participant's Accrued
Benefit shall be reduced actuarially by the value of the Participant's
disability retirement benefits previously paid to him hereunder; provided,
however, that no such reduction shall be applied to the extent the Participant
repays the earlier distribution(s) received in accordance with the provisions of
Paragraph 7.7.

      5.8 Relation to Social Security Benefits. Increases in Social Security
benefits or the Social Security Wage Base under Title II of the Social Security
Act subsequent to a Participant's termination of employment or retirement shall
not cause a reduction in benefits under this Plan.

      5.9 Supplemental Retirement Benefit. Notwithstanding any other provision
in this Plan, John A. Lanahan shall be entitled to receive a supplemental
retirement benefit equal to $250.00 per month payable as a life annuity
beginning at his Annuity Starting Date. Such benefit shall be in addition to any
other benefits he may be entitled to under the terms of this Plan. Payment of
such benefit shall be made in accordance with the terms of Article IX.


                                       34
<PAGE>

                                   Article VI

                                 DEATH BENEFITS

      6.1 Benefits Upon Death.

            (a) If a Participant (including any Inactive Participant) dies prior
to his Annuity Starting Date at a time when he is not married on the date of his
death, no death benefit shall be payable under this Plan with respect to such
Participant, except to the extent provided in subparagraph (f) below.

            (b) If a married Participant (including any married Inactive
Participant) who is Vested in any portion of his Accrued Benefit dies prior to
his Earliest Retirement Age (as defined in subparagraph (c) below), a
Pre-Retirement Survivor Annuity shall be payable to the Participant's Spouse.
The Pre-Retirement Survivor Annuity cannot be waived, and no optional form of
benefit shall be provided in lieu of the Pre-Retirement Survivor Annuity, except
as provided in subparagraphs (e) and (f) below.

            (c) For purposes of this Article, "Earliest Retirement Age" means
the earliest date on which the Participant can elect to receive retirement
benefits under the Plan (disregarding disability retirement benefits), and
administered (for purposes of this paragraph) as follows:

                  (1) If a Participant dies or separates from Service before
completing the service requirement for an Early Retirement Benefit hereunder,
the Earliest Retirement Age is the date the Participant would have attained his
Normal Retirement Age had he survived.

                  (2) If a Participant dies or separates from Service after
completing the service requirement for an Early Retirement Benefit hereunder,
the Earliest Retirement Age is the earliest date the Participant could have
retired and begun receiving his Early Retirement Benefit.

            (d) If retirement benefits have begun to be paid to the Participant
and the Participant dies before his entire interest has been distributed to him,
distribution shall continue to the Participant's Beneficiary in accordance with
the terms of this Plan and the Participant's executed beneficiary designation
(if in effect) and consistent with the method of payment selected by the
Participant. Notwithstanding anything to the contrary in the Plan or any payment
election made by a Participant, if distribution of the Participant's benefit has
begun as of the time of the Participant's death as determined under Code
ss.401(a)(9), the remaining benefit shall be distributed to his Beneficiary at
least as rapidly as under the method of distribution in effect as of the date of
the Participant's death.

            (e) Regardless of the normal form of benefit or any optional form
chosen by the Participation or his Beneficiary, the Actuarial Equivalent of the
Pre-Retirement Survivor Annuity shall be paid in a lump sum, without the consent
of the Participant's Spouse, under the following circumstances:


                                       35
<PAGE>

                  (1) for Plan Years beginning before August 6, 1997, the single
sum Actuarial Equivalent of such death benefit does not exceed $3,500 at the
time of distribution;

                  (2) for Plan Years beginning on or after August 6, 1997, the
single sum Actuarial Equivalent of such death benefit does not exceed $5,000 at
the time of distribution.

Notwithstanding the foregoing, no distribution to the surviving Spouse may be
made after the Annuity Starting Date unless the Spouse consents in writing to
such distribution within the 90-day period preceding the date of distribution.

            (f) Notwithstanding the provisions of subparagraphs (a) and (b)
above, to the extent the Cash Balance Formula and/or the provisions of
subparagraph 5.2(a)(9) or (10) apply to a Participant at the time of his death,
the provisions of this subparagraph (f) shall apply.

                  (1) If a Participant dies prior to the Participant's
Retirement Date, such Participant's Beneficiary shall receive a death benefit
equal to the Actuarial Equivalent of the Accrued Benefit determined as of the
date of death.

                  (2) Death benefits payable by reason of the death of a
Participant or a Retired Participant shall be paid to such Participant's
Beneficiary in accordance with the following provisions:

                        (A) Upon the death of a Participant subsequent to the
Participant's Retirement Date, but prior to the Annuity Starting Date, the
Participant's Beneficiary shall be entitled to a death benefit in an amount
equal to the Actuarial Equivalent of the benefit the Participant would have
received at the Participant's Retirement Date.

                        (B) Upon the death of a Participant subsequent to the
Annuity Starting Date, the Participant's Beneficiary shall be entitled to
whatever death benefit may be available under the settlement arrangements
pursuant to which the Participant's benefit is made payable.

                        (C) In the event of a Terminated Participant's death
subsequent to the Participant's termination of employment, the Participant's
Beneficiary shall receive the Present Value of such Participant's Vested Accrued
Benefit as of the date of the Participant's death.

                  (3) The Administrator may require such proper proof of death
and such evidence of the right of any person to receive the death benefit
payable as a result of the death of a Participant as the Administrator may deem
desirable. The Administrator's determination of death and the right of any
person to receive payment shall be conclusive.

                  (4) Unless otherwise elected in the manner prescribed in
Paragraph 6.4, the Beneficiary of that portion of the death benefit necessary to
fund the "minimum spouse's death benefit" shall be the Participant's surviving
spouse, who shall receive such benefit in the


                                       36
<PAGE>

form of a Pre-Retirement Survivor Annuity. Except, however, the Participant may
designate a Beneficiary other than the surviving spouse to receive the Actuarial
Equivalent of the "minimum spouse's death benefit" if:

                        (A) the Participant and the Participant's spouse have
validly waived the Pre-Retirement Survivor Annuity in the manner prescribed in
Paragraph 6.4, and the spouse has waived the right to be the Participant's
Beneficiary, or

                        (B) the Participant is legally separated or has been
abandoned (within the meaning of local law) and the Participant has a court
order to such effect (and there is no qualified domestic relations order which
provides otherwise), or

                        (C) the Participant has no spouse, or

                        (D) the spouse cannot be located.

            In such event, the designation of a Beneficiary shall be made on a
form satisfactory to the Administrator. A Participant may at any time revoke a
designation of a Beneficiary or change a Beneficiary by filing written (or in
such other form as permitted by the Internal Revenue Service) notice of such
revocation or change with the Administrator. However, the Participant's spouse
must again consent in writing (or in such other form as permitted by the
Internal Revenue Service) to any change in Beneficiary of that portion of the
death benefit that would otherwise be paid as a Pre-Retirement Survivor Annuity
unless the original consent acknowledged that the spouse had the right to limit
consent only to a specific Beneficiary and that the spouse voluntarily elected
to relinquish such right. That portion of the death benefit remaining after the
"minimum spouse's death benefit" shall be paid to the Participant's designated
Beneficiary. In the event no valid designation of Beneficiary exists, or if the
Beneficiary is not alive, at the time of the Participant's death, the death
benefit shall be payable in accordance with Paragraph 6.6. Additionally, if the
Beneficiary does not predecease the Participant, but dies prior to the
distribution of the death benefit, the death benefit will be paid to the
Beneficiary's estate.

                  (5) The benefit payable under this subparagraph (f) shall be
paid pursuant to the provisions of Article IX.

                  (6) In no event shall the death benefit payable to a surviving
spouse be less than the Actuarial Equivalent of the "minimum spouse's death
benefit."

                  (7) For the purposes of this Section, the "minimum spouse's
death benefit" means a death benefit for a Vested married Participant payable in
the form of a Pre-Retirement Survivor Annuity. Such annuity payments shall be
equal to the amount which would be payable as a survivor annuity under the joint
and survivor annuity provisions of the Plan if:

                        (A) in the case of a Participant who dies after the
Earliest Retirement Age, such Participant had retired with an immediate joint
and survivor annuity on the day before the Participant's date of death, or


                                       37
<PAGE>

                        (B) in the case of a Participant who dies on or before
the Earliest Retirement Age, such Participant had:

                              (i) separated from service on the earlier of the
      actual time of separation or the date of death,

                              (ii) survived to the Earliest Retirement Age,

                              (iii) retired with an immediate joint and survivor
      annuity at the Earliest Retirement Age based on the Participant's Vested
      Accrued Benefit on date of death, and

                              (iv) died on the day after the day on which said
      Participant would have attained the Earliest Retirement Age.

            (g) Inactive Participants who are not credited with an Hour of
      Service after August 22, 1984 shall be provided with rights to a
      pre-retirement survivor annuity in accordance with Section 303(e)(2) of
      the Retirement Equity Act of 1984 and not under the preceding terms of
      this paragraph.

      6.2 Commencement of Payment. To the extent the Traditional Formula
applies, unless a later date is elected by the Participant's Spouse, payment to
the Spouse of the Pre-Retirement Survivor Annuity or the Actuarial Equivalent
lump sum shall be made as soon as administratively feasible following the
Participant's Earliest Retirement Age (as defined in Paragraph 6.1). To the
extent the Cash Balance Formula applies, the Actuarial Equivalent of the
Pre-Retirement Survivor Annuity or the balance credited to the Participant's
Account shall be payable as soon as administratively feasible following the
Administrator's receipt of the Spouse's and/or Beneficiary's election(s).
Notwithstanding anything to the contrary herein, distribution of the
Pre-Retirement Survivor Annuity to a surviving Spouse must commence on or before
the later of: (1) December 31st of the calendar year immediately following the
calendar year in which the Participant died; or (2) December 31st of the
calendar year in which the Participant would have attained age 70 1/2 ("Required
Beginning Date"). Distribution to a designated Beneficiary (who is not the
Spouse) must be made by December 31st of the calendar year immediately following
the calendar year during which the Participant died.

      6.3 Notice of Right to Waive Pre-Retirement Survivor Annuity. The
Administrator shall provide each Participant with a written explanation of the
terms and conditions of the Pre-Retirement Survivor Annuity in a manner
consistent with Treasury regulations within that of the following periods ending
last:

            (a) the period beginning on the first day of the Plan Year in which
the Participant attains age 32 and ending on the last day of the Plan Year in
which the Participant attains age 34;

            (b) a reasonable period after he became a Participant;


                                       38
<PAGE>

            (c) a reasonable period ending after Code ss.401(a)(11) first
applies to the Participant;

            (d) a reasonable period after the Participant's termination of
employment if the Participant's termination occurs prior to age 35.

      6.4 Effective Waiver of Pre-Retirement Survivor Annuity.

            (a) Election Period. A waiver of a Pre-Retirement Survivor Annuity
may be elected only during the period that begins on the first day of the Plan
Year in which the Participant attains age 35 (or, if he separates from Service
with the Employer prior to then, the date of separation) and ends on the date of
his death.

            (b) Form of Election. The Participant's election shall be made in
writing on a form prescribed by the Administrator.

            (c) Spousal Consent. The Participant's spouse must consent in
writing to a Participant's election under this paragraph. Such consent shall
acknowledge the effect of the election and shall be either notarized or
witnessed by a Plan representative.

            (d) Revocation of Election; Subsequent Election(s). A Participant
may revoke his election at any time during the election period and make one (1)
or more subsequent elections at any time during the election period. A Spouse
who consents to a Participant's election may not revoke his or her consent to
the Participant's election. A subsequent election by the Participant resulting
in a change of form of benefit must be consented to by the Spouse at the time
the subsequent election is made.

            (e) Valid Election Without Consent. Notwithstanding anything herein
to the contrary, a Participant's election under this paragraph shall be valid
without the Spouse's consent if the Participant establishes to the satisfaction
of the Plan Administrator that

                  (1) the Participant is not married at the time of the
election;

                  (2) after all reasonable efforts by the Participant, the
Spouse cannot be located; or

                  (3) there exists other circumstances not requiring spousal
consent, as provided under Treasury regulations.

      6.5 Beneficiary Designation. Except as provided in subparagraph 6.1(f), no
beneficiary other than the Participant's Spouse shall be entitled to receive
death benefits payable by reason of a married Participant's death prior to his
Annuity Starting Date. To the extent the Cash Balance Formula applies to a
Participant who is not married at the time of his death prior to his Annuity
Starting Date, death benefits shall be paid to the Beneficiary designated by the
Participant.


                                       39
<PAGE>

      6.6 No Beneficiary Designation. If a Participant fails to name a
Beneficiary in accordance with Paragraph 6.5, or if all designated Beneficiaries
predecease him or die before complete distribution of benefits, the Trustees
shall pay the Participant's remaining benefits in one of the methods specified
under Article IX in the following order of priority to:

            (a) the surviving Spouse;

            (b) surviving children, including adopted children, in equal shares;
or

            (c) the legal representatives of the estate of the last to die of
the Participant and his Beneficiary.


                                       40
<PAGE>

                                   Article VII

                         EMPLOYMENT TERMINATION BENEFITS

      7.1 Termination of Employment. Any Participant who terminates from Service
prior to attaining Retirement Age shall be entitled to receive the Vested
portion of his Accrued Benefit in accordance with the terms of this Article.
Vesting shall be determined under the following schedule, based on his Years of
Vesting Service as of his termination date:

            (a) For those Participants hired on or after January 1, 1989:

                  Years of Vesting Service           Vested Percentage
                  ------------------------           -----------------

                  Less than 5                                 0%

                  5 or more                                 100%

            (b) For those Participants hired before January 1, 1989 credited
with at least 1 Hour of Service on or after January 1, 1989:

                  Years of Vesting Service           Vested Percentage
                  ------------------------           -----------------

                  Less than 4                                  0%

                  4                                           40%

                  5 or more                                  100%

If this Plan becomes Top Heavy, this vesting schedule shall be superceded by the
vesting schedule set forth in Article XIV.

      7.2 Vesting Service.

            (a) Except as otherwise provided in this paragraph, for purposes of
Paragraph 7.1, a "Year of Vesting Service" shall mean any Vesting Computation
Period during which the Participant completes at least 1000 Hours of Service
with the Employer. Should an Employee's Eligibility Computation Period overlap
two Vesting Computation Periods, and if such Employee completes 1000 Hours of
Service in the Eligibility Computation Period but fails to complete 1000 Hours
of Service in either of the overlapping Vesting Computation Periods, the Year of
Service completed for eligibility purposes shall also be considered a Year of
Vesting Service at the time the Employee becomes a Participant.

            (b) With respect to any Employee described in Paragraph 3.9, all of
the Employee's service with Key Bank, N.A., Fleet Bank, Benefit Plans
Administrators, Chase Bank, Citizens Bank, FleetBoston, Pricewaterhouse Coopers,
LLP, Peoples Bankcorp, Inc.,


                                       41
<PAGE>

Grange National Banc Corp., First Heritage Bank or HSBC, as the case may be,
prior to such Employee's employment by the Employer shall be treated as Service
with the Employer for purposes of determining his Vested interest in his Accrued
Benefit under this Plan.

            (c) With respect to any Employee described in Paragraph 3.10, all of
the Employee's service with Elias prior to April 3, 2000 shall be treated as
Service with the Employer for purposes of determining his Vested interest in his
Accrued Benefit under this Plan.

      7.3 Break in Service. For purposes of this Article, a Participant shall
incur a Break in Vesting Service if during any Vesting Computation Period he
does not complete more than 500 Hours of Service with the Employer.

      7.4 Determination of Years of Service for Vesting. All of the
Participant's credited Years of Vesting Service with the Employer shall be taken
into account in determining a Participant's Vested interest in the Plan, except
as follows:

            (a) In the case of a Participant who has any One-Year Break in
Service, Years of Vesting Service before such Break shall be disregarded until
such Participant completes a Year of Vesting Service after his return to
employment.

            (b) In the case of any Participant who incurs 5 or more consecutive
One-Year Breaks in Service and who at the time of his Termination of Employment
did not have a Vested right to any portion of his Accrued Benefit derived from
Employer Contributions, Years of Vesting Service before such break shall be
disregarded for purposes of vesting his Accrued Benefit that is earned after
such break if the number of consecutive One-Year Breaks in Service equals or
exceeds the number of Years of Vesting Service before such break. Such aggregate
number of Years of Vesting Service before such break shall not include any Years
of Vesting Service not required to be taken into account under this paragraph by
reason of any prior Break in Service.

            (c) Years of Vesting Service after a period of 5 or more consecutive
One-Year Breaks in Service shall be disregarded for purposes of determining the
Participant's Vested interest in his Accrued Benefit that is earned before such
break.

            (d) Notwithstanding (c) above, for the purpose of determining a
reemployed Participant's Vested interest in his Accrued Benefit earned after
such Participant's date of reemployment, if the Participant had a Vested
interest in his then Accrued Benefit when his prior period of employment
terminated, any Years of Vesting Service attributable to his prior period of
employment shall not be disregarded and shall be reinstated as of the date of
such Participant's reparticipation.

      7.5 Forfeitures.

            (a) Forfeiture of any portion of a Participant's Accrued Benefit
shall occur as of the date the Participant receives a lump sum distribution of
his Vested Accrued Benefit following his Termination of Employment. A
Participant who at his Termination of Employment


                                       42
<PAGE>

had no Vested right to his Accrued Benefit will be considered to have received a
lump sum distribution of his entire Vested Accrued Benefit on the last day on
which he performed an Hour of Service.

            (b) Forfeitures for any Plan Year shall be applied to reduce the
Employer's contribution to the Trust for such Plan Year and succeeding Plan
Years and shall not revert to the Employer except as otherwise permitted herein.

      7.6 Payment of Vested Benefit.

            (a) To the extent the Traditional Formula applies, the Vested
Accrued Benefit of a Participant who terminates employment prior to attaining
Retirement Age shall become payable to the Participant, if living, in an
Actuarial Equivalent amount as soon as administratively feasible following the
date the Participant attains Retirement Age. Payment shall be made to the
Participant in the normal form in accordance with Paragraph 9.1 or an optional
form in accordance with Paragraph 9.3.

            (b) To the extent the Cash Balance Formula applies, the Vested
Account balance of a Participant who terminates employment shall be payable to
the Participant as soon as administratively feasible following the
Administrator's receipt of appropriate election and consent forms. Payment shall
be made in accordance with Article IX.

            (c) Notwithstanding subparagraphs (a) and (b), the single sum
Actuarial Equivalent of the Participant's Vested Accrued Benefit shall be paid
in a single sum as soon as practicable following his Termination of Employment
without his consent or the consent of his Spouse under any of the following
circumstances:

                  (1) for distribution occurring in Plan Years beginning before
August 6, 1997, the amount of such single sum did not exceed $3,500 at the time
of distribution;

                  (2) for distributions occurring in Plan Years beginning on or
after August 6, 1997, the amount of such single sum does not exceed $5,000 at
the time of distribution, regardless of the value of the Participant's Vested
Accrued Benefit at the time of any earlier distribution; however, this
subparagraph (2) shall not apply if a Participant has begun to receive
distribution of his Vested Accrued Benefit and there is still payable at least
one scheduled periodic distribution and the single sum present value of his
Vested Accrued Benefit exceeded $5,000 at the time the earlier distribution
began or was made.

      7.7 Reemployment of Participant. If a former Participant who received a
distribution returns to Service and repays the entire amount previously
received, plus interest from the date of distribution at 120% of the Federal
mid-term rate (in effect under Code ss.1274 for the first month of the Plan Year
of payment) compounded annually, before the earlier of (i) the fifth anniversary
of the Participant's Reemployment Date or (ii) the close of a period of 5
consecutive One-Year Breaks in Service commencing after distribution, his
Accrued Benefit, Years of Creditable Service and Years of Vesting Service shall
be restored to the levels at the time of his termination of employment. If the
former Participant fails to repay the amount(s) plus


                                       43
<PAGE>

interest, his Accrued Benefit, Years of Creditable Service and Years of Vesting
Service attributable to his pre-Break Service shall be fully restored, but his
benefit payable upon his later termination from Service shall be reduced
actuarially by the value of amounts previously paid.


                                       44
<PAGE>

                                  Article VIII

                             LIMITATION OF BENEFITS

      8.1 Maximum Permissible Benefit.

            (a) Except as otherwise provided in this Article, a Participant's
annual retirement benefit payable hereunder and expressed as a straight life
annuity with no ancillary benefits (hereinafter referred to in this Article as
the "Annual Benefit") shall not exceed the lesser of:

                  (1) $160,000 ($90,000 for Limitation Years ending before
January 1, 2002) multiplied by the Cost of Living Factor, and further multiplied
by a fraction (not to exceed 1), the numerator of which is the Participant's
Years of Participation, and the denominator of which is 10; or

                  (2) 100% of the Participant's Compensation for his high three
consecutive Years of Service, multiplied by a fraction (not to exceed 1), the
numerator of which is all of his Years of Service, and the denominator of which
is 10.

For purposes of this paragraph, a Year of Service shall mean any Eligibility
Computation Period, beginning on the Participant's first hire date or
thereafter, during which the Participant completed 1000 Hours of Service. The
limitation described in this subparagraph (a) shall be referred to in this
Article as the Participant's "Maximum Permissible Benefit".

            (b) An Accrued Benefit payable in any form other than a straight
life annuity shall be adjusted to an equivalent straight life annuity. For
purposes of adjusting a benefit to an equivalent "annual benefit", the
equivalent "annual benefit" shall be the greater of the Actuarial Equivalent of
such "annual benefit" computed using the Plan interest rate and mortality table
(as determined under Paragraph 2.3) and the equivalent "annual benefit" computed
using 5% interest and the blended 1983 GAM table specified in Revenue Ruling
95-6, or such successor table as may be prescribed by the Secretary of the
Treasury. If the benefit is paid in a form other than a nondecreasing life
annuity payable for a period of not less than the life of the Participant or, in
the case of a Pre-Retirement Survivor Annuity, the life of the surviving spouse,
the annual interest rate on 30-year Treasury securities as published for the
second full calendar month (the "Lookback Month") preceding the first day of the
Plan Year (the "Stability Period") shall be substituted for 5% in the preceding
sentence. As the Effective Date of the Plan is after the first day of the first
Limitation Year beginning in 1995 (the "Retirement Protection Act of 1994
section 415 effective date"), all changes to Code ss.415(b)(2)(E) enacted in the
Retirement Protection Act of 1994 shall apply to all benefit calculations
hereunder.

      8.2 Aggregation of Defined Benefit Plans. For purposes of this Article,
all defined benefit plans maintained by the Employer shall be considered as a
single plan.


                                       45
<PAGE>

      8.3 Adjustments to Benefit Limitations.

            (a) Retirement Prior to Social Security Retirement Age. If a
Participant's retirement benefit begins before the Participant's Social Security
Retirement Age under the Social Security Act, the dollar limitation under
Paragraph 8.1(a)(l) shall be reduced as follows:

                  (1) If payment commences prior to age 62, reduction of the
dollar limit under Paragraph 8.1(a)(1) shall be to the Actuarial Equivalent of
such dollar limit beginning at age 62, reduced for each month by which benefits
commence before the month the Participant attains age 62. The interest rate
assumption used to determine the Actuarial Equivalent shall be the greater of 5%
or the post-retirement interest rate described in Paragraph 2.3(b).

                  (2) If payment commences on or after age 62 and the
Participant's Social Security Retirement Age is 65, reduction of the dollar
limit under Paragraph 8.1(a)(l) shall be 5/9 of 1 % for each month by which
benefits commence before the month in which the Participant attains age 65.

                  (3) If payment commences on or after age 62 and the
Participant's Social Security Retirement Age is 66 or older, reduction of the
dollar limit under Paragraph 8.1(a)(l) shall be 5/9 of 1% for each of the first
36 months and 5/12 of 1 % for each additional month (up to 24 months) by which
benefits commence before the month of the Participant's Social Security
Retirement Age.

      For Limitation Years ending after December 31, 2001, if a Participant's
retirement benefit begins before the Participant attains age 62, the dollar
limitation under Paragraph 8.1(a)(1) shall be reduced to the Actuarial
Equivalent of such dollar limit beginning at age 62, reduced for each month by
which benefits commence before the month the Participant attains age 62. The
interest rate assumption used to determine the Actuarial Equivalent shall be the
greater of 5% or the post-retirement interest rate described in Paragraph
2.3(b).

            (b) Retirement After Social Security Retirement Age. If the
retirement benefit begins after the Participant's Social Security Retirement
Age, the dollar limitation under Paragraph 8.1(a)(l) shall be increased so that
it is the Actuarial Equivalent of the amount in such Paragraph 8.1 (a)(l)
beginning at the Participant's Social Security Retirement Age, multiplied by the
Cost of Living Factor. The interest rate assumption used to determine the
Actuarial Equivalent shall not exceed 5%.

      For Limitation Years ending after December 31, 2001, if the retirement
benefit begins on or after the Participant 66th birthday, the dollar limitation
under Paragraph 8.1(a)(1) shall be increased so that it is the Actuarial
Equivalent of the amount in such Paragraph 8.1(a)(1) beginning at age 66,
multiplied by the Cost of Living Factor. The interest rate assumption used to
determine the Actuarial Equivalent shall not exceed 5%.

            (c) No Anticipatory Adjustments. For purposes of adjusting the
Annual Benefit under this paragraph, no adjustments shall be taken into account
before the year for which such adjustment first takes effect.


                                       46
<PAGE>

      8.4 Exception for Minimum Benefit. Notwithstanding the preceding
provisions of this Article, the Participant's retirement benefit shall be deemed
not to exceed the Maximum Permissible Benefit if (a) his Annual Benefit payable
under this Plan and under all other Defined Benefit Plans sponsored by the
Employer does not exceed $10,000, multiplied by a fraction (not to exceed 1) the
numerator of which is all of his Years of Service (as defined in Paragraph
8.1(a)) and the denominator of which is 10; and (b) the Participant never
participated in a Defined Contribution Plan maintained by the Employer.

      8.5 Limitations for Defined Contribution Plans. Effective for Plan Years
beginning on or after December 31, 1994, the Annual Additions for any Limitation
Year for a Participant participating only in a Defined Contribution Plan
maintained by the Employer shall not exceed the lesser of: (i) $30,000
multiplied by the applicable Cost of Living Factor, or (ii) 25% of the
Participant's compensation as defined in Code ss.415(c)(3).

      8.6 Limitation if Employer Maintains Defined Contribution Plan(s) in
Addition to this Plan. For Plan Years beginning prior to January 1, 2000, if an
Employee is or has ever been a Participant in one or more Defined Benefit Plans
and one or more Defined Contribution Plans maintained by the Employer or any
Affiliated Company, then for any Limitation Year the sum of the Participant's
Defined Benefit Plan Fraction and Defined Contribution Plan Fraction may not
exceed 1.0. If for any Limitation Year such sum would exceed 1.0, to the extent
necessary to avoid such excess (a) the Participant's voluntary contributions
which constitute Annual Additions to the Defined Contribution Plans of the
Employer and any Affiliated Company and Participant voluntary contributions to
this Plan shall be returned to him, and (b) the annual benefit which the
Participant would accrue for such Limitation Year under this Plan shall be
limited such that the sum of both fractions shall not exceed 1.0.

      8.7 Definitions. For purposes of this Article, the following terms shall
have the following meanings:

            (a) "Annual Additions" with respect to any Participant shall mean
the sum of the following amounts allocated to the Participant's Account in a
Defined Contribution Plan for a Limitation Year:

                  (1) all Employer contributions;

                  (2) all Employee contributions (excluding any Rollover
Amount);

                  (3) all forfeitures; plus

                  (4) amounts described in Code ss.415(i)(1) and amounts
described in Code ss.419(A)(d)(2), which are paid or accrued to a Key Employee,
but only for determining whether the dollar limit in Paragraph 8.5 is exceeded.

            (b) "Limitation Year" shall mean the Employer's fiscal year or any
other 12 consecutive month period the Employer, by written resolution, adopts
for all plans of which it is the Employer.


                                       47
<PAGE>

            (c) "Accounting Date" shall mean the date with respect to which the
plan administrator allocates all or any portion of Employer contributions,
Employee contributions, and Forfeitures (if any) to the Participants' Accounts.

            (d) "Highest average compensation" shall mean the average
Compensation for the 3 consecutive years of service with the Employer that
produces the highest average.

            (e) "Participant's Account" shall mean the account established and
maintained for each Participant with respect to his total interest in the
Defined Contribution Plan maintained by the Employer.

            (f) (1) "Compensation" for purposes of the limitations contained in
this Article shall be the Participant's Compensation measured in relation to the
Limitation Year, adjusted in accordance with Treas. Regs. ss.1.415-2(d)(2) and
(3).

                  (2) For Limitation Years beginning on and after January 1,
2001, for purposes of applying the limitations described in Paragraphs 8.1 and
8.5, Compensation paid or made available during such limitation years shall
include elective amounts that are not includible in the gross income of the
Employee by reason of Code ss.132(f)(4).

            (g) Social Security Retirement Age means:

                  (1) age 65 for a Participant attaining age 62 before January
1, 2000;

                  (2) age 66 for a Participant attaining age 62 after December
31, 1999 and before January 1, 2017;

                  (3) age 67 for a Participant attaining age 62 after December
31, 2016.


                                       48
<PAGE>

                                   Article IX

                               PAYMENT OF BENEFITS

      9.1 Form and Payment of Benefit. The retirement benefit payable to a
Participant hereunder shall be paid in accordance with the following:

            (a) The normal form of benefit is, for a non-married Participant, a
life annuity, and for a married Participant, a Qualified Joint and Survivor
Annuity which is the Actuarial Equivalent of his Accrued Benefit payable in the
form of a life annuity. Prior to distribution, the Administrator shall obtain
the consent of the Participant and, if he is married, the Participant's Spouse,
if required pursuant to Paragraph 9.9.

            (b) Subject to the terms of Paragraph 9.4, unless the Participant
elects a later beginning date in writing, the Trustee shall commence
distribution of a Participant's benefit not later than 60 days after the close
of the Plan Year in which the latest of the following occurs:

                  (1) The earlier of the Participant's Normal Retirement Date,
or the date he attains age 65;

                  (2) The tenth anniversary of the year in which the Participant
commenced participation in the Plan; or

                  (3) The date on which the Participant terminates Service with
the Employer.

            (c) Notwithstanding the terms of subparagraph (a), a Participant may
elect at any time during the 90-day period ending on his Annuity Starting Date
to receive an optional form of benefit under Paragraph 9.3 or to select a
non-Spouse Beneficiary, however, a married Participant must obtain the consent
of his Spouse to either such election unless otherwise provided in this Article.

      9.2 Notice of Right to Waive Normal Form and Select Optional Form.

            (a) Subject to the provisions of subparagraph (b) below, no less
than 30 days nor more than 90 days before the Participant's Annuity Starting
Date, the Administrator shall provide the Participant a written explanation of
the terms and conditions of the normal form of benefit, including the
Participant's right to make and the effect of an election to waive the normal
form of benefit, the material features and relative values of the available
optional forms of benefit, the rights of the Participant's Spouse regarding the
waiver election, and the Participant's right to make and the effect of a
revocation of a waiver election.

            (b) Effective for Plan Years beginning after December 31, 1996, the
Participant may elect to begin receiving his benefits less than 30 days after
the Participant receives the written explanation described in subparagraph (a)
above, provided that:


                                       49
<PAGE>

                  (1) the Administrator clearly informs the Participant of the
Participant's right to a period of at least 30 days after receipt of the
explanation to consider the decision to receive his benefit and to elect an
optional form;

                  (2) the distribution does not begin before the end of the
7-day period that begins the day after the Participant's receipt of the written
explanation;

                  (3) the Participant affirmatively elects distribution after
receipt of the notice;

                  (4) the Participant is notified of his right to revoke his
election prior to the end of the 7-day period described in subparagraph (b)(2)
above and does not revoke his election within that time period; and

                  (5) in accordance with Paragraph 9.5 his Spouse consents to
the optional form chosen (if any) and to the waiver of the 30-day notice period.

      9.3 Optional Forms of Benefit.

            (a) Participant's Waiver and Election of Optional Form. A
Participant may elect, under the procedure described in Paragraph 9.5, to waive
his normal form of benefit and select an Actuarial Equivalent form under one of
the following options:

                  (1) a life annuity, payable no less frequently than annually,
with payments ending on the Participant's death;

                  (2) a life annuity with 60 monthly payments guaranteed;

                  (3) a joint life and last survivor annuity, with payments
ending on the death of the survivor of the Participant and the contingent
annuitant (Payments to the contingent annuitant shall be equal to 50%, 75% or
100% of the monthly amount paid to the Participants.);

                  (4) a joint life and last survivor annuity, payable no less
frequently than annually, with 60 monthly payments guaranteed;

                  (5) to the extent the Cash Balance Formula applies, or
subparagraph 5.2(a)(9), 5.2(a)(10), 5.3(d) or 5.3(e) applies, a single lump sum
payment; and

                  (6) with respect to any vested Participant who terminated
employment for any reason after December 31, 2003 and before October 1, 2004, a
single lump sum payment; provided that such a Participant must make the lump sum
election by June 30, 2005. Eligible Participants who make the foregoing election
and who previously commenced receipt of Plan benefits shall be considered to
have a new Annuity Starting Date and shall have the elected lump sum payment
reduced by the value of Plan benefits previously paid.


                                       50
<PAGE>

            (b) Cash-Out. Notwithstanding the normal form of benefit or any
optional form selected by the Participant, the Actuarial Equivalent of the
Participant's Vested Accrued Benefit shall be paid in a single sum under any of
the following circumstances:

                  (1) for distribution occurring in Plan Years beginning before
August 6, 1997, the amount of such single sum does not exceed $3,500 at the time
of distribution; or

                  (2) for distributions occurring in Plan Years beginning on or
after August 6, 1997, the amount of such single sum does not exceed $5,000 at
the time of distribution, regardless of the value of the Participant's Vested
Accrued Benefit at the time of any earlier distribution; however, this
subparagraph shall not apply if a Participant has begun to receive distribution
of his Vested Accrued Benefit and there is still payable at least one scheduled
periodic distribution and the single sum present value of his Vested Accrued
Benefit exceeded $5,000 at the time the earlier distribution began or was made.

Such distributions may be made without the consent of either the Participant or
his Spouse; however, if distribution is to be made after the Annuity Starting
Date, the Participant and his Spouse (or if the Participant has died, the
surviving Spouse) must consent in writing to such distribution in accordance
with Paragraph 9.9.

            (c) Selection of Form by Beneficiary. Following a Participant's
death the Beneficiary may elect to receive his or her benefit under any of the
options listed in subparagraph (a), unless the Participant irrevocably elects an
optional form of benefit to be paid to his Beneficiary.

            (d) Alternate Form to Comply With Minimum Distribution Rules. No
alternate form of benefit described in subparagraph (a) shall result in an
annual payment to a Participant or his Beneficiary which fails to comply with
the minimum distribution rules under Code ss.401(a)(9), as generally described
in Paragraph 9.4. The Administrator shall, after consultation with the
Participant (or his Beneficiary, as the case may be), modify such non-complying
form to the extent necessary to conform the selected mode of payment to such
rules.

            (e) Validity of ss.242(b)(2) Elections. Notwithstanding the
foregoing provisions of this Article, the Administrator shall pay the
Participant's retirement benefit in accordance with his timely written election
which meets the requirements of ss.242(b)(2) of the Tax Equity and Fiscal
Responsibility Act of 1982, provided that a married Participant's Spouse
consents in writing to such election, which consent is either notarized or
witnessed by a Plan representative.

            (f) Validity of Waiver. A Participant's waiver of the normal form of
retirement benefit or pre-retirement death benefit and election of an optional
form under this paragraph shall be valid only if executed in accordance with
Paragraph 9.5.

            (g) Participant Consent to Early Distributions. No distribution of
an optional form of benefit to the Participant (except a cash-out under
subparagraph (b)) may be made without the Participant's prior consent, if
required under the provisions of Paragraph 9.9.


                                       51
<PAGE>

      9.4 Minimum Distribution Rules.

            (a) Benefits under this Plan shall be paid in a form that, as of the
Required Beginning Date, satisfies the minimum distribution rules and minimum
distribution incidental benefit rules under this paragraph, Code ss.401(a)(9)
and Treas. Reg. ss. 1.401(a)(9)-2. If any provision of this Plan is inconsistent
with Code ss.401(a)(9), the provisions of Code ss.401(a)(9) shall control.

            (b) The Administrator shall, after consultation with the Participant
(or his Beneficiary, as the case may be), modify any noncomplying form of
payment to the extent necessary to conform the selected mode of payment to such
rules.

            (c) Without limiting the generality of the foregoing provisions of
this paragraph, a Participant's Accrued Benefit payable to the Participant must
be distributed:

                  (1) in its entirety to the Participant on or before his
Required Beginning Date, or

                  (2) in two or more payments, beginning on or before his
Required Beginning Date, over a period of time not extending beyond the
Participant's life, the lives of the Participant and his Designated Beneficiary,
the Participant's life expectancy, or the joint life and last survivor
expectancy of the Participant and his Designated Beneficiary.

            (d) If the Participant dies prior to the date benefit payments have
begun (determined in accordance with Code ss.401(a)(9)), the following rules
apply:

                  (1) With respect to benefits payable other than to a
Designated Beneficiary, the benefits shall be distributed in their entirety by
no later than December 31 of the calendar year in which occurs the fifth
anniversary of the Participant's death;

                  (2) The portion of the Participant's benefit payable to a
Designated Beneficiary shall commence by December 31 of the calendar year
immediately following the calendar year of the Participant's death, and shall be
distributed in minimum amounts in accordance with Code ss.401(a)(9), over the
life of the Designated Beneficiary or over a period not longer than the
Designated Beneficiary's life expectancy as selected by the Designated
Beneficiary. Alternatively, the Designated Beneficiary may irrevocably elect to
receive all benefits by no later than December 31 of the calendar year
containing the fifth anniversary of the Participant's death. Such election must
be made by the earlier of:

                        (A) December 31 of the calendar year in which
distributions would, absent such election, be required to begin to the
Designated Beneficiary; or

                        (B) December 31 of the calendar year containing the
fifth anniversary of the Participant's death.


                                       52
<PAGE>

Absent such election, payments shall be made over the life expectancy of the
Designated Beneficiary, commencing by December 31 of the calendar year following
the Participant's death. With respect to benefits payable to the surviving
Spouse, payment need not commence until the later of (i) December 31 of the
calendar year immediately following the calendar year of the Participant's
death, or (ii) December 31 of the calendar year in which the Participant would
have attained age 70 1/2.

            (e) Death of Participant After Payments Begin. If the Participant
dies after the date benefit payments have begun (determined in accordance with
Code ss.401(a)(9)), the balance of the Participant's benefit shall be
distributed at least as rapidly as under the method of distribution in effect as
of the date of his death.

            (f) Definitions. For purposes of this Article:

                  (1) "Required Beginning Date" shall mean:

                        (A) for a Participant who is a 5% owner (as determined
under Code ss.401(a)(9)), the April 1 following the calendar year in which he
attains age 70 1/2; and

                        (B) effective for Plan Years beginning after December
31, 1996, for all other Participants, the April 1 following the later of (i) the
calendar year in which he attains age 70 1/2 or (ii) the calendar year in which
he retires. If the Participant becomes a 5% owner after attaining age 70 1/2,
his Required Beginning Date shall be the April 1 immediately following the
calendar year with or within which ends the Plan Year in which the Participant
became a 5% owner.

                  (2) "Designated Beneficiary" shall mean such person or entity
named by the Participant or named pursuant to Paragraph 6.6 to receive benefits
following the Participant's death, who (or which) qualifies as a "designated
beneficiary" under Code ss.401(a)(9).

            (g) Effect of Disclaimer. Any Designated Beneficiary may disclaim
all or any portion of the benefit to which the Designated Beneficiary is
entitled at any time within 9 months following the Participant's death. Such
disclaimed portion shall then be payable to such alternate Beneficiary
designated by the Participant to receive the disclaimed portion, or in the
absence of such contingent designation, to such individual(s), in the order of
priority, designated in Paragraph 6.6.

      9.5 Election Procedure-Qualified Waivers.

            (a) Election Period. A married Participant's waiver of a Qualified
Joint and Survivor Annuity or an unmarried Participant's waiver of a straight
life annuity may be elected only during the 90-day period ending on the Annuity
Starting Date.

            (b) Form of Election. The Participant's election shall be made in
writing on a form prescribed by the Administrator.


                                       53
<PAGE>

            (c) Spousal Consent. No election of an optional form of benefit by a
married Participant shall be effective without the written consent of the
Participant's Spouse. Such consent shall acknowledge the effect of the election
and shall be either notarized or witnessed by a Plan representative.

            (d) Revocation of Election; Subsequent Election(s). A Participant
may revoke his election at any time during the applicable election period, and
he or she may make one or more subsequent elections at any time during the
applicable election period. A Spouse who consents to a Participant's election
may not revoke his or her consent to that election. A subsequent election by the
Participant resulting in a change of Beneficiary or form of benefit must be
consented to by the Participant's Spouse at the time the subsequent election is
made, unless the Spouse executed a general consent. Such consent must, in
addition, acknowledge the specific non-spouse Beneficiary including any class of
beneficiaries or any contingent Beneficiaries.

            (e) Valid Election Without Consent. Notwithstanding anything herein
to the contrary, a Participant's election under this paragraph shall be valid
without the Spouse's consent if the Participant establishes to the satisfaction
of the Administrator that:

                  (1) the Participant is not married at the time of the
election;

                  (2) after all reasonable efforts by the Participant, the
Participant's Spouse cannot be located; or

                  (3) there exists other circumstances not requiring spousal
consent, as provided under Treasury regulations.

      9.6 Qualified Domestic Relations Orders. For purposes of this Article and
Article XV, to the extent provided in a Qualified Domestic Relations Order (as
defined in Article XV), a Participant's Spouse or former Spouse who is entitled
to any portion of the Participant's Accrued Benefit shall be treated as the
Participant's Spouse or surviving Spouse, as the case may be, with respect to
the portion of the Accrued Benefit to which he or she may be entitled under such
Qualified Domestic Relations Order. With respect to the remaining portion (if
any) of the Participant's Accrued Benefit, the Participant's former Spouse shall
be treated as not married to the Participant.

      9.7 Post-Distribution Credits. If after payment has commenced there shall
be additional benefits accrued by a Participant, the Administrator shall direct
adjustment of the remaining payments so as to include all such credited sums, as
nearly evenly as possible, in the remaining payments.

      9.8 Incompetency of Recipient. In the event of the incompetency of a
Participant or Beneficiary at any time while he or she is entitled to receive
benefits under the Plan, the Trustees, in their sole discretion, may pay such
benefits to the legal representative of such incompetent or to such other person
as the Trustees shall deem appropriate.


                                       54
<PAGE>

      9.9 Required Consents.

            (a) (1) If the Participant's Vested Accrued Benefit cannot be
distributed under Paragraphs 7.6(b) or 9.3(b), the Participant and the
Participant's Spouse (or where either the Participant or the Spouse has died,
the survivor) must consent to any distribution of the Vested Accrued Benefit.
Such consent shall be obtained in writing within the 90-day period ending on the
Annuity Starting Date. The Administrator shall notify the Participant and the
Participant's Spouse of the right to defer any distribution until the
Participant's Accrued Benefit is no longer immediately distributable. Such
notification shall describe the material features and explain the relative
values of the optional forms of benefit available under the Plan in a manner
that would satisfy the notice requirements of Paragraph 9.2. The notice shall be
provided no less than 30 days but no more than 90 days prior to the Annuity
Starting Date, except as provided in subparagraph (a)(2) below.

                  (2) The written explanation described in subparagraph (a)(1)
may be provided after the Annuity Starting Date, in which case the 90-day
election period shall not end before the 30th day after the date on which such
explanation is provided. The Secretary may by regulations limit the period of
time by which the Annuity Starting Date precedes the provision of the written
explanation.

            A Participant may elect (with spousal consent if the Participant is
married) to waive any requirement that the written explanation be provided at
least 30 days before the Annuity Starting Date, and may waive the 30-day
requirement under the foregoing provisions of this subparagraph, if the
distribution commences more than 7 days after the explanation is provided.

            (b) Notwithstanding the foregoing, only the Participant need consent
to the commencement of a distribution in the form of a Qualified Joint and
Survivor Annuity while the benefit is immediately distributable. Neither the
consent of the Participant or the Participant's Spouse shall be required to the
extent that a distribution is required to satisfy Code ss.ss.401(a)(9) or 415.

            (c) A benefit is immediately distributable if any part of the
benefit could be distributed to the Participant (or surviving Spouse) before the
Participant attains (or would have attained had he not died) the later of his
Normal Retirement Age or age 62.

      9.10 Annuity Contracts. Any annuity form of distribution may be
distributed to the annuitant in the form of an annuity contract, provided that
such contract is by its terms non-transferable (except for surrender to the
obligor under such contract). The terms of any such contract shall comply with
the requirements of this Plan and, in the event of any conflict, the terms of
this Plan shall control.

      9.11 Loans to Participants. Loans to Participants or Beneficiaries shall
not be allowed from this Plan.


                                       55
<PAGE>

      9.12 Direct Rollover.

            (a) Rollover to Eligible Plan. Notwithstanding any contrary
provision in this Plan, a Distributee may elect, at the time and in the manner
prescribed by the Plan Administrator, to have any portion of an Eligible
Rollover Distribution paid directly to an Eligible Retirement Plan specified by
the Distributee in a Direct Rollover.

            (b) Definitions. For purposes of this paragraph:

                  (1) "Eligible Rollover Distribution" means any distribution of
all or any portion of the balance to the credit of the Distributee, except that
an Eligible Rollover Distribution does not include: any distribution that is one
of a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the Distributee or the joint
lives (or joint life expectancies) of the Distributee and the Distributee's
designated beneficiary, or for a specified period of 10 years or more; any
distribution to the extent such distribution is required under Code
ss.401(a)(9); nor the portion of any distribution that is not includable in
gross income (determined without regard to the exclusion for net unrealized
appreciation with respect to employer securities). For distributions made after
December 31, 2001, any amount that is distributed on account of hardship shall
not be an eligible rollover distribution and the distribute may not elect to
have any portion of such a distribution paid directly to an eligible retirement
plan.

                  (2) "Eligible Retirement Plan" means an individual retirement
account described in Code ss.408(a), an individual retirement annuity described
in Code ss.408(b), an annuity plan described in Code ss.403(a), or a qualified
trust described in Code ss.401(a), that accepts the Distributee's Eligible
Rollover Distribution. However, in the case of an Eligible Rollover Distribution
to the surviving Spouse, an Eligible Retirement Plan is limited to an individual
retirement account or individual retirement annuity.

                  For distributions made after December 31, 2001, an eligible
retirement plan shall also mean an annuity contract described in Code ss.403(b)
and an eligible plan under Code ss.457(b) which is maintained by a state,
political subdivision of a state, or any agency or instrumentality of a state or
political subdivision of a state, and which agrees to separately account for
amounts transferred into such plan from this Plan. The definition of eligible
retirement plan shall also apply in the case of a distribution to a surviving
spouse, or to a spouse or former spouse who is the alternative payee under a
qualified domestic relation order, as defined in Code ss.414(p).

                  (3) "Distributee" means an Employee or former Employee, his or
her surviving Spouse, or his or her Spouse or former Spouse who is the Alternate
Payee under a Qualified Domestic Relations Order (as defined in Paragraph 15.5)
with regard to the interest of the Spouse or former Spouse.

                  (4) "Direct Rollover" means a payment by the Plan to the
Eligible Retirement Plan specified by the Distributee.


                                       56
<PAGE>

            (c) Automatic Rollover. Effective as of March 28, 2005, absent an
affirmative election by the Distributee, an Eligible Rollover Distribution of an
amount in excess of $1,000 but not exceeding $5,000 which is required to be
distributed to the Distributee without the consent of the Distributee (in
accordance with the applicable terms of the Plan) shall be rolled over into an
individual retirement plan, as defined in Code Section 7701(a)(37), established
for the benefit of the Distributee. The establishment of the individual
retirement plan shall comply with the requirements of 29 C.F.R. 2550.404a-2.
Automatic rollovers from the Plan shall be administered in accordance with, and
shall be subject to, the requirements of Code Sections 401(a)(31) and 402.


                                       57
<PAGE>

                                    Article X

                                  CONTRIBUTIONS

      10.1 Fund. The funding of the Plan and payment of the benefits hereunder
will be provided through, and only through, the medium of a Trust Fund to which
contributions shall be made by the Employer as provided herein, and which shall
be held by the Trustee under the provisions of this Plan and Trust. This Plan
confers no right to any Participant, Beneficiary or any other person claiming
through such Participant or Beneficiary to any asset of the Employer to provide
the benefits provided hereunder.

      10.2 Employer Contributions. The Employer intends to make from time to
time such contributions to the Trust Fund as determined necessary or appropriate
by the Plan Administrator to fund the Plan in accordance with the minimum
funding standards of the Code, and to make such contributions in periodic
installments as may be required under ERISA or the Code. Administration expenses
of the Plan, unless paid by the Employer, will be paid out of the assets of the
Trust Fund.

      10.3 Employee Contributions. No Participant shall be required or allowed
to make contributions to the Trust.

      10.4 Rollover Contribution. Rollover Contributions will not be accepted by
the Plan.


                                       58
<PAGE>

                                   Article XI

                       EMPLOYER ADMINISTRATIVE PROVISIONS

      11.1 Information to Administrator. The Employer shall supply current
information to the Administrator as to the name, date of birth, date of
employment, annual compensation, leaves of absences, Service and date of
termination of employment of each Employee who is, or who will be eligible to
become, a Participant under the Plan, together with any other information which
the Administrator considers necessary. The Employer's records as to the current
information the Employer furnishes to the Administrator shall be conclusive as
to all persons.

      11.2 No Liability. Except as specifically provided herein, the Employer
assumes no obligation or responsibility to any of its Employees, Participants or
Beneficiaries for any act or failure to act on the part of the Trustees or the
Administrator.

      11.3 Indemnity of Administrator. To the maximum extent not prohibited by
law, the Employer shall indemnify and hold harmless the Administrator from and
against any and all loss, liability or expense incurred by the Administrator by
reason of any act or conduct (except that amounting to the Administrator's
willful misconduct or gross negligence) in the administration of the Trust or
Plan or both, including all expenses reasonably incurred in the Administrator's
defense in case the Employer fails to provide such defense.


                                       59
<PAGE>

                                   Article XII

                      PARTICIPANT ADMINISTRATIVE PROVISIONS

      12.1 Personal Data to Plan Administrator. Each person entitled to benefits
hereunder must furnish to the Administrator such evidence, data or information
as the Administrator considers necessary or desirable for the purpose of
administering the Plan. The provisions of this Plan are effective for the
benefit of each Participant upon the condition precedent that each Participant
furnish promptly full, true and complete evidence, data and information when
requested by the Administrator.

      12.2 Address for Notification. Each Participant and each Beneficiary of a
deceased Participant shall file with the Administrator from time to time, in
writing, his post office address and any change of post office address. Any
communication, statement or notice addressed to a Participant or Beneficiary at
his last post office address filed with the Administrator, or as shown on the
records of the Employer, shall bind the Participant, or Beneficiary, for all
purposes of this Plan.

      12.3 Assignment or Alienation. Except as permitted under the Code and/or
ERISA, neither a Participant nor a Beneficiary shall transfer, assign or
alienate any benefit provided under the Plan, nor shall such benefit be subject
to attachment, execution, garnishment or other legal or equitable process, and
the Trustee shall not recognize any such transfer, assignment, alienation,
attachment, execution or legal or equitable process.

      12.4 Litigation Against the Trust. If any legal action filed against the
Trustee or the Administrator, or against any individual Administrator, by or on
behalf of any Participant or Beneficiary, results adversely to the Participant
or to the Beneficiary, the Trustee shall reimburse itself or the Administrator
all costs and fees expended by it or him by surcharging, to the extent such
surcharging is not prohibited by ERISA, all costs and fees against the sums
payable under the Plan to the Participant or to the Beneficiary.

      12.5 Denial of Claim.

            (a) If the Plan Administrator denies a claim in whole or in part, it
shall send the claimant a written notice of the denial.

            (b) The Plan Administrator shall send the denial notice within 90
days after the date if receives a claim, unless it needs additional time to make
its decision. In that case, the Plan Administrator may authorize an extension of
up to an additional 90 days, if it notifies the claimant of the extension within
the initial 90-day period. The extension notice shall state the reasons for the
extension and the expected decision date.

            (c) The denial notice shall be written in a manner calculated to be
understood by the claimant and shall contain:

                  (1) The specific reason or reasons for the denial of the
claim;


                                       60
<PAGE>

                  (2) Specific reference to pertinent Plan provisions on which
the denial is based;

                  (3) A description of any additional material or information
necessary to perfect the claim, with an explanation of why the material or
information is necessary;

                  (4) An explanation of the review procedures provided by
Section 12.6 and 12.7; and

                  (5) A statement regarding the claimant's right to commence a
civil action.

      12.6 Request for Review of Denial.

            (a) Within 60 days after the claimant receives a denial notice, the
claimant may file a request for review with the Plan Administrator. Any such
request must be made in writing.

            (b) A claimant who timely requests review shall have the right to
review documents affecting the claim, to submit additional information or
written comments, and to be represented.

      12.7 Review Decision.

            (a) The Plan Administrator shall send the claimant a written
decision on any request for review that it receives.

            (b) The Plan Administrator shall send the review decision within 60
days after the date it receives a request for review, unless an extension of
time is needed, due to special circumstances. In that case, the Plan
Administrator may authorize an extension of up to an additional 60 days,
provided it notifies the claimant of the extension within the initial 60-day
period.

            (c) The review decision shall be written in a manner calculated to
be understood by the claimant and shall contain:

                  (1) The specific reason or reasons for the decision;

                  (2) Specific reference to the pertinent Plan provisions on
which the decision is based; and

                  (3) A statement regarding the claimant's right to commence a
civil action.

            (d) If the Plan Administrator does not send the claimant a review
decision within the applicable time period, the claim shall be deemed denied on
review.


                                       61
<PAGE>

            (e) The review decision (including a deemed decision) shall be the
final decision of the Plan.


                                       62
<PAGE>

                                  Article XIII

                                 ADMINISTRATION

      13.1 Appointment; Compensation.

            (a) The Employer shall appoint one or more persons (whether or not
Participants) to act as Administrator. In the absence of such appointment, the
Employer shall act as Administrator.

            (b) The Administrator shall serve without compensation, but the
Employer shall pay all expenses of the Administrator including the expense for
any bond required under ERISA.

      13.2 Term. The Administrator shall serve until its successor is appointed.
Any Administrator may resign upon 10 days' prior written notice. The Employer
may remove any individual acting as Administrator at any time and, in its
discretion, appoint a successor whenever a vacancy occurs.

      13.3 Action During Vacancy. In case of a vacancy in the position of
Administrator, the persons remaining to act as Administrator may exercise any
and all of the powers, authority, duties and discretion conferred upon the
Administrator pending the filling of the vacancy.

      13.4 General Powers and Duties. The Administrator shall have the authority
and responsibility to administer the Plan. The Administrator shall have all
powers necessary or appropriate to administer the Plan, including, but not
limited to the following:

            (a) to select a secretary, who need not be an individual;

            (b) to direct the Trustee as respects the crediting and distribution
of the Trust fund;

            (c) to furnish the Employer with information required by the
Employer for tax or other purposes;

            (d) to engage the service of actuaries, agents, accountants,
attorneys, physicians or such other personnel, whom it may deem advisable to
assist it with the performance of its duties;

            (e) to engage the services of an Investment Manager who shall have
full power and authority to manage, acquire or dispose (or direct the Trustees
with respect to acquisition or disposition) of any Plan asset under its control;

            (f) to be the sole and exclusive arbiter of all questions arising
with respect to issues under the Plan as to coverage and eligibility, both as to
participation and as to benefits and the amount thereof, including, without
limitation, the determination of those individuals who are


                                       63
<PAGE>

deemed employees of the Employer (or any controlled group member). This Plan is
to be construed to exclude all individuals who are not classified by the
Employer as employees for purposes of the Employer's payroll system, and the
Administrator is authorized to do so, despite the fact that its decision may
result in the loss of the Plan's tax qualification;

            (g) to adopt rules of procedure and regulations as the Administrator
deems desirable for the conduct of the administration of the Plan;

            (h) to interpret the terms of the Plan and the Administrator's rules
and regulations, and to determine all questions arising in the administration,
interpretation and application of the Plan;

            (i) to render and review decisions respecting claims for benefits
and rights under the Plan;

            (j) to make factual determinations relating to the value of a
Participant's Accrued Benefit and the right to receive such Accrued Benefit;

            (k) to determine whether a domestic relations order constitutes a
Qualified Domestic Relations Order and whether a putative Alternate Payee
otherwise qualifies for benefits hereunder; and

            (1) to correct any defect, supply any omission or reconcile any
inconsistency, including but not limited to mathematical or arithmetical errors,
in such manner and to such an extent as it shall deem necessary to carry out the
purposes of this Plan.

            Any final decision by the Administrator shall be binding and
conclusive on all parties concerned. The Administrator shall have absolute,
exclusive, total and complete discretion in carrying out the Administrator's
duties and responsibilities, and no decision by the Administrator shall be
modified or overturned upon judicial review unless it was arbitrary and
capricious or made in bad faith.

      13.5 Funding Policy. The Administrator shall establish a funding policy
and method consistent with the objectives of the Plan and the requirements of
Title I of ERISA. The Administrator shall review, not less often than annually,
all pertinent Employee information and Plan data in order to review the funding
policy of the Plan and to determine the appropriate methods of carrying out the
Plan's objectives. The Administrator shall communicate annually to the Trustee
and to any Investment Manager the Plan's short-term and long-term financial
needs so that investment policy can be coordinated with Plan financial
requirements.

      13.6 Manner of Action. The decision of a majority of persons acting as
Administrator shall control.

      13.7 Authorized Representative. The Administrator may authorize anyone of
its members to sign on its behalf any notices, directions, applications,
certificates, consents,


                                       64
<PAGE>

approvals, waivers, letters or other documents. The Administrator must evidence
this authority by an instrument signed by all members and filed with the
Trustees.

      13.8 Interested Member. No Administrator may decide or determine any
matter concerning the distribution, nature or method of settlement of his own
benefits under the Plan, unless he is acting alone in the capacity of the
Administrator.

      13.9 Annual Statement. As soon as practicable after the Valuation Date of
each Plan Year but within the time prescribed by ERISA and the regulations under
the Act, the Plan Administrator shall deliver to each Participant (and to each
Beneficiary) a statement reflecting his Accrued Benefit in the Plan as of such
Valuation Date and such other information the Act required by ERISA to be
furnished to the Participant or Beneficiary.

      13.10 Unclaimed Benefit Procedure.

            (a) Neither the Trustees nor the Administrator shall be obliged to
search for, or ascertain the whereabouts of, any Participant or Beneficiary. The
Administrator, by certified or registered mail addressed to his last known
address of record with the Administrator or the Employer, shall notify any
Participant, or Beneficiary, that he is entitled to a distribution under this
Plan, and the notice shall quote the provisions of this paragraph.

            (b) If the Participant or Beneficiary fails to claim his benefit or
make his whereabouts known in writing to the Administrator within 6 months from
the date of mailing of the notice or before this Plan is terminated or
discontinued, whichever should first occur, the Administrator shall request a
third party of the Administrator's choice to locate such Participant or
Beneficiary. If after a 2-year period commencing from the date the Administrator
notifies the Trustees that a Participant's Accrued Benefit is to be distributed,
a Participant or his Beneficiary fails to claim his benefit, the Administrator
may either treat as a Forfeiture, or permanently segregate such benefit for the
Participant or Beneficiary in any manner acceptable under ERISA.

            (c) The forfeiture of a Participant's unclaimed benefit shall be
subject to the right of the Participant (or, following the Participant's death,
the Participant's Beneficiary) at any time to make a claim for such benefit. In
the event a Participant or the Participant's Beneficiary claims such forfeited
amount, the Employer shall contribute such additional amount to the Plan as is
required to make complete distribution to the claimant, but if the Trust is not
in existence, the Employer shall pay such amount directly to the claimant.


                                       65
<PAGE>

                                   Article XIV

                             TOP HEAVY REQUIREMENTS

      14.1 General. If this Plan becomes Top Heavy with respect to any Plan
Year, the requirements of this Article must be met, notwithstanding any other
Plan provision to the contrary. The requirements of this Article will not apply,
however, to Participants who have ceased employment with the Employer before the
Plan becomes Top Heavy and who have not returned to employment with the Employer
in a Top Heavy Year.

      14.2 Minimum Benefits for Top Heavy Plan.

            (a) If the Employer does not maintain any qualified defined
contribution plan, and if this Plan becomes Top Heavy, then a minimum Normal
Retirement Benefit shall accrue for each Non-Key Employee Participant equal to
2% of his "average annual compensation", multiplied by the number of Years of
Participation (not to exceed 10) earned as a Non-Key Employee Participant in Top
Heavy Years ("Top Heavy Minimum Benefit"). For purposes of this Paragraph,
"average annual compensation" shall be the average of the Participant's "415
Compensation" for such five consecutive Top Heavy Years that produce the highest
average. "415 Compensation" shall mean compensation as defined in Treas. Regs.
ss.1.415-2(d). The Plan meets this requirement if the Non-Key Employee's Accrued
Benefit at the end of the Top Heavy Year is at least equal to the Top Heavy
Minimum Benefit.

                  For purposes of this paragraph, a Non-Key Employee Participant
includes any Employee eligible to participate in the Plan and entitled to
benefit accrual for the Plan Year but who does not participate solely because
his Compensation does not exceed a specified level. For purposes of this
paragraph, the Participant's Accrued Benefit and Top Heavy Minimum Benefit is
expressed as a straight life annuity payable annually beginning at Normal
Retirement Age.

                  If, at the end of any Top Heavy Year, a Non-Key Employee
Participant's Accrued Benefit is not at least equal to the Top Heavy Minimum
Benefit, the Participant shall earn the additional accrual necessary to increase
his Accrued Benefit to such Top Heavy Minimum Benefit. The Participant's Accrued
Benefit shall never be less than the Top Heavy Minimum Benefit, regardless of
whether the Plan is Top Heavy in Plan Years subsequent to a Top Heavy Year.

                  The Employer shall not impute Social Security benefits to
determine whether it has satisfied its obligation to provide the Top Heavy
Minimum Benefit, nor shall the Plan offset a Participant's Social Security
Benefit against his Top Heavy Minimum Benefit.

                  The provisions of this subparagraph (a) shall not apply to any
Participant to the extent the Participant is covered under any other defined
benefit plan of the Employer and the Employer has provided in such other plan
the Top Heavy Minimum Benefit.


                                       66
<PAGE>

                  For Plan Years beginning after December 31, 2001, if this Plan
is frozen, for purposes of satisfying the minimum benefit requirements of Code
ss.416(c)(1) and the Plan, in determining Years of Service with the Employer,
any service with the Employer shall be disregarded to the extent that such
service occurs during a Plan Year when the Plan benefits (within the meaning of
Code ss.410(b)) no Key Employee or former Key Employee.

            (b) If the Employer maintains, in addition to this Plan, any
qualified defined contribution plan which is part of a Required or Permissive
Aggregation Group, and a Non-Key Employee participates in both plans, the
Non-Key Employee shall be entitled to the top heavy minimum benefit under this
Plan.

            (c) The minimum benefit provided for a Participant under this
paragraph (to the extent such benefit is Vested) shall not be treated as
forfeitable solely because the Plan provides (i) that the payment of benefits is
suspended for such period as the Employee is employed, subsequent to the
commencement of payment of such benefits, or (ii) that, in the case of a
Participant who does not have a Vested right to at least 50% of his Accrued
Benefit derived from Employer contributions, such Accrued Benefit may be
forfeited on account of the withdrawal by the Participant of any amount
attributable to the benefit derived from mandatory contributions made by such
Participant.

      14.3 Combined Plan Limits in Top Heavy Years.

            (a) If for any Plan Year the Plan is Super Top Heavy, then for
purposes of the limitations on contributions and benefits under Code ss.415 as
described in Article V, the dollar limitations in the denominators of the
Defined Benefit Plan Fraction and the Defined Contribution Plan Fraction shall
be multiplied by 100% rather than 125% (as otherwise stated in the definitions
of such Fractions in Article II). The foregoing shall not apply in Plan Years
beginning after December 31, 1999.

            (b) If reduction of the multiplier in the Defined Benefit and
Defined Contribution Plan Fractions from 125% to 100% would cause a Participant
to exceed the combined Code ss.415 limitations on contributions and benefits,
then the application of the provisions of Paragraph 14.2 shall be suspended as
to such Participant until such time as he no longer exceeds the combined Code
ss.415 limits. During the period of such suspension, there shall be no Employer
contributions allocated to such Participant under this Plan. The foregoing shall
not apply in Plan Years beginning after December 31, 1999.

      14.4 Top Heavy Vesting. Notwithstanding anything to the contrary in
Article VII, the following vesting schedule shall apply in any Top Heavy Year
for any Participant who is credited with an Hour of Service after the Plan
becomes Top Heavy:


                                       67
<PAGE>

                      Years of
                  Vesting Service                      Vested Percentage
                  ---------------                      -----------------

                  Less than 3                                  0%

                  3 or more                                  100%

If following a Top Heavy Year this Plan ceases to be Top Heavy, a Participant's
Vested percentage of his Accrued Benefit shall be determined under the schedule
in Paragraph 7.1, subject to the Participant's right of election under Paragraph
19.3. No change in the Plan's Top Heavy status which alters the Plan's vesting
schedule shall reduce a Participant's Vested percentage of his Accrued Benefit
as determined immediately prior to the effective date of such change.


                                       68
<PAGE>

                                   Article XV

                       QUALIFIED DOMESTIC RELATIONS ORDERS

      15.1 Payment of Benefits to Alternate Payee. Notwithstanding the
prohibitions contained in Paragraph 12.3, all or a portion of a Participant's
Accrued Benefit shall be paid to one or more Alternate Payees in accordance with
the terms of a Qualified Domestic Relations Order entered into on or after
January 1, 1985.

      15.2 Determination of Qualified Status.

            (a) Initial Notice. Within 30 days following receipt of any domestic
relations order, or within such other time period as may be prescribed by
Treasury regulations, the Administrator shall notify the Participant and each
Alternate Payee in writing of its receipt and shall provide a copy of the
Administrator's procedures as outlined below for determining if such order
qualifies as a Qualified Domestic Relations Order.

            (b) Notice of Determination. Within 90 days following the
Administrator's initial notice described in subparagraph (a) above, the
Administrator shall notify the Participant and each Alternate Payee in writing
of its determination whether the proposed order is qualified. If the order is
denied qualified status, the Administrator shall list the specific reasons
therefor. Whether or not the order is determined to be qualified, the
Administrator shall notify the Participant and each Alternate Payee of their
right to appeal such determination within 60 days after receipt of the
determination, and that failure to appeal such determination in writing within
the 60-day period will render such determination final, binding and conclusive.
The Administrator's notice shall identify the name of the Administrator and the
address to which appeal is to be forwarded.

            (c) Appeal. If a Participant or Alternate Payee should appeal the
Administrator's decision, he may submit in writing all pertinent issues and
comments and may review pertinent Plan documents. The Administrator shall
re-examine all facts related to the appeal and make a final determination as to
whether the initial determination is justified under the circumstances. The
Administrator shall notify the appellant of the Administrator's decision within
such time period as provided in rules adopted by the Administrator.

      15.3 Authorized Representative. An Alternate Payee may designate an
authorized representative to receive copies of all notices with respect to the
payment of benefits or claim for such payment under a domestic relations order.
The Alternate Payee shall notify the Administrator of such designation in
writing, which shall be effective upon its receipt by the Administrator.

      15.4 Transition Rule. In the case of a domestic relations order entered
into before January 1, 1985, the Administrator shall treat such order as a
Qualified Domestic Relations Order if benefits pursuant to such order are in pay
status on January 1, 1985. In addition, the Administrator, in its sole
discretion, may treat any other order entered into before January 1,


                                       69
<PAGE>

1985 as a Qualified Domestic Relations Order notwithstanding its failure to meet
all the requirements for qualification under Code ss.4l4(p).

      15.5 Definitions.

            (a) "Qualified Domestic Relations Order" shall mean a domestic
relations order that meets the requirements of Code ss.4l4(p).

            (b) "Domestic relations order" shall mean any judgment, decree or
order, including approval of a property settlement agreement, which relates to
the provision of child support, alimony payments, or marital property rights of
a Spouse, former Spouse, child or other dependent of a Participant, and which is
made pursuant to a state domestic relations law (including community property
law).

            (c) "Alternate Payee" shall mean a Spouse, former Spouse, child or
other dependent of a Participant who is recognized by a domestic relations order
as entitled to receive all or a portion of the benefits payable under a
qualified plan with respect to the Participant.

      15.6 Method and Timing of Distribution.

            (a) Distribution of benefits to an Alternate Payee specified in a
Qualified Domestic Relations Order shall be in any optional form of distribution
allowable under this Plan.

            (b) A domestic relations order which requires payment to an
Alternate Payee prior to the Participant's "earliest retirement age" as defined
in Code ss.4l4(p)(4)(B) shall be allowable under this Plan.


                                       70
<PAGE>

                                   Article XVI

                            TRUSTEE POWERS AND DUTIES

      16.1 Acceptance. The Trustees accept the Trust created under the Plan and
agree to perform the obligations imposed upon them hereunder. The Trustees shall
provide bond for the faithful performance of their duties under the Trust to the
extent required by ERISA.

      16.2 Receipt of Contributions. The Trustees shall be accountable to the
Employer for the funds contributed to the Trust by the Employer, but shall have
no duty to see that the contributions received comply with the provisions of the
Plan. The Trustees shall not be obligated to collect any contributions from the
Employer, nor be obligated to see that funds deposited in the Trust are
deposited according to the provisions of the Plan.

      16.3 Full Investment Powers. The Trustees shall have full discretion and
authority with regard to the investment of the Trust Fund, except with respect
to a Plan asset under the control or direction of a properly appointed
Investment Manager. The Trustees shall coordinate their investment policy with
the financial needs of the Plan as communicated to the Trustees by the
Administrator. The Trustees are authorized and empowered, but not by way of
limitation, with the following powers, rights and duties with respect to the
Trust Fund:

            (a) to invest any or all of the Trust Fund in any common or
preferred stocks, bonds (including United States retirement plan bonds),
insurance contracts, mortgages, notes or other property of any kind, real or
personal, as a prudent man would do under like circumstances with due regard for
the purposes of this Plan;

            (b) to retain in cash so much as the Trustees may deem advisable to
satisfy liquidity needs of the Plan and to deposit any cash in a bank account
without liability for the highest rate of interest available;

            (c) to manage, sell, contract to sell, grant options to purchase,
convey, exchange, transfer, abandon, improve, repair, insure, lease for any term
even though commencing in the future or extending beyond the term of the Trust,
and otherwise deal with all property, real or personal, in such manner, for such
consideration and on such terms and conditions as the Trustees shall decide;

            (d) to credit and distribute the Trust as directed by the
Administrator. The Trustees shall not be obliged to inquire as to whether the
distribution is proper or within the terms of the Plan, or as to the manner of
making any payment or distribution. The Trustees shall be accountable only to
the Administrator for any payment or distribution made by it in good faith on
the order or direction of the Administrator;

            (e) to borrow money, to assume indebtedness, extend mortgages and
encumber by mortgage or pledge;


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<PAGE>

            (f) to compromise, contest, arbitrate or abandon claims and demands,
in their discretion;

            (g) to have all of the rights of an individual owner, including the
power to give proxies, to participate in any voting trusts, mergers,
consolidations or liquidations, and to exercise or sell stock subscriptions or
conversion rights;

            (h) to hold any securities or other property in the name of the
Trustees or their nominee, or in another form as they may deem best, with or
without disclosing the trust relationship;

            (i) to perform any and all other acts in their judgment necessary or
appropriate for the proper and advantageous management, investment and
distribution of the Trust;

            (j) to retain any funds or property subject to any dispute without
liability for the payment of interest, and to decline to make payment or
delivery of the funds or property until final adjudication is made by a court of
competent jurisdiction;

            (k) to apply for one or more insurance contracts and to pay to the
insurer in accordance with such insurance contract(s) and otherwise to act as
contractholder under such insurance contract(s).

            (1) to file all required tax returns; and

            (m) to begin, maintain or defend any litigation necessary in
connection with the administration of the Plan.

      16.4 Accounting. Upon request by the Administrator within 60 days after
the later of the Anniversary Date or receipt of the Employer's contribution for
the Fiscal Year, the Trustees shall furnish to the Employer and Administrator a
written statement of account with respect to the Fiscal Year for which such
contribution was made, and any prior period for which the Trustees have not
provided an accounting, setting forth:

            (a) the net income or loss of the Trust Fund;

            (b) the gains or losses realized by the Trust Fund upon sales or
other disposition of the assets;

            (c) the increase or decrease in the value of the Trust Fund;

            (d) all payments and distributions made from the Trust Fund; and

            (e) such further information as the Trustees and/or Administrator
deems appropriate. The Employer, forthwith upon its receipt of each such
statement of account, shall acknowledge receipt thereof in writing and advise
the Trustees and/or Administrator of its


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<PAGE>

approval or disapproval thereof. Failure by the Employer to disapprove any such
statement of account within a reasonable period after its receipt thereof shall
be deemed an approval thereof. The approval by the Employer of any statement of
accounting shall be binding as to all matters embraced therein as between the
Employer and the Trustees to the same extent as if the account of the Trustee
has been settled by judgment or decree in an action for a judicial settlement of
its account in a court of competent jurisdiction in which the Trustees, the
Employer and all persons having or claiming an interest in the Plan were
parties; provided, however, that nothing herein contained shall deprive the
Trustees of their right to have the accounts judicially settled if the Trustees
so desire.

      16.5 Records and Statements. The Trustees' records shall be open to the
inspection of the Administrator and the Employer at all reasonable times and may
be audited from time to time by any person(s) as the Administrator may specify
in writing. The Trustees shall furnish the Administrator with whatever
information relating to the Trust Fund the Administrator considers necessary.

      16.6 Fees and Expenses From Fund. The Trustees shall receive annual
compensation as may be agreed upon from time to time between the Employer and
the Trustees; however, no person who is receiving full pay from the Employer
shall receive compensation for services as Trustee. The Trustees shall pay all
expenses reasonably incurred by them in their administration of the Plan from
the Trust Fund unless the Employer pays the expenses.

      16.7 Parties to Litigation. Except as otherwise provided by ERISA, only
the Employer, the Administrator, and the Trustees shall be necessary parties to
any court proceeding involving the Trust or the Trust Fund. No Participant or
Beneficiary shall be entitled to any notice of process unless required by ERISA.
Any final judgment entered in any proceeding shall be conclusive upon the
Employer, the Administrator, the Trustees, Participants and Beneficiaries.

      16.8 Professional Agents. The Trustees may employ and reasonably
compensate from the Trust Fund such agents, attorneys, accountants and other
persons to advise the Trustees as in their opinion may be necessary and may act
or refrain from acting on such advice. The Trustees may delegate to any person
any such power or duty vested in them by the Plan to the extent not prohibited
by ERISA.

      16.9 Third Party. No person dealing with the Trustees shall be obligated
to see to the proper application of any money paid or property delivered to the
Trustees, or to inquire whether the Trustees have acted pursuant to any of the
terms of the Plan. Each person dealing with the Trustees may act upon any
notice, request or representation in writing by the Trustees, or by the
Trustees' duly authorized agent, and shall not be liable to any person
whomsoever in so doing. The certificate of the Trustees that they are acting in
accordance with the Plan shall be conclusive in favor of any third person
relying on the certificate.


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<PAGE>

      16.10 Resignation, Removal and Appointment of Trustee.

            (a) A Trustee may resign at any time by giving 30 days' written
notice in advance to the Employer and to the Administrator.

            (b) The Employer may remove any Trustee upon written notice to such
Trustee.

            (c) The Employer may appoint additional or successor Trustees at any
time by giving written notice to such persons. Each additional or successor
Trustee shall succeed to the title to the Trust by accepting in writing his
appointment as Trustee and filing such acceptance with the former Trustee (if
any) and the Administrator.

            (d) The Employer may designate one or more successors prior to the
death, resignation, incapacity, or removal of a Trustee. In the event a
successor is so designated by the Employer and accepts such designation, the
successor shall, without further act, become vested with all the estate, rights,
powers, discretions, and duties of his predecessor with the like effect as if he
were originally named as Trustee herein immediately upon the death, resignation,
incapacity, or removal of his predecessor.

            (e) A resigning or removed Trustee, upon receipt of acceptance in
writing of the Trust by a successor Trustee, shall execute all documents and do
all acts necessary to vest title of record in any successor Trustee. Each
successor Trustee shall have and enjoy all of the powers, both discretionary and
ministerial, conferred under this Agreement upon his predecessor. No successor
Trustee shall be personally liable for any act or failure to act of any
predecessor Trustee. With the approval of the Employer and the Administrator, a
successor Trustee may accept the account rendered and the property delivered to
it by a predecessor Trustee without incurring any liability or responsibility
for so doing.

      16.11 Limitation of Liability Upon Appointment of Investment Manager. The
Trustees shall not be liable for the acts or omissions of any Investment
Manager(s) appointed by the Administrator, nor shall the Trustees be under any
obligation to invest or otherwise manage any asset of the Plan which is subject
to the management of a properly appointed Investment Manager.

      16.12 Investment in Pooled Fund. Notwithstanding the provisions of
Paragraph 16.3, the Employer specifically authorizes the Trustees to invest all
or any portion of the assets comprising the Trust Fund in any common trust fund
which at the time of the investment provides for the pooling of the assets of
plans qualified under Code ss.401(a).

      16.13 Protection of Trustee. To the maximum extent not prohibited by law,
the Employer shall indemnify and hold harmless the Trustees from any loss,
liability or expense (including reasonable attorneys fees) suffered or incurred
by the Trustees as a result of any act or omission on the Trustees' part in the
performance of their duties hereunder, unless the same results from the
Trustees' gross negligence or willful misconduct.


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<PAGE>

      16.14 Duties Limited. The duties and responsibilities of the Trustees are
limited to those specifically stated in this instrument and no other or further
duties or responsibilities shall be implied.

      16.15 Notices.

            (a) All notices to the Trustees hereunder shall be mailed or
delivered to the Trustees at their last known address.

            (b) The Trustees shall be fully protected in presenting any notice
hereunder to an Employer or Administrator by mailing such notice to the
Employer, or in care of the Employer, at the last known address provided by such
Employer, and in presenting any notice or distributing any benefit hereunder to
a Participant by mailing it to such Participant at the latest address, if any,
which may have been furnished to the Trustees or by mailing it in care of the
Employer, as above provided.

      16.16 Audit. If an audit of the Plan's records shall be required for any
Plan Year, the Administrator shall direct the Trustees to engage an independent
qualified public accountant for that purpose. Such accountant shall, after an
audit of the books and records of the Plan in accordance with generally accepted
auditing standards, within a reasonable period after the close of the Plan Year,
furnish to the Administrator and the Trustees a report of his audit setting
forth his opinion as to whether each of the following statements, schedules or
lists, or any others that are required by ERISA ss.103 or the Secretary of Labor
to be filed with the Plan's annual report, are presented fairly in conformity
with generally accepted accounting principles applied consistently:

            (a) statement of the assets and liabilities of the Plan;

            (b) statement of changes in net assets available to the Plan;

            (c) statement of receipts and disbursements, a schedule of all
assets held for investment purposes, a schedule of all loans or fixed income
obligations in default at the close of the Plan Year;

            (d) a list of all leases in default or uncollectible during the Plan
Year;

            (e) the most recent annual statement of assets and liabilities of
any bank common or collective trust fund in which Plan assets are invested.


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<PAGE>

                                  Article XVII

                             VALUATION OF TRUST FUND

      17.1 Valuation of Trust Fund. Each Plan Year, the Trustees shall value the
Trust Fund at fair market value as of the close of business on each Valuation
Date for the Plan Year. In making such valuation, the Trustees shall deduct all
charges, expenses and other liabilities (if any), contingent or otherwise, then
chargeable against the Trust Fund, in order to give effect to income realized
and expenses paid or incurred, losses sustained and unrealized gains or losses
constituting appreciation or depreciation in the value of Trust investments
since the last previous valuation. As soon as practicable after such valuation,
the Trustees shall deliver in writing to the Administrator and to the Employer a
certified valuation of the Trust Fund together with a statement of the amount of
net income or loss (including appreciation or depreciation in the value of Trust
investments) since the last previous valuation.

      17.2 Method of Valuation. In determining the fair market value of
securities held in the Trust Fund which are listed on a registered stock
exchange, the Administrator shall direct the Trustee to value them at the prices
they were last traded on such exchange preceding the close of business on the
Valuation Date. If such securities were not traded on the Valuation Date, or if
the exchange on which they are traded was not open for business on the Valuation
Date, then the securities shall be valued at the prices at which they were last
traded prior to the Valuation Date. Any unlisted security held in the Trust Fund
shall be valued at its bid price next preceding the close of business on the
Valuation Date, which bid price shall be obtained from a registered broker or an
investment banker. In determining the fair market value of assets other than
securities for which trading or bid prices can be obtained, the Trustee may
appraise such assets itself, or in its discretion, employ one or more appraisers
for that purpose and rely on the values established by such appraiser or
appraisers.


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<PAGE>

                                  Article XVIII

                     LIFE INSURANCE CONTRACTS AND COMPANIES

      18.1 Purchase of Life Insurance Contracts for the Benefit of Individual
Participants.

            (a) If life insurance coverage is made available on a uniform,
non-discriminatory basis to all Participants, then upon written request received
from any Participant, the Trustees shall purchase and pay premiums on one or
more life insurance policies on the life of a Participant, provided that the
face amounts of such Contract(s) covering anyone Participant shall be limited to
the greater of:

                  (1) 100 times the Participant's anticipated monthly retirement
benefit; or

                  (2) an amount of Ordinary Life Insurance that may be purchased
by less than 66% of such Participant's Theoretical Contribution (as hereinafter
defined); or

                  (3) an amount of Universal Life Insurance or other Contract(s)
that may be purchased by less than 33% of such Participant's Theoretical
Contribution; or

                  (4) an amount of insurance which is a combination of Ordinary
Life, Universal Life or other life insurance Contracts where the sum of one-half
of the Ordinary Life premiums plus all other premiums does not exceed 33% of
such Participant's Theoretical Contribution.

Notwithstanding the above, the Trustee may purchase Contracts as described in
Code ss.412(i) for each Participant in units of $1,000 face amount for each $10
of anticipated monthly retirement benefit to which the Participant is entitled.

            (b) The Trustees shall, at or before such Participant's retirement,
either

                  (1) convert the entire value of such insurance policies into
cash or into an annuity contract, which will provide periodic income so that no
portion of such value may be used to continue life insurance protection beyond
the date of retirement of such Participant, or

                  (2) distribute such insurance policies to such Participant at
the time such Participant is entitled to receive benefits under the Plan.

            (c) If the Trustees deem it prudent to purchase a Participant's
existing insurance policy either from the Participant directly or from another
qualified employee benefit plan, they may do so provided that such purchase be
made in compliance with all relevant state and federal requirements.


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<PAGE>

            (d) All dividends paid on such policies, if any, shall be used to
reduce the Employer's contribution for the year in which the dividends are paid.
In no event shall any dividends revert to the Employer.

            (e) If a Participant or his designated Beneficiary wishes to
purchase an insurance policy from the Trust, the Trustees may transfer such
policy in accordance with all relevant state and federal regulations.

      18.2 Purchase of Life Insurance for the Benefit of the Trust. The Trustees
may, in their discretion, purchase and pay premiums on one or more life
insurance policies on the life of a Participant for the benefit of the Trust
rather than the insured Participant, in which event all premiums paid shall be
treated as a general expense of the Trust Fund and all proceeds from such
insurance shall constitute a general asset of the Trust Fund. The Trustees may
purchase a Participant's existing insurance contract subject to compliance with
all relevant state and federal requirements.

      18.3 Annuity Purchase Riders. Any insurance policy purchased hereunder may
be subject to the terms of an annuity purchase rider, applied for by the
Trustees and issued as a part of such policy, pursuant to which the proceeds of
such policy may be applied for the purchase of an annuity to provide benefits
under the Plan. The annuity referred to in this paragraph shall be paid
according to the terms of such policy regardless of the survival of the
Participant.

      18.4 Designation of Trust as Owner and Beneficiary. Each application for
an insurance policy and the policy itself shall nominate and designate the Trust
or the Trustees as sole owner, with the right reserved to said Trustees to
exercise any right or option contained therein. All such policies shall be held
by the Trustees. The Trust or the Trustees shall be designated in the policies
to receive the proceeds maturing by reason of the death of the Participant;
however the Trustees shall be required to pay over the proceeds of any contract
purchased pursuant to Paragraph 18.1 to the Participant's Beneficiary in
accordance with the distribution provisions of this Plan, and under no
circumstances shall the Trust retain any part of the proceeds of such contract.

      18.5 Insurance Company Reliance on Trustee's Signature. For the purpose of
applying to an insurance company and in the exercise of any right or option
contained in any contract, the insurance company may rely upon the signature of
anyone Trustee and shall be held harmless and completely discharged in acting at
the direction and authorization of such Trustees.

      18.6 Duties of Insurance Company. Each insurance company shall keep such
records, make such identification of contracts, funds and accounts within funds,
and supply such information as may be necessary for the proper administration of
the Plan under which it is carrying insurance benefits.

      18.7 Plan Provisions Control. In the event of any conflict between the
terms of the Plan and the provisions of any insurance policy or annuity contract
purchased hereunder, the terms of the Plan shall control.


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<PAGE>

      18.8 Protection of Employer, Plan Administrator and Trustee. Neither the
Employer, Administrator nor the Trustees shall be responsible for the validity
of any insurance policy nor for the failure on the part of an insurance company
to make payments under such insurance policies, nor for the action of any other
person which may render a policy null and void or unenforceable in whole or in
part.

      18.9 Definitions. For purposes of this Article:

            (a) "Contract" shall mean an ordinary or term life insurance
contract, or annuity contract, issued by an insurer.

            (b) "Issuing Company" is any life insurance company which has issued
a policy upon application by the Trustee under the terms of this Plan.

            (c) "Ordinary Life Insurance" contracts shall mean contracts with
nondecreasing death benefits and non-increasing premiums.

            (d) "Theoretical Contribution" shall mean the contribution that
would be made on behalf of the Participant, using the actuarial assumptions
stated in Paragraph 2.3(b) and the individual level premium funding method from
the age at which participation commenced to Normal Retirement Age, to fund the
Participant's entire retirement benefit without regard to preretirement
ancillary benefits.

            (e) "Theoretical Individual Level Premium Reserve" shall mean the
reserve that would be available at time of death if for each year of plan
participation a contribution had been made on behalf of the Participant in an
amount equal to the Theoretical Contribution.

            (f) "Universal Life" contracts are contracts where the premium or
death benefit amounts can be adjusted.


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<PAGE>

                                   Article XIX

                    EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION

      19.1 Exclusive Benefit.

            (a) Except as specifically set forth in this Plan, the Employer
shall have no beneficial interest in any asset of the Trust and no part of any
asset in the Trust shall ever revert to or be repaid to the Employer, either
directly or indirectly; nor shall any part of the corpus or income of the Trust
Fund, or any asset of the Trust, be at any time used for, or diverted to,
purposes other than for the exclusive benefit of the Participants or their
Beneficiaries.

            (b) Any contribution made by the Employer because of a mistake of
fact may be returned to the Employer within one year after the contribution was
made.

            (c) All Employer contributions are conditioned upon the Plan's
initial qualification under the Code. If the Employer receives a final
determination that the Plan does not initially qualify, the Plan shall terminate
and all Employer contributions shall be returned to the Employer within one year
after the date such initial qualification is denied, but only if the application
for qualification is made by the time prescribed by law for filing the
Employer's tax return for the taxable year in which the Plan is adopted, or such
later date as the Secretary of the Treasury may prescribe.

            (d) All Employer contributions are conditioned upon their
deductibility under Code ss.404 for the Employer's fiscal year for which a
deduction is claimed, and to the extent the deduction is disallowed, the
contributions may be returned to the Employer within one year after the
disallowance.

            (e) For purposes of this Article, "contribution" has the same
meaning as in ERISA ss.403(c).

      19.2 Amendment. The Employer shall have the right at any time to amend the
Plan, subject to the limitations of this paragraph and such prohibitions as may
be provided by law or by other terms of this Plan. Any such amendment shall be
adopted by formal action of the Employer's Board of Directors and executed by an
officer authorized to act on behalf of the Employer, except as otherwise
provided herein. However, any amendment which affects the rights, duties or
responsibilities of the Trustee and Administrator may only be made with the
Trustee's and Administrator's written consent.

            In addition, subject to the foregoing limitation with respect to the
rights, duties and responsibilities of the Trustee or the Administrator, the
pension committee of the Employer's Board of Directors shall also have the
authority to amend the Plan pursuant to written Plan amendments.

            (a) to comply with changes required by law, or


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<PAGE>

            (b) to make any other change to the Plan, including any change
required as a result of a corporate purchase or sale of stock or assets which
involves the transfer of employees and their eligibility, participation or
benefits under the Plan;

provided that any such change does not have or create any material financial
impact on the Employer and does not have any adverse impact on the rights of
Participants. Any such amendment shall become effective as provided therein upon
its execution. The Trustee shall not be required to execute any such amendment
unless the Trust provisions contained herein are part of the Plan and the
amendment affects the duties of the Trustee hereunder.

      19.3 Amendment to Vesting Schedule. No amendment shall directly or
indirectly reduce a Participant's Vested interest in his Accrued Benefit to the
date of the amendment, as computed under the terms of the Plan in effect
immediately prior to the date of the amendment. If the vesting schedule of the
Plan is amended, each Participant with at least three Years of Service for
vesting purposes may elect within the time period described below after the
adoption of the amendment to have his Vested percentage computed under the Plan
without regard to such amendment. The period during which the election may be
made shall commence with the date the amendment is adopted and shall end on the
later of:

            (a) 60 days after the amendment is adopted;

            (b) 60 days after the amendment becomes effective; or

            (c) 60 days after the Participant is issued written notice of the
amendment by the Employer or Administrator.

      19.4 Termination. The Employer shall have the right at any time to
terminate the Plan by delivering to the Trustees and Administrator written
notice of such termination. Upon full or partial termination of this Plan, the
Accrued Benefit of each affected Participant, to the extent funded as of the
date of such termination, shall become fully Vested. Upon complete termination
of the Plan, the Employer, by written notice to the Trustee, and subject to the
ensuing Paragraphs of this Article, shall distribute the assets in the Trust
Fund in the form of deferred annuities payable at Normal Retirement Date. The
Trustee may also distribute benefits in the form of a lump sum, in cash or in
kind, as soon as practicable following termination.

      19.5 Allocation of Assets. Upon complete termination of the Plan, the
Administrator shall allocate the assets of the Plan among Participants and
Beneficiaries in the following order of priority and subject in any event to the
provisions of ERISA:

            (a) First, to that portion of each Participant's Accrued Benefit
which is derived from his voluntary contributions.

            (b) Equally among individuals in the following two categories:

                  (1) Benefits to retired Participants and their Beneficiaries
to whom payment commenced at least 3 years prior to the termination date, based
on Plan provisions in


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<PAGE>

effect during the 5-year period ending on such date. The lowest benefit in any
pay status during the most recent 3-year period shall be considered the benefit
in pay status for such period.

                  (2) Benefits as respects a Participant wherein payment would
have commenced at least 3 years prior to the termination date if the Participant
had actually retired, based on the lowest benefit determined under the Plan
provisions in effect during the 5-year period ending on such date.

            (c) All other benefits guaranteed (insured) under ERISA determined
without regard to ss.4022(b)(5) thereof; and additional benefits, if any, under
this subparagraph if ERISA Section 4022(b)(6) did not apply.

            (d) All other (uninsured) Vested benefits.

            (e) All other benefits under the Plan.

Any funds remaining after satisfaction of the foregoing shall be returned to the
Employer.

      19.6 Limitation of Benefits on Early Termination.

            (a) Upon termination of this Plan, the benefits under the Plan for
any Highly Compensated Employee (or any Highly Compensated Employee formerly
employed by the Employer) shall be limited to benefits that are
nondiscriminatory under Code ss.401(a)(4).

            (b) The following distribution restrictions shall apply only to the
25 highest paid Highly Compensated Employees or formerly employed Highly
Compensated Employees taking into account the Employee's highest Compensation in
any Plan Year ("Restricted Participants").

                  (1) The payments made to any Restricted Participant from this
Plan shall be restricted to an amount equal to the payments that would be made
under a single life annuity that is the Actuarial Equivalent of the sum of (A)
the Employee's Accrued Benefit and the other benefits he is entitled to under
the Plan (other than a social security supplement), plus (B) the amount of the
payments that he is actually entitled to receive under a social security
supplement (such sum to be hereinafter referred to as the "Restricted Amount").

                  (2) The restriction set forth in (1) above shall not apply if:

                        (A) After payment to a Restricted Participant of his
total benefit under the Plan, the value of the remaining Plan's assets is at
least 110% of the value of the Plan's current liabilities (as defined in Code
ss.412(l)(7)); or

                        (B) The value of all benefits payable to a Restricted
Participant is less than 1% of the value of the Plan's current liabilities (as
defined in Code ss.412(l)(7)) before distribution; or


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<PAGE>

                        (C) The lump sum Actuarial Equivalent of all benefits
payable to the Restricted Participant is less than $5,000; or

                        (D) The Participant agrees in writing with the Plan
Administrator to return to the Plan all amounts necessary for the distribution
of assets upon Plan termination to meet the requirements of Code ss.401(a)(4)
and to secure such obligation by agreeing either (A) to promptly deposit in
escrow with an acceptable depository property having a fair market value of at
least 125% of the Restricted Amount, or (B) to post a bond or arrange a bank
letter of credit, in either case acceptable to the Plan Administrator, in an
amount equal to at least 100% of the Restricted Amount. The escrow account shall
at no time have a value less than 125% of the Restricted Amount.

            (c) If an escrow is arranged by the Participant, the following shall
apply:

                  (1) The Participant may withdraw amounts in the escrow account
in excess of 125% of the Restricted Amount at any time;

                  (2) If the value of the escrow account falls below 110% of the
Restricted Amount, the Participant shall deposit additional property into the
escrow account to increase the value to 125% of the Restricted Amount;

                  (3) The depository may release all property from the escrow
account only if the Plan Administrator certifies to the depository that the
Participant (or his estate) is no longer obligated to repay the Restricted
Amount, which certification shall be made only if at any time after distribution
the conditions set forth in either subparagraphs (b)(2)(A) or (b)(2)(B) are met.

      19.7 Merger or Consolidation. This Plan and Trust may be merged or
consolidated with, or its assets and/or liabilities may be transferred to, any
other plan and trust only if the benefits which would be received by a
Participant of this Plan, in the event of a termination of the plan immediately
after such transfer, merger or consolidation, are at least equal to the benefits
the Participant would have received if this Plan had terminated immediately
before the transfer, merger or consolidation.

      19.8 Transfer to Qualified Plan. The Administrator may direct the Trustee
to transfer all or any part of a Participant's Accrued Benefit to the trustee of
any other plan that purportedly meets the qualification requirements of Code
ss.401(a), provided, however, that such transfer would not disqualify this Plan
under Code ss.401(a). The Trustee may require a certification from the trustee
of such other plan as to the qualified status of such plan under Code ss.401(a)
prior to making such transfer.


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<PAGE>

                                   Article XX

                          VETERANS' REEMPLOYMENT RIGHTS

      20.1 Veterans' Reemployment Rights. Notwithstanding any other provision of
this Plan and in accordance with the Uniformed Services Employment and
Reemployment Rights Act of 1994 ("USERRA"), this Article shall apply to
Participants reemployed on or after December 12, 1994, after a Qualified Leave.

      20.2 Service Credit.

            (a) Participant's Qualified Leave shall not be considered as a Break
in Service, but shall be deemed to constitute continuous Service with the
Employer for purposes of determining such Participant's Accrued Benefit under
this Plan and his Vested interest therein.

            (b) All rights to additional Service credit under this Article shall
accrue only upon a Participant's timely reemployment in accordance with this
Article; however, a Participant's Vested interest in his Accrued Benefit earned
prior to entering a Uniformed Service shall not be reduced regardless of the
date such Participant actually returns to Service with the Employer.

      20.3 Compensation. For purposes of determining the benefits to which a
Participant may be entitled under this Article, a Participant shall be deemed to
have received Compensation from the Employer during his Qualified Leave, of an
amount based on the rate of pay such Participant would have received from the
Employer but for the Qualified Leave. If such Participant's pre-Qualified Leave
Compensation was not based on a fixed rate, the calculation will be based on
such Participant's average rate of pay during the 12-month period immediately
preceding the Qualified Leave or, if shorter, the Participant's period of
employment immediately preceding the Qualified Leave.

      20.4 Qualified Leave. A Participant's absence from employment with the
Employer shall be a "Qualified Leave" for the purposes of this Article if all of
the following conditions are met:

            (a) Notice. The Participant (or an appropriate officer of the
Uniformed Service in which services are to be performed) gives written or verbal
notice to the Employer of such Participant's service in one of the Uniformed
Services in advance of the Participant's departure for such service.

            (b) Cumulative Length of Absence. The cumulative length of the
Participant's absence from employment with the Employer by reason of such
Participant's service in one of the Uniformed Services, when combined with all
previous absences from service with the Employer by reason of service in the
Uniformed Services, does not exceed 5 years.


                                       84
<PAGE>

      (c) Uniformed Service. The Participant's absence from employment with the
Employer is due to the Participant's service in one of the following "Uniformed
Services" of the United States: the Army, Navy, Marine Corps, Air Force, Coast
Guard, Army Reserve, Naval Reserve, Marines Corps Reserve, Air Force Reserve,
Coast Guard Reserve, Army National Guard, Air National Guard, commissioned corps
of the Public Health Service, or any other category designated as a uniformed
service by the President of the United States during a time of war or national
emergency.

      (d) Reemployment. The Participant, upon completion of a period of service
in one of the Uniformed Services, notifies the Employer of the Participant's
intention to return to employment with the Employer by reporting to or
submitting an application for reemployment to the Employer within the following
time periods:

            (1) if the period of service in the Uniformed Services is less than
31 days, or a period of any length for the purposes of an examination to
determine the Participant's fitness to perform service in the Uniformed
Services, the Participant reports to the Employer not later than the beginning
of the first full regularly scheduled work period in the first full calendar day
following the completion of the period of service and the expiration of 8 hours
after a period allowing for the safe transportation of the Participant from the
place of that service to the Participant's residence; or if reporting within the
period referred to above is impossible or unreasonable through no fault of the
Participant, as soon as possible after the expiration of the 8-hour period
referred to above;

            (2) if the period of service in the Uniformed Services is more than
30 days but less than 181 days the Participant submits an application for
reemployment not later than 14 days after the completion of the period of such
service, or if submitting such application within such time period is impossible
or unreasonable through no fault of the Participant, the next first full
calendar day when submission of such application becomes possible;

            (3) if the period of service in the Uniformed Services is more than
180 days the Participant submits an application for reemployment not later than
90 days after the completion of the period of such service;

            (4) a Participant who is hospitalized for, or convalescing from, an
illness or injury incurred in, or aggravated during, the performance of service
in the Uniformed Services shall, at the end of the period that is necessary for
the person to recover from such illness or injury, report to (in the case of a
Participant described in subparagraph (1) above) or submit an application for
reemployment (in the case of a Participant described in subparagraph (2) or (3)
above) with the Employer. Such period of recovery may not exceed 2 years,
although such period shall be extended by the minimum time required to
accommodate the circumstances beyond such Participant's control which make
reporting within the period specified in subparagraph (1) impossible or
unreasonable.

      (e) Less Than Honorable Discharge. Notwithstanding the above, a
Participant shall not be entitled to the benefits of this Article if such
Participant's service in the Uniformed Services terminates upon any of the
following events:


                                       85
<PAGE>

                  (1) a separation of the Participant from such Uniformed
Service with a dishonorable or bad conduct discharge;

                  (2) a separation of such Participant from such Uniformed
Service under other than honorable conditions; or

                  (3) a dismissal or dropping from the rolls of any Uniformed
Service of such Participant, in accordance with 10 U.S.C. 1161(a) or (b).


                                       86
<PAGE>

                                   Article XXI

                             PARTICIPATING EMPLOYERS

      21.1 Adoption by Other Entities. Anything contained herein to the contrary
notwithstanding, with the consent of the Employer, any corporation, partnership
or sole proprietorship, whether an Affiliated Company or not, may adopt this
Plan and all of the provisions hereof, and participate herein and be known as a
Participating Employer, by a properly executed document evidencing said intent
and will of such other entity.

      21.2 Requirements of Participating Employers.

            (a) Each Participating Employer shall be required to use the same
Trustee as provided in this Plan.

            (b) The Trustee shall commingle, hold and invest as one Trust Fund
all contributions made by Participating Employers, as well as all increments
thereof.

            (c) The transfer of any Participant from or to a company
participating in this Plan, whether he be an Employee of the Employer or a
Participating Employer, shall not affect such Participant's rights under the
Plan, and the Participant's interest in his Accrued Benefit as well as his
accumulated service time with the transferor or predecessor and his length of
participation in the Plan, shall continue to his credit.

      21.3 Designation of Agent. Each Participating Employer shall be deemed to
be a part of this Plan; provided, however, that with respect to all of its
relations with the Trustee and Administrator for the purpose of this Plan, each
Participating Employer shall be deemed to have designated irrevocably the
signatory Employer to this Plan document as its agent. Unless the context of the
Plan clearly indicates the contrary, the word "Employer" shall be deemed to
include each Participating Employer as related to its adoption of the Plan.

      21.4 Employee Transfers. It is anticipated that an Employee may be
transferred between Participating Employers, and in the event of any such
transfer, the Employee involved shall carry with him his accumulated service and
eligibility. No such transfer shall effect a termination of employment
hereunder, and the Participating Employer to which the Employee is transferred
shall thereupon become obligated hereunder with respect to such Employee in the
same manner as was the Participating Employer from whom the Employee was
transferred.

      21.5 Amendment and Termination. Amendment or termination of this Plan by
the Employer at any time when there shall be a Participating Employer hereunder
shall only be by the written action of each and every Participating Employer and
with the consent of the Trustee where such consent is necessary in accordance
with the terms of this Plan.

      21.6 Discontinuance of Participation. Any Participating Employer shall be
permitted to discontinue or revoke its participation in the Plan. At the time of
any such discontinuance or revocation, satisfactory evidence thereof and of any
applicable conditions imposed shall be


                                       87
<PAGE>

delivered to the Trustee. The Trustee shall thereafter transfer, deliver and
assign Contracts and other Trust Fund assets allocable to the Participants of
such Participating Employer to such new Trustee as shall have been designated by
such Participating Employer, in the event that it has established a separate
pension plan for its Employees. If no successor is designated, the Trustee shall
retain such assets for the Employees of said Participating Employer. In no such
event shall any part of the corpus or income of the Trust as it relates to such
Participating Employer be used for or diverted for purposes other than for the
exclusive benefit of the Employees of such Participating Employer.

      21.7 Administrator's Authority. The Administrator shall have authority to
make any and all necessary rules or regulations, binding upon all Participating
Employers and all Participants, to effectuate the purpose of this Article.


                                       88
<PAGE>

                                  Article XXII

                                  MISCELLANEOUS

      22.1 Evidence. Anyone required to give evidence under the terms of the
Plan may do so by certificate, affidavit, document or other information which
the person to act in reliance thereof may consider pertinent, reliable and
genuine, and to have been signed, made or presented by the proper party or
parties. The Administrator and the Trustees shall be fully protected in acting
and relying upon any evidence described under this paragraph.

      22.2 Named Fiduciaries and Allocation of Responsibility. The "named
fiduciaries" of this Plan are the Employer, the Administrator, the Trustees and
any Investment Manager appointed hereunder. The named fiduciaries shall have
only those specific powers, duties, responsibilities, and obligations as are
specifically given them under this Plan. Each named fiduciary warrants that any
directions given, information furnished, or action taken by it shall be in
accordance with the provisions of this Plan, authorizing or providing for such
direction, information or action. Further, each named fiduciary may rely upon
such direction, information or action of another named fiduciary as being proper
under this Plan, and is not required under this Plan to inquire into the
propriety of any such direction, information or action. It is intended that each
named fiduciary shall be responsible only for the proper exercise of its own
powers, duties, responsibilities and obligations under this Plan. Any person or
group may serve in more than one fiduciary capacity.

      22.3 Limited Responsibilities. The Trustees and the Administrator shall
not have any obligation nor responsibility with respect to any action required
by the Plan to be taken by the Employer, any Participant or eligible Employee,
nor for the failure of the Employer to act or make any payment or contribution,
or to otherwise provide any benefit contemplated under this Plan, nor shall the
Trustee or the Plan Administrator be required to collect any contribution
required under the Plan, or determine the correctness of the amount of any
Employer contribution. The Trustees and the Administrator shall not have any
obligation to inquire into or be responsible for any action or failure to act on
the part of the others.

      22.4 Fiduciaries Not Insurers. The Trustees, the Administrator and the
Employer do not guarantee the Trust Fund from loss or depreciation. The Employer
does not guarantee the payment of any money which may become due to any person
from the Trust Fund. The liability of the Administrator and the Trustees to make
any payment from the Trust Fund at any time and all times is limited to the then
available assets of the Trust.

      22.5 Waiver of Notice. Any person entitled to notice under the Plan may
waive the notice.

      22.6 Successors. The Plan shall be binding upon all persons entitled to
benefits under the Plan, their respective heirs and legal representatives, upon
the Employer, its successors and assigns, and upon the Trustees, the
Administrator and their successors.


                                       89
<PAGE>

      22.7 Word Usage. Words used in the masculine shall apply to the feminine
where applicable, and wherever the context of the Plan dictates, the plural
shall be read as the singular and the singular as the plural.

      22.8 Status of Employment Relations. The adoption and maintenance of the
Plan and Trust shall not be deemed to constitute a contract between the Employer
and its Employees or to be consideration for, or an inducement or condition of,
the employment of any person. Nothing herein contained shall be deemed (a) to
give to any Employee the right to be retained in the employ of the Employer; (b)
to affect the right of the Employer to discipline or discharge any Employee at
any time; (c) to give the Employer the right to require any Employee to remain
in its employ; or (d) to affect any Employee's right to terminate his employment
at any time.

      22.9 Interpretation of the Plan and Trust. It is the intention of the
Employer that this Plan and Trust shall comply with the provisions of Code
ss.ss.401 and 501, the requirements of ERISA, and the corresponding provisions
of any subsequent laws. The provisions of this Plan and Trust shall be construed
to effectuate such intention.

      22.10 Governing Law. All questions arising with respect to the provisions
of this Agreement shall be determined by application of the laws of the State of
New York, except to the extent superseded by federal law.

      IN WITNESS WHEREOF, the Employer and the Trustees named herein have
executed this Plan and Trust Agreement this 30th day of December, 2004.

                                        The Employer:

                                        COMMUNITY BANK SYSTEM, INC.


                                        By: /s/ Sanford A. Belden
                                           ----------------------------------
                                           President and CEO

                                        The Trustee:


                                        By: /s/ Mark E. Tryniski
                                           ----------------------------------
                                           Executive Vice President and COO

                                       90
<PAGE>

                           COMMUNITY BANK SYSTEM, INC.
                                  PENSION PLAN

                                TABLE OF CONTENTS

Article I      HISTORY AND PURPOSE OF PLAN ...............................    1

Article II     DEFINITIONS ...............................................    2

Article III    ELIGIBILITY REQUIREMENTS ..................................   17

Article IV     CREDITED SERVICE FOR BENEFIT ACCRUAL ......................   23

Article V      RETIREMENT BENEFITS .......................................   25

Article VI     DEATH BENEFITS ............................................   35

Article VII    EMPLOYMENT TERMINATION BENEFITS ...........................   41

Article VIII   LIMITATION OF BENEFITS ....................................   45

Article IX     PAYMENT OF BENEFITS .......................................   49

Article X      CONTRIBUTIONS .............................................   58

Article XI     EMPLOYER ADMINISTRATIVE PROVISIONS ........................   59

Article XII    PARTICIPANT ADMINISTRATIVE PROVISIONS .....................   60

Article XIII   ADMINISTRATION ............................................   63

Article XIV    TOP HEAVY REQUIREMENTS ....................................   66

Article XV     QUALIFIED DOMESTIC RELATIONS ORDERS .......................   69

Article XVI    TRUSTEE POWERS AND DUTIES .................................   71

Article XVII   VALUATION OF TRUST FUND ...................................   76

Article XVIII  LIFE INSURANCE CONTRACTS AND COMPANIES ....................   77

Article XIX    EXCLUSIVE BENEFIT, AMENDMENT, TERMINATION .................   80

Article XX     VETERANS' REEMPLOYMENT RIGHTS .............................   84


                                       i
<PAGE>

Article XXI    PARTICIPATING EMPLOYERS ...................................   87

Article XXII   MISCELLANEOUS .............................................   89


                                       ii



</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-23.1
<SEQUENCE>8
<FILENAME>d62959_ex23-1.txt
<DESCRIPTION>CONSENT OF PRICEWATERHOUSECOOPERS LLP
<TEXT>

                                                                    Exhibit 23.1

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


    We hereby consent to the incorporation by reference in the Registration
    Statement on and Form S-8 (Nos. 333-61916, 333-61672, 333-17011, 333-16635,
    033-60607, 333-119887, 333-119590) of Community Bank System, Inc. of our
    report dated March 11, 2005 relating to the financial statements,
    management's assessment of the effectiveness of internal control over
    financial reporting and the effectiveness of internal control over financial
    reporting, which appears in the Annual Report to Shareholders, which is
    incorporated in this Form 10-K.


/s/ PricewaterhouseCoopers LLP

Syracuse, New York
March 14, 2005
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.1
<SEQUENCE>9
<FILENAME>d62959_ex31-1.txt
<DESCRIPTION>CEO CERTIFICATION
<TEXT>

                                                                    Exhibit 31.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Sanford A. Belden, certify that:

1. I have reviewed this annual report on Form 10-K of Community Bank System,
Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:

a)    Designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under our supervision,
      to ensure that material information relating to the registrant, including
      its consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;

b)    Designed such internal control over financial reporting, or caused such
      internal control over financial reporting to be designed under our
      supervision, to provide reasonable assurance regarding the reliability of
      financial reporting and the preparation of financial statements for
      external purposes in accordance with generally accepted accounting
      principles;

c)    Evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this report our conclusions about the
      effectiveness of the disclosure controls and procedures, as of the end of
      the period covered by this report based on such evaluation; and

c)    Disclosed in this report any change in the registrant's internal control
      over financial reporting that occurred during the registrant's most recent
      fiscal quarter (the registrant's fourth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant's internal control over financial
      reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

a)    All significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information; and

b)    Any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.

Date: March 14, 2005


/s/ Sanford A. Belden
---------------------------
Sanford A. Belden,
President, Chief Executive Officer and Director
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-31.2
<SEQUENCE>10
<FILENAME>d62959_ex31-2.txt
<DESCRIPTION>CFO CERTIFICATION
<TEXT>

                                                                    Exhibit 31.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Scott A. Kingsley, certify that:

1. I have reviewed this annual report on Form 10-K of Community Bank System,
Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial
reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and we have:

d)    Designed such disclosure controls and procedures, or caused such
      disclosure controls and procedures to be designed under our supervision,
      to ensure that material information relating to the registrant, including
      its consolidated subsidiaries, is made known to us by others within those
      entities, particularly during the period in which this report is being
      prepared;

e)    Designed such internal control over financial reporting, or caused such
      internal control over financial reporting to be designed under our
      supervision, to provide reasonable assurance regarding the reliability of
      financial reporting and the preparation of financial statements for
      external purposes in accordance with generally accepted accounting
      principles;

f)    Evaluated the effectiveness of the registrant's disclosure controls and
      procedures and presented in this report our conclusions about the
      effectiveness of the disclosure controls and procedures, as of the end of
      the period covered by this report based on such evaluation; and

d)    Disclosed in this report any change in the registrant's internal control
      over financial reporting that occurred during the registrant's most recent
      fiscal quarter (the registrant's fourth fiscal quarter in the case of an
      annual report) that has materially affected, or is reasonably likely to
      materially affect, the registrant's internal control over financial
      reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

c)    All significant deficiencies and material weaknesses in the design or
      operation of internal control over financial reporting which are
      reasonably likely to adversely affect the registrant's ability to record,
      process, summarize and report financial information; and

d)    Any fraud, whether or not material, that involves management or other
      employees who have a significant role in the registrant's internal control
      over financial reporting.

Dated: March 14, 2005


/s/ Scott A. Kingsley
---------------------------
Scott A. Kingsley,
Treasurer and Chief Financial Officer

</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.1
<SEQUENCE>11
<FILENAME>d62959_ex32-1.txt
<DESCRIPTION>CEO CERTIFICATION
<TEXT>

                                                                    Exhibit 32.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Community Bank System, Inc. (the
"Company") on Form 10-K for the year ended December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Sanford
A. Belden, President and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)   the Report fully complies with the requirements of Section 13(a) or 15(d)
      of the Securities Exchange Act of 1934; and

(2)   the information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.


/s/ Sanford A. Belden
---------------------
Sanford A. Belden
President, Chief Executive Officer and Director
March 14, 2005
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-32.2
<SEQUENCE>12
<FILENAME>d62959_ex32-2.txt
<DESCRIPTION>CFO CERTIFICATION
<TEXT>

                                                                    Exhibit 32.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Community Bank System, Inc. (the
"Company") on Form 10-K for the year ended December 31, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Scott
A. Kingsley, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that to the best of my knowledge:

(1)   the Report fully complies with the requirements of Section 13(a) or 15(d)
      of the Securities Exchange Act of 1934; and

(2)   the information contained in the Report fairly presents, in all material
      respects, the financial condition and results of operations of the
      Company.


/s/ Scott A. Kingsley
---------------------
Scott A. Kingsley,
Treasurer and Chief Financial Officer
March 14, 2005
</TEXT>
</DOCUMENT>
</SUBMISSION>
