COMMUNITY BANK SYSTEM INC, S-2, 1995-04-11

COMMUNITY BANK SYSTEM INC
S-2, 1995-04-11
STATE COMMERCIAL BANKS

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<PAGE>

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 11, 1995.

REGISTRATION NO. 33-

----------------

FORM S-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

----------------
COMMUNITY BANK SYSTEM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 16-1213679
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

5790 WIDEWATERS PARKWAY
DEWITT, NEW YORK 13214
(315) 445-2282
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

SANFORD A. BELDEN, PRESIDENT AND CEO
5790 WIDEWATERS PARKWAY
DEWITT, NEW YORK 13214
(315) 445-2282
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

It is requested that copies of notices and communications from the Securities
and Exchange Commission be sent to:

GEORGE J. GETMAN, ESQ. LAWRENCE A. LAROSE, ESQ.
BOND, SCHOENECK & KING, LLP CADWALADER, WICKERSHAM & TAFT
ONE LINCOLN CENTER 100 MAIDEN LANE
SYRACUSE, NEW YORK 13202 NEW YORK, NEW YORK 10038
(315) 422-0121 (212) 504-6000

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement.

If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]

If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box. [_]

CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AMOUNT PROPOSED MAXIMUM PROPOSED AMOUNT OF
TITLE OF EACH CLASS OF SECURITY TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE PRICE FEE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock
$1.25 par value per
share................. 862,500 shares $ 26.50 $22,856,250.00 $7,881.47
- -----------------------------------------------------------------------------------------------
Cumulative Perpetual
Preferred Stock,
Series A, par value
$1.00 per share....... 100,000 shares $100.00 $10,000,000.00 $3,448.28
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>

COMMUNITY BANK SYSTEM, INC.

CROSS REFERENCE SHEET

SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY FORM S-2

<TABLE>
<CAPTION>
ITEM
NO. REGISTRATION STATEMENT ITEM AND HEADING LOCATION IN PROSPECTUS
---- --------------------------------------- ----------------------
<S> <C> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus..................... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus......................................... Inside Front and Outside Back
Cover Pages of Prospectus;
Available Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.......................... Prospectus Summary;
Special Considerations; Selected
Consolidated Financial Information
4. Use of Proceeds..................................... Use of Proceeds
5. Determination of Offering Price..................... Underwriting
6. Dilution............................................ Not Applicable
7. Selling Security Holders............................ Not Applicable
8. Plan of Distribution................................ Underwriting
9. Description of Securities to be Registered.......... Description of Capital Stock
10. Interests of Named Experts and Counsel.............. Not Applicable
11. Information with Respect to the Registrant.......... Prospectus Summary; The Company;
The Acquisition; Selected
Consolidated Financial Information;
Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Management; Consolidated
Financial Statements
12. Incorporation of Certain Information by Reference... Incorporation of Certain
Information by Reference
13. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities..................... Not Applicable
</TABLE>
<PAGE>

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION; PRELIMINARY PROSPECTUS DATED APRIL 11, 1995

COMMUNITY BANK SYSTEM, INC.

LOGO
750,000 SHARES OF COMMON STOCK

100,000 SHARES OF CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES A

This Prospectus relates to two separate offerings, one of 750,000 shares of
Common Stock, par value $1.25 per share (the "Common Stock") of Community Bank
System, Inc. (the "Company"), and the other of 100,000 shares of Cumulative
Perpetual Preferred Stock, Series A (the "Preferred Stock") of the Company. The
offerings of Common Stock and Preferred Stock are referred to herein as the
Common Stock Offering and the Preferred Stock Offering, respectively, and
collectively as the Offerings.

The Company is a bank holding company incorporated under the laws of the
State of Delaware, which is the parent of Community Bank, National Association,
a federally chartered national bank (the "Bank"). The Company's outstanding
Common Stock is traded over-the-counter on the Nasdaq National Market under the
symbol CBSI. On April 10, 1995, the last closing bid price of the Common Stock
on the Nasdaq National Market was $27.00 per share. See "Description of Capital
Stock" and "Market for Common Stock and Dividends." The offering price per
share of Common Stock will be determined by agreement between the Company and
the Underwriters. See "Underwriting."

The offering price per share of Preferred Stock is $100.00. Holders of shares
of Preferred Stock will be entitled to a cumulative cash dividend at the rate
of % per annum which dividend will be payable semi-annually on September 30
and March 31 of each year. The Preferred Stock has a perpetual maturity and is
redeemable, in whole or in part, at the option of the Company at any time after
September 30, 1998 at the declining redemption price set forth herein. See
"Description of Capital Stock -- Preferred Stock."

The Company has reserved up to 40,000 shares of Common Stock (the "Reserved
Shares") for sale to directors, officers, and employees of the Bank at the
public offering price. See "Underwriting -- Reserved Shares."

FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS, SEE "SPECIAL CONSIDERATIONS."

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share of Common Stock............... $ $ $
- --------------------------------------------------------------------------------
Per Reserved Share of Common Stock(3)... $ $-- $
- --------------------------------------------------------------------------------
Total Common Stock(4)................... $ $ $
- --------------------------------------------------------------------------------
Per Share of Preferred Stock............ $100.00 $3.00 $97.00
- --------------------------------------------------------------------------------
Total Preferred Stock................... $10,000,000 $300,000 $9,700,000
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) Assuming all Reserved Shares are sold directly by the Company.
(4) The Company has granted the Underwriters a 30-day option to purchase up to
112,500 additional shares of Common Stock to cover over-allotments, if any.
If the Underwriters exercise this option in full, the total Price to Public
of Common Stock, Underwriting Discount and Commissions, and Proceeds to the
Company will be $ $ and $ , respectively. See "Underwriting."

-----------

The shares of Common Stock and Preferred Stock are offered, subject to prior
sale, when, as and if delivered to and accepted by the Underwriters and subject
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of certificates evidencing the Common Stock and the
Preferred Stock will be made against payment therefor at the offices of M.A.
Schapiro & Co., Inc., One Chase Manhattan Plaza, New York, New York, 10005 on
or about , 1995.

-----------

M.A. SCHAPIRO & CO., INC.

FIRST ALBANY CORPORATION

THE DATE OF THIS PROSPECTUS IS , 1995.
<PAGE>

[Insert list of branch offices, map of market area showing acquired branches
and current branch locations, and insert of market area in relation to New York
State]

2
<PAGE>

IN CONNECTION WITH THESE OFFERINGS, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE COMMON STOCK
AND THE PREFERRED STOCK AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN
THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER
MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.

THE SHARES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS AND
ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC") OR ANY
OTHER GOVERNMENT AGENCY.

----------------

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission ("the Commission"). Such reports, proxy
statements and other information can be inspected and copied at prescribed
rates at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at 75 Park Place, New York, New York 10007
and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material can also be obtained at prescribed
rates from the Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549.

The Company has filed with the Commission a Registration Statement on Form S-
2 (together with all amendments and supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act")
with respect to the Common Stock and the Preferred Stock. This Prospectus omits
certain information contained in the Registration Statement, certain items of
which are contained in exhibits to the Registration Statement as permitted by
the rules and regulations of the Commission. For further information with
respect to the Company and the Common Stock and Preferred Stock, reference is
made to the Registration Statement, including the exhibits filed as a part
thereof, which may be inspected at the principal office of the Commission
without charge at 450 Fifth Street, N.W., Washington, D.C. 20549.

Copies of the Registration Statement may be obtained from the Commission at
its principal office at Room 1024, 450 Fifth Street, N.W., Washington, D.C.
20549, upon payment of prescribed fees. Statements contained in this Prospectus
as to the contents of any contract or other document are not necessarily
complete and, where the contract or the document has been filed as an exhibit
to the Registration Statement, each such statement is qualified in all respects
by reference to the applicable document filed with the Commission.

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

The following documents are incorporated in this Prospectus by reference:

(i) The Company's Annual Report on Form 10-K for the year ended December
31, 1994; and

(ii) All reports filed by the Company pursuant to Section 13(a) or 15(d)
of the Exchange Act since December 31, 1994.

Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.

The Company will provide, without charge and upon oral or written request, to
each person to whom this Prospectus is delivered, a copy of any or all of the
documents that have been incorporated by reference in this Prospectus (other
than exhibits to such documents). Requests for such documents should be
directed to Community Bank System, Inc., 5790 Widewaters Parkway, DeWitt, New
York 13214, Attention: Ms. Loretta L. Marx, Corporate Secretary, (315) 445-
2282.

3
<PAGE>

PROSPECTUS SUMMARY

The following summary is not intended to be complete and is qualified in its
entirety by the more detailed information and the Consolidated Financial
Statements and the Notes thereto appearing elsewhere in this Prospectus and in
the documents incorporated herein by reference.

THE COMPANY

Community Bank System, Inc. (the "Company") is a bank holding company
headquartered in DeWitt, New York which owns all of the outstanding stock of
Community Bank, National Association (the "Bank"). The Bank is a full service
commercial bank providing a range of banking services through its two regional
offices in Canton, New York and Olean, New York, and through a total of 36
banking offices in the counties of St. Lawrence, Jefferson, Lewis, Cayuga,
Seneca, Ontario, Oswego, Allegany, Cattaraugus, Tioga and Steuben.

As of December 31, 1994, the Company had consolidated assets and deposits of
$915.5 million and $679.6 million, respectively. The Company's net income for
the year ended December 31, 1994 was $10.1 million, or $3.59 per share.

The Bank offers a broad range of financial services to both commercial and
retail customers located in its market area, including accepting time, demand
and savings deposits, and making secured and unsecured commercial, real estate
and consumer loans. Related financial services provided include a range of
trust services and the offering of annuities, mutual funds and other non-
deposit investment products. The Bank's lending activities primarily take the
form of commercial, agricultural, consumer and real estate loans and indirect
consumer financing. The Bank's lending and investment activities are funded
principally by deposits gathered through its retail branch office network.

Consistent with its commitment to serving the financial needs of customers in
the local communities where its offices are located, the Bank's marketing
efforts are directed primarily towards individuals and small- to medium-sized
businesses. The Bank's strategy for growth focuses primarily on the further
development of its community-based retail branch network. As a community-
oriented bank, the Bank's emphasis is on development of long-term customer
relationships, personalized service, convenient locations, and responding to
the specific needs of individuals and businesses in its market area. The
Company believes that the local character of the business environment,
knowledge of the customer and customer needs, and comprehensive retail and
small business products, together with rapid decision-making at the branch and
regional level, enable the Bank to compete effectively in its market area.

PENDING ACQUISITION

The Bank and the Company have entered into a Purchase and Assumption
Agreement (the "Agreement") with The Chase Manhattan Bank, N.A. ("Chase") for
the acquisition of certain assets and the assumption of certain liabilities
(the "Acquisition") relating to 15 Chase branch offices located in Norwich,
Watertown (two), Boonville, New Hartford, Utica, Skaneateles, Geneva, Pulaski,
Seneca Falls, Hammondsport, Canton, Newark (two) and Penn Yan, New York (the
"Chase Branches"). Subject to the terms of the Agreement, on the closing date
the Bank will assume deposits booked at the Chase Branches (the "Chase
Deposits") and pay Chase a premium of 8.25% on the Chase Deposits. As of
December 31, 1994, the Chase Deposits totaled $459.1 million, which amount is
subject to change due to run-off or growth of deposits occurring prior to the
closing date. As of February 28, 1995, the Chase Deposits totaled $451.7
million. In addition, the Bank will acquire certain assets related to the Chase
Branches including certain small

4
<PAGE>

business and consumer loans (the "Chase Loans"), which totaled approximately
$25.3 million as of December 31, 1994, at face value, and branch facilities and
fixed operating assets associated with the Chase Branches (the "Chase Assets")
at a purchase price of approximately $5.1 million.

It is anticipated that the Acquisition will close during the third quarter of
1995. The closing is contingent upon, among other things, receipt by the
parties of all necessary regulatory approvals. In the event that the Bank is
unable to proceed to closing due to a lack of regulatory approval or the
Company's inability to raise sufficient capital, the Bank is obligated to pay
Chase a "break-up fee" of up to $1.85 million.

The Company and the Bank view the Acquisition as a unique opportunity to
augment the Bank's branch network in existing market areas, as well as to
expand the Bank's network into contiguous markets in Central and Northern New
York State. The acquisition of the Chase Branches provides the opportunity for
the Bank to increase its business substantially and improve the quality of its
services to existing market areas, without significantly increasing overhead or
operating costs.

POTENTIAL DISPOSITION

Subject to general market conditions and the Company's ongoing assessment of
its business objectives, the Bank intends to divest up to $125 million in
deposits through a combination of selling certain branch locations and related
deposits and reducing public funds from the Bank's balance sheet. The purpose
of any such divestiture would be to mitigate any potential adverse impact of
the Acquisition on the Company's earnings per share and tangible book value,
reduce the Company's exposure to interest rate risk, and strengthen the Bank's
capital ratios. Any such divestitures would occur subsequent to the
consummation of the Acquisition, would be structured to maximize the Bank's
business objectives at that time, and would help facilitate the Bank's return
to a Tier I leverage ratio in the "well capitalized" range, as defined by the
Federal Deposit Insurance Corporation ("FDIC").

CAPITAL PLAN

In order to offset the reduction in regulatory capital ratios resulting from
the Acquisition, the Company anticipates raising approximately $26.7 million
(net of expenses) in the Offerings. The Company will contribute the additional
capital to the Bank as capital surplus with the objective of maintaining the
Bank's Tier I leverage ratio following consummation of the Acquisition in the
"adequately capitalized" range, which is defined by the FDIC as between 4.0%
and 5.0%.

THE OFFERINGS
<TABLE>
<S> <C>
COMMON STOCK
Common Stock Offered............. 750,000 shares.(1)
Common Stock Outstanding After
the Common Stock Offering....... 3,538,150 shares.(2)
Reserved Shares.................. The Company has reserved up to 40,000
shares of Common Stock for sale to direc-
tors, officers and employees of the Bank at
the public offering price. See "Underwrit-
ing -- Reserved Shares."
Market For Common Stock.......... The Common Stock is traded over-the-counter
on the Nasdaq National Market under the
symbol "CBSI."
</TABLE>

5
<PAGE>

<TABLE>
<S> <C>
PREFERRED STOCK
Preferred Stock Offered............ 100,000 shares.
Maturity........................... Perpetual.
Dividends.......................... Cash dividends are cumulative from the date
of issue and are payable semi-annually in
arrears, at the rate of % per annum or $
per share per annum.
Redemption......................... The Preferred Stock will not be redeemable
until September 30, 1998. After September
30, 1998, the Preferred Stock may, at the
Company's option, be redeemed, in whole or
in part at the declining redemption price
set forth herein. See "Description of Capi-
tal Stock -- Preferred Stock."
Voting............................. Non-voting, except that in certain events,
holders of Preferred Stock will have the
right to elect two members to the Company's
Board of Directors.
Liquidation Preference............. $100.00 per share plus accrued and unpaid
dividends before distribution to holders of
Common Stock.
Minimum Purchase................... The Preferred Stock will be offered to the
public with a minimum purchase requirement
of 10,000 shares.
Market for Preferred Stock......... The Company may make an application to have
the Preferred Stock approved for quotation
on the Nasdaq National Market, although
there can be no assurance that the Company
will be able to do so. If the Preferred
Stock is approved for quotation on the
Nasdaq National Market, M.A. Schapiro &
Co., Inc. ("M.A. Schapiro") intends to make
a market in the Preferred Stock.
USE OF PROCEEDS..................... The primary purpose of the Offerings is to
raise additional capital in form and amount
sufficient to maintain the Bank's Tier I
leverage ratio at no lower than 4.0% upon
consummation of the Acquisition. See "Use
of Proceeds."
DIVIDEND POLICY..................... The Company has historically paid regular
quarterly cash dividends on its Common
Stock, and declared a cash dividend of
$0.30 per share for the first quarter of
1995. The Company's Board of Directors
presently intends to continue its dividend
payment policy on the Common Stock, as well
as pay regular cash dividends on the Pre-
ferred Stock as and when due. See "Market
for Common Stock and Dividends," "Certain
Regulatory Considerations" and "Description
of Capital Stock--Preferred Stock."
</TABLE>

(1) Does not include 112,500 shares of Common Stock that may be issued pursuant
to the Underwriters' over-allotment option.

(2) Based on 2,788,150 shares of Common Stock outstanding on the date of this
Prospectus plus the shares of Common Stock offered hereby. If the over-
allotment option is exercised in full, the total number of shares of Common
Stock outstanding would be 3,650,650.

6
<PAGE>

SPECIAL CONSIDERATIONS

In addition to the other information contained in this Prospectus, potential
investors should consider the following factors before purchasing the Common
Stock or the Preferred Stock offered hereby.

ACQUISITION OF BRANCHES

The Bank currently operates 36 banking facilities in 11 counties in the
Northern, Finger Lakes and Southern Tier regions of New York State. Pursuant to
the Agreement, the Bank plans to acquire 15 additional banking facilities in 10
counties in Central and Northern New York State. The Bank currently maintains
facilities in five of these 10 counties. The Bank has not historically made
acquisitions on this scale, and the future growth of the Bank and the Company
will depend on the success of the Acquisition. The success of the Acquisition
will, in turn, depend on a number of factors, including, without limitation:
the Bank's ability to integrate the Chase Branches into the current operations
of the Bank; its ability to limit the outflow of deposits held by its new
customers in the Chase Branches; its success in deploying the cash received in
the Acquisition into assets bearing sufficiently high yields without incurring
unacceptable credit or interest rate risk; its ability to control the
incremental non-interest expense from the Chase Branches in a manner that
enables the Company to maintain its favorable overall efficiency ratio; its
ability to retain and attract the appropriate personnel to staff the Chase
Branches; and its ability to earn acceptable levels of non-interest income from
the Chase Branches. No assurance can be given that the Bank will be able to
integrate the Chase Branches successfully; that the operation of the Chase
Branches will not adversely affect the Company's existing profitability; that
the Company will be able to achieve results in the future similar to those
achieved by the Bank's existing banking offices; or that the Bank will be able
to manage its growth resulting from the Acquisition effectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

As of December 31, 1994, the Chase Deposits totaled $459.1 million and the
Chase Loans totaled $25.3 million. While approximately $45.9 million of the
Chase Deposits are non-interest-bearing, the Bank will acquire substantially
more interest-bearing liabilities than interest-earning assets. The Bank
currently plans to use the approximately $391.4 million in cash expected to be
received in the Acquisition (representing the approximately $459.1 million of
the Chase Deposits as of December 31, 1994, plus other net liabilities of
approximately $0.6 million, less (a) a deposit premium of 8.25% or
approximately $37.9 million, (b) approximately $25.3 million in Chase Loans,
and (c) approximately $5.1 million in fixed assets and branch facilities) (the
"Acquired Funds") to (i) fund investment security purchases and repay short-
term borrowings and (ii) make loans in the market areas of the Chase Branches
and thereby earn a return on the Acquired Funds. The Company anticipates that
it may take in excess of five years to invest the Acquired Funds in loans such
that the resulting loan to deposit ratio approximates the loan to deposit ratio
of the Company prior to the Acquisition. In the interim, the Bank will invest
the Acquired Funds in investment securities and repay short-term borrowings of
the Bank pursuant to an investment strategy adopted by the Company. It is
expected that such investment securities will earn interest at rates lower than
the interest rates that would be earned on loans and, thus, the Bank's net
interest margin will decrease in the short- to medium-term. The Company
believes that the net interest margin will increase over the long-term as the
Bank invests the Acquired Funds in loans at market rates. There can be no
assurance that the Bank will be able to invest the Acquired Funds in loans at
market rates or that the Bank will be able to earn a favorable net interest
margin through investing the Acquired Funds in investment securities until
loans can be made. See "The Acquisition -- Impact of the Acquisition on
Operating Performance."

PENDING LITIGATION

On March 27, 1995, a shareholder derivative action was brought by three
shareholders of the Company (the "Plaintiffs") against the Company, the Bank
and each member of the Board of Directors of the Company in New York State
Supreme Court, Albany County (the "Court"). The Plaintiffs allege in substance
that the

7
<PAGE>

directors failed to exercise due care and breached their fiduciary duties to
the Company in pursuing and approving the Acquisition. The Plaintiffs sought to
preliminarily and permanently enjoin consummation of the Acquisition, the
Offerings and any other acts in furtherance of the Acquisition or the
Offerings. However, on April 6, 1995, the Court denied the Plaintiffs' motion
for preliminary injunction, stating that "[i]t does not appear likely to this
Court that the Plaintiffs will succeed on the merits." In addition, the Court
dismissed the claims of one of the Plaintiffs who did not meet the requirements
for bringing a shareholder derivative action and required the remaining two
Plaintiffs to post a bond covering the reasonable expenses, including
attorneys' fees, which may be incurred by the defendants. The Company believes
that the Plaintiffs' allegations are without merit and intends to defend the
lawsuit vigorously. Although the Court has indicated that the Plaintiffs are
not likely to prevail on the merits, there can be no assurance that the Court
will ultimately find for the Company and against the Plaintiffs. Any judgment
against the Company in this action is likely to have a material adverse effect
on the Acquisition and the Offerings.

POTENTIAL DISPOSITION

The Bank intends to divest up to $125 million in deposits through a
combination of selling certain branch locations and related deposits and
reducing public funds from the Bank's balance sheet following the Acquisition.
The purpose of such divestitures would be to mitigate any potential impact of
the Acquisition on the Company's earnings per share and tangible book value,
reduce the Company's exposure to interest rate risk and strengthen the Bank's
capital ratios. Any such divestitures would occur subsequent to consummation of
the Acquisition, would be structured to maximize the Bank's business objectives
at that time, and would help facilitate the Bank's return to a Tier I leverage
ratio in the "well capitalized" range.

Economic and other factors beyond the control of the Company's management may
affect the Company's ability to consummate the disposition of the deposits and
branch locations. These factors include regional economic conditions which may
limit the number of potential purchasers of the assets as well as the timing of
the divestitures. Any potential disposition would also be subject to regulatory
approval, including the approval of the Office of the Comptroller of the
Currency (the "OCC"). There can be no assurance that the Company will be able
to locate and secure a purchaser of the branch locations or deposits to be
sold, structure a disposition of the assets on terms that are favorable to the
Company, complete the dispositions within a reasonable time frame or at all, or
obtain the necessary regulatory approvals.

LENDING RISKS -- CREDIT QUALITY

A central focus of the Company's and the Bank's strategic plan is the
continued development and growth of a diversified loan portfolio, with emphasis
on commercial, consumer and real estate loans made to borrowers within the
Bank's market areas. Certain risks are inherent in the lending function,
including a borrower's inability to pay, insufficient collateral coverage and
changes in interest rates. Repayment risk on commercial loans is most
significantly affected by changing economic conditions in a particular
geographical area, business or industry which could impair future operating
performance. Risks associated with real estate loans and general business loans
include changes in general economic conditions which may affect underlying
collateral values as well as the borrower's ability to repay. Installment and
other consumer loans are subject to repayment risk which the Company believes
is mitigated by the diverse portfolio of such loans, the relatively low average
balances outstanding on individual extensions of credit, and the Bank's
distributed network of branches.

As soon as practicable after consummation of the Acquisition, the Bank
intends to begin investing the Acquired Funds in commercial, installment and
mortgage loans. Given the volume of Acquired Funds to be invested in such
loans, there can be no assurance that the Bank will be able to make sufficient
loans meeting the Bank's credit quality standards within an acceptable time
frame.

8
<PAGE>

DILUTION

The Company's sale of newly issued shares of Common Stock in the Common Stock
Offering will represent approximately 21.2% of the shares of the Common Stock
outstanding following completion of the Common Stock Offering (23.6% if the
Underwriters' over-allotment option is fully exercised). Therefore, in the
near-term, the Company expects that the Offerings and the Acquisition will
result in a dilution of the Company's return on equity, earnings per share, and
tangible book value per share. However, the Company's long-term strategy, as
evidenced by the Acquisition, is to enhance earnings per share, return on
equity and tangible book value per share by deploying assets from investments
into loans, continuing its asset growth and maintaining a favorable efficiency
ratio. The Company believes that any initial dilution of earnings per share,
return on equity, or tangible book value per share will be outweighed by the
long-term benefits to the Company associated with the financial flexibility and
opportunities which the Company expects to derive from the Acquisition. There
can be no assurance, however, that the Company will be able to achieve these
goals.

Following the Acquisition and assuming net proceeds from the Offerings of
$26.7 million, the Company's Tier I leverage ratio will decrease from 6.81% to
4.25% and its tangible book value per share will decrease from $21.59 to
$11.02, and, the Bank's Tier I leverage ratio will decrease from 6.70% to
4.16%. Federal regulations require a "well capitalized" financial institution
to maintain a minimum Tier I leverage ratio of at least 5.00%. Historically,
the Bank has targeted a Tier I leverage ratio well in excess of the regulatory
minimum to allow for capacity for potential branch acquisitions and leverage
strategies. The Company believes that the Acquisition represents an opportunity
which warrants foregoing such excess capacity in the near-term in order to
maximize the potential long-term benefits of the Acquisition to the Company. As
a result of the expected decrease in the Bank's Tier I leverage ratio, the Bank
will not qualify as a "well capitalized" institution, but rather as an
"adequately capitalized" institution, as defined by the FDIC. The Bank's cost
of FDIC deposit insurance may therefore increase. While the Bank expects to
return to "well capitalized" status within approximately 12 months after the
consummation of the Acquisition and the Offerings, there can be no assurance
that the Bank will be able to do so.

IMPACT OF INTEREST RATE CHANGES

The Company's results of operations are derived almost entirely from the
operations of the Bank and are heavily dependent on its net interest income.
Net interest income is the difference between the interest income received on
interest-earning assets, including loans and securities, and the interest
expense incurred in connection with interest-bearing liabilities, including
deposits and borrowings. Net interest income can be significantly affected by
changes in market interest rates. The Company actively monitors its assets and
liabilities in an effort to minimize the effects of changes in interest rates
primarily by altering the mix and maturity of the Company's loans, investments
and funding sources.

Changes in interest rates also affect the volume of loans originated by the
Bank, as well as the value of its loans and other interest-earning assets,
including investment securities. In addition, changes in interest rates may
result in disintermediation, which is the flow of funds away from bank accounts
into direct investments, such as U.S. Government and corporate securities, and
other investment instruments such as mutual funds which, due to the absence of
federal insurance premiums and reserve requirements, can generally pay higher
rates of return than commercial banks.

As discussed above, the Bank's strategy is to invest the Acquired Funds in
investment securities in the near-term and in loans in the long-term. Changes
in interest rates will affect the value of, and interest earned on, the Bank's
investment securities which, in the near-term following the Acquisition, will
represent an increased portion of the Bank's assets. In addition, interest rate
changes will affect the Bank's ability to

9
<PAGE>

increase the volume of its loan originations in the long-term following the
Acquisition. Therefore, the success of the Bank's post-Acquisition strategy
will depend, in large part, on the Company's ability to manage interest rate
risk. While the Company has taken measures intended to manage interest rate
risk, there can be no assurance that such measures will be effective in
avoiding undue interest rate risk or that the Company will be able to
effectively manage the interest rate risk with respect to the Acquisition. See
"The Acquisition -- Impact of the Acquisition on Operating Performance."

ALLOWANCE FOR LOAN LOSSES

The Company believes that the Bank has established adequate allowances for
loan losses in accordance with generally accepted accounting principles.
However, future additions to the allowances may be necessary due to changes in
economic conditions and growth of the Bank's loan portfolio. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. An increase in the
Bank's allowance for loan losses would negatively affect the Company's
earnings.

During 1993 the Financial Accounting Standards Board issued Statement No.
114, "Accounting By Creditors for Impairment of a Loan." This pronouncement,
effective for fiscal years beginning 1995, is not expected to have a material
effect on the Company's financial statements.

ECONOMIC CONDITIONS AND MONETARY POLICIES

Conditions beyond the Company's control may have a significant impact on
changes in net interest income from one period to another. Examples of such
conditions could include: (i) the strength of credit demands by customers; (ii)
fiscal and debt management policies of the federal government, including
changes in tax laws; (ii) the Federal Reserve Board's monetary policy,
including the percentage of deposits that must be held in the form of non-
earning cash reserves; (iv) the introduction and growth of new investment
instruments and transaction accounts by non-bank financial competitors; and (v)
changes in rules and regulations governing the payment of interest on deposit
accounts.

REGIONAL ECONOMIC FACTORS

The Bank's current branches are located in St. Lawrence, Jefferson, Lewis,
Cayuga, Seneca, Ontario, Oswego, Allegany, Cattaraugus, Tioga and Steuben
counties in the Northern, Finger Lakes and Southern Tier areas of New York
State. The Chase Branches are located in Norwich, Watertown, Boonville, New
Hartford, Utica, Skaneateles, Geneva, Pulaski, Seneca Falls, Hammondsport,
Canton, Newark and Penn Yan, New York. Although mitigated by geographic
dispersion of the branches, the concentration of the Bank's market in Central
and Northern New York State exposes it to risks resulting from changes
affecting regional economic conditions. A significant decline in economic
conditions or real estate values in the areas of New York State in which the
Bank operates could adversely affect the quality of the Bank's loan portfolio
and its ability to invest the Acquired Funds in loans promptly after the
Acquisition.

REGULATION

The banking industry is heavily regulated. These regulations are intended to
protect depositors and the FDIC, not the shareholders of banking institutions.
Applicable laws, regulations, interpretations and enforcement policies have
been subject to significant, and sometimes retroactively applied, changes in
recent years, and may be subject to significant future changes. There can be no
assurance that such future changes will not adversely affect the business of
the Company. In addition, the burden imposed by federal and state regulations
may place banks in general, and the Bank specifically, at a competitive
disadvantage compared to less regulated competitors.

10
<PAGE>

SOURCE OF FUNDS FOR DIVIDENDS ON COMMON STOCK AND PREFERRED STOCK

The Company's principal source of funds to pay cash dividends on the Common
Stock and Preferred Stock are the earnings of and dividends paid by the Bank.
Bank regulations, as well as the terms of current or any future preferred stock
issuances or loan agreements, may restrict the ability of the Bank to pay
dividends to the Company. See "Certain Regulatory Considerations -- Limits on
Dividends and Other Revenue Sources."

NO PRIOR MARKET FOR THE PREFERRED STOCK

Prior to the Preferred Stock Offering there has been no public market for the
Preferred Stock. Although the Company may make an application to have the
Preferred Stock approved for quotation on the Nasdaq National Market, there can
be no assurance that any active and liquid trading market for the Preferred
Stock will develop after the Preferred Stock Offering. If the Preferred Stock
is approved for quotation on the Nasdaq National Market, M.A. Schapiro intends
to make a market in the Preferred Stock.

COMPETITION

The Company operates in a series of competitive local markets, and competes
with commercial banks, savings banks, savings and loan associations, credit
unions and other financial institutions. See "Business -- Competition." Many of
these entities are larger institutions that have significantly greater
financial, management and other resources than the Company. There can be no
assurance that the Company's profitability will not be negatively affected by
expansion of competitors in and into its primary markets.

DEPENDENCE ON KEY INDIVIDUALS

The Company is dependent in large part on its ability to retain the services
of certain key personnel, including Sanford A. Belden (President and Chief
Executive Officer); James A. Wears (Regional President, Northern Region);
Michael A. Patton (Regional President, Southern Region); and David G. Wallace
(Senior Vice President and Chief Financial Officer). The Company has employment
contracts with these officers. See "Management -- Employment Agreements." The
Company's continued success is also dependent on its ability to retain and
attract qualified employees to meet the Company's needs in connection with the
Acquisition.

ANTI-TAKEOVER EFFECTS

The Company's Certificate of Incorporation and By-Laws contain certain
provisions which may impede any merger, consolidation, takeover or other
business combination involving the Company or may discourage a potential
acquiror from making a tender offer or otherwise attempting to obtain control
of the Company. These provisions include a classified board of directors;
supermajority provisions with respect to the approval of certain business
combinations by the Company's shareholders and directors; the availability of
authorized but unissued shares of common and preferred stock; and a requirement
that the provisions of the Certificate of Incorporation designed to protect the
Company from unfriendly takeover attempts can only be amended by a
supermajority of the Company's shareholders and directors. See "Description of
Capital Stock -- Certain Certificate of Incorporation and By-Laws Provisions."
In addition, the Company has adopted a Stockholder Protection Rights Plan (the
"Rights Plan") which is designed to protect shareholders in the event of an
unsolicited offer or attempt to acquire control of the Company. See
"Description of Capital Stock -- Rights Plan."

These provisions are intended to avoid costly takeover battles and lessen the
Company's vulnerability to a hostile change in control, thereby enhancing the
possibility that the Board of Directors can maximize shareholder value in
connection with any unsolicited offer to acquire the Company. However, anti-
takeover provisions can also have the effect of depressing the Company's stock
price because they are an impediment to potential investors and their ability
to gain control of the Company, and thus discourage activities such as
unsolicited merger proposals, acquisitions or tender offers by which
shareholders might otherwise receive enhanced consideration for their shares.

11
<PAGE>

THE COMPANY

The Company is a bank holding company incorporated in 1983 under the laws of
the State of Delaware whose sole banking subsidiary is the Bank. The Bank is a
national bank formed in 1992 by consolidation of the Company's then existing
banking subsidiaries, The St. Lawrence National Bank, Horizon Bank, N.A., The
Exchange National Bank, The Nichols National Bank and Community National Bank.
The Bank provides banking services through its two regional offices in Canton,
New York and Olean, New York, as well as through 36 banking offices in the
counties of St. Lawrence, Jefferson, Lewis, Cayuga, Seneca, Ontario, Oswego,
Allegany, Cattaraugus, Tioga and Steuben.

At December 31, 1994, the Company had consolidated assets and deposits of
$915.5 million and $679.6 million, respectively. The Company's net income for
the year ended December 31, 1994 was $10.1 million, or $3.59 per share. The
Bank is a member of the Federal Reserve System and its deposits are insured by
the FDIC up to applicable limits.

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 cities and villages within its geographic market
areas. 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 rapid decision-making at the branch and regional level,
enable the Bank to compete effectively.

The Company's administrative office is located at 5790 Widewaters Parkway,
DeWitt, New York and its telephone number is (315) 445-2282. The Bank's
Northern Region has its regional office at 45-49 Court Street, Canton, New
York, and operates 18 banking offices in the New York counties of St. Lawrence,
Jefferson and Lewis. The Bank's Southern Region has its regional office at 201
North Union Street, Olean, New York, and operates 18 banking offices in Seneca,
Ontario, Oswego, Cayuga, Allegany, Cattaraugus, Tioga and Steuben Counties.

THE ACQUISITION

TERMS AND CONDITIONS OF THE ACQUISITION

On December 6, 1994, the Bank and the Company entered into a Purchase and
Assumption Agreement (the "Agreement") with The Chase Manhattan Bank, N.A.
("Chase"). The Agreement provides for the acquisition of certain assets and the
assumption of certain liabilities by the Bank (the "Acquisition") relating to
the 15 Chase branches located in Norwich, Watertown (two), Boonville, New
Hartford, Utica, Skaneateles, Geneva, Pulaski, Seneca Falls, Hammondsport,
Canton, Newark (two), and Penn Yan, New York (the "Chase Branches").

It is anticipated that the Acquisition will close during the third quarter of
1995. At the closing, and subject to the terms of the Agreement, the Bank will
assume deposit liabilities booked at the Chase Branches (the "Chase Deposits")
and pay Chase a premium of 8.25% on the Chase Deposits. As of December 31,
1994, the Chase Deposits totaled $459.1 million, which amount is subject to
change due to run-off or growth of deposits occurring prior to the closing
date. As of February 28, 1995, the Chase Deposits totaled $451.7 million. In
addition, the Bank will acquire certain small business and consumer loans
associated with the Chase Branches (the "Chase Loans"), as well as the real
property owned or leased by Chase for operation of the Chase Branches and
related furniture, equipment and other fixed operating assets (the "Chase
Assets"). The Acquisition will be accounted for as a purchase; the excess of
liabilities assumed over assets acquired (goodwill) approximates $18.8 million
and will be amortized over a 25-year period on a straight-line basis. In
addition, approximately $19.1 million of the premium will be attributed to the
value of the Chase Deposits (the "Core Deposit Value"), which will be amortized
over 10 years on an accelerated method. For tax purposes, both the excess of
liabilities assumed over assets acquired and the core deposit value will be
amortized over a 15-year period on a straight-line basis and is expected to be
fully deductible under current law.

12
<PAGE>

The Bank will acquire the Chase Loans at face value and the Chase Assets at
fair market value with the exception of furniture, equipment and other fixed
assets which will be acquired at book value. The face value of the Chase Loans
as of December 31, 1994 was approximately $25.3 million, and the total purchase
price of the Chase Assets is approximately $5.1 million. The deposit premium
will be calculated on the basis of the average amount of Chase Deposits
outstanding over specified time periods preceding the closing date, except that
if the closing date occurs after June 30, 1995, the closing date for purposes
of calculating the average amount of Chase Deposits outstanding will be June
30, 1995. Payment of the premium on the Chase Deposits, as well as the purchase
price for the Chase Loans and Chase Assets, will be effectuated through an
appropriate reduction of the cash received to fund deposits assumed by the
Bank. Accordingly, the Bank expects to receive approximately $391.4 million in
cash from Chase at the closing in connection with its assumption of Chase
Deposits of $459.1 million as of December 31, 1994, after deduction of (a) the
deposit premium of approximately $37.9 million, (b) the purchase price of the
Chase Loans of approximately $25.3 million, (c) the purchase price of the Chase
Assets of approximately $5.1 million, and the addition of (d) other net
liabilities of $0.6 million.

The Bank has reviewed the Chase Loans and found them to be fully performing
with acceptable risk ratings. The Agreement provides the Bank the right to
reject any loan failing to meet the Bank's underwriting standards as provided
in the Agreement, as well as loans which may be adversely affected by
environmental conditions relating to real property securing such loans. In
connection with its evaluation of the Acquisition, the Bank examined the Chase
Loans using substantially the same criteria, analyses and collateral
evaluations that the Bank has traditionally used in the ordinary course of its
business.

The Bank will retain approximately 117 full-time equivalent Chase employees
currently associated with the Chase Branches. The Agreement requires the Bank
to recognize prior service with Chase for purposes of vesting and eligibility
under the Bank's benefit plans and to maintain base salary for all such
transferred employees for a period of at least one year following the closing
except in the case of discharge for cause, voluntary separation, death, or
disability. All pension obligations earned by Chase employees prior to the
Acquisition will be funded by Chase. The Agreement also requires Chase to pay
the Bank an amount, at closing, equal to the accounting benefit Chase would
receive resulting from the reduction of the post retirement medical benefit
liability under Statement of Financial Accounting Standards No. 106,
"Accounting for Postretirement Benefits Other than Pensions."

Pursuant to the Agreement, environmental inspection of the Chase Branches has
been performed, and Chase is expected to remedy all material violations of
environmental laws discovered during such inspections. The Bank has the right
to refuse specific properties in the event any noncompliance with environmental
laws is not remedied.

The closing of the Acquisition is contingent upon receipt by the parties of
all necessary regulatory approvals, including approval of the OCC. See "Special
Considerations--Pending Litigation" and "Acquisition--Regulatory Conditions and
Capital Plan." In the event the Bank is unable to close the Acquisition due to
a lack of regulatory approval and the determining factor relates to the
Community Reinvestment Act, Equal Credit Opportunity Act, the Fair Housing Act
or possible anti-competitive effects, the Bank is obligated to pay Chase a
"break-up fee" of $1.0 million. In the event the Bank is unable to proceed to
closing due to its inability to raise sufficient capital or due to a lack of
regulatory approval for any other reason, the Bank is obligated to pay Chase a
"break-up fee" of $1.85 million.

REASONS FOR THE ACQUISITION

The following summarizes the major objectives of the Acquisition and the
benefits the Company expects will accrue to the operations of the Bank from the
Acquisition:

. The Chase Branches consolidate and extend the Bank's branch network into
contiguous markets. Assuming the Acquisition and the Offerings were
completed as of December 31, 1994, the Company would have total assets in
excess of $1.2 billion and 50 locations (net of the planned closing of
one of

13
<PAGE>

the Canton facilities and prior to any potential dispositions). The Chase
Branches will link the Bank's existing Northern New York and Finger
Lakes/Southern Tier distribution network.

. The Chase Branches are located in markets with which the Bank is already
familiar, either because it is servicing them to some degree already
without a branch facility, or because they are similar to the Bank's
existing markets, being comprised of small towns and villages outside of
metropolitan trade centers. Of the 13 towns in which the Chase Branches
are located, the Chase Branches are ranked either first, second or third
in deposit market share as of June 30, 1994 in 10 of the towns, which,
when coupled with the Bank's present branches, will result in the Bank
being ranked either first, second or third in 36 of the 41 towns in which
the Bank will operate branches.

. Although the Acquisition includes only a relatively small amount of loans
outstanding, the depositor base of the Chase Branches includes
approximately 300 small business customers and 30,000 consumer
households. Because of Chase's centralized style of underwriting and
servicing, the Company believes that these markets offer significant
future growth opportunities. Based on the Bank's locally responsive
approach to loan decision-making, personalized service, and knowledge of
these markets, the Bank believes the achievement of a 40.0% loan to
deposit ratio in the Chase Branches (compared to a 4.7% level as of the
closing date of the Acquisition) to be reasonable within five years. The
Bank's loan to deposit ratio for its present branch network is
approximately 71.0% as of year-end 1994.

. The Company believes that the Chase Deposits are largely stable,
relatively low cost core deposit funds, similar to the Bank's existing
deposit base. The Chase Deposits will be used to replace the Bank's
presently higher cost Federal Home Loan Bank of New York ("FHLB")
borrowings, thus lowering overall funding costs and improving the Bank's
liquidity. After providing for purchased loans, branch facilities and
equipment, and the deposit premium, approximately $220 million of cash
received (net of repayment of short-term borrowings) will be temporarily
placed in the Bank's investment portfolio, increasing its size by nearly
60% (or approximately 65% including the impact of the proposed capital
issuance). It is the Company's intention to invest these funds in a mix
of securities intended to produce a high, relatively stable level of
interest income and provide on-going cash flow to help fund expected loan
growth and/or be subsequently reinvested in other investment securities.

. The Acquisition leverages the Company's existing infrastructure. The
Chase Branches will be administratively managed from either the Bank's
Northern or Southern Region by existing senior management personnel. The
Northern and Southern regional service centers will process the added
loan and deposit volumes, with incremental overhead limited to volume-
sensitive staff and equipment. Similarly, a limited number of audit, loan
review, and accounting personnel will be added. A total of approximately
36 full-time employees are expected to be added to the Bank upon
consummation of the Acquisition. The personnel acquired from Chase
include only branch-related personnel, including approximately 14 small
business lending and support staff and three residential mortgage
origination personnel, for a total of approximately 117 full-time
equivalent employees. To assist with the integration of the Chase
Branches into its existing branch network, the Bank has engaged an
outside consultant to focus on customer sales and service training,
operations center planning and upgrading; a full-time internal project
coordinator has also been retained.

. The Company believes that the Acquisition provides it with the
opportunity to increase non-interest income because annuities and mutual
funds have been offered at the Chase Branches for several years. The Bank
only sold fixed-rate annuities at its branches during calendar-year 1994
and was not fully staffed until late 1994 to sell variable-rate annuities
and mutual funds. Consequently, the staff at the Chase Branches and the
Bank's new investment products should complement each other in increasing
referrals for the sale of these products.

For a discussion of the potential risks to the Company inherent in the
Acquisition, see "Special Considerations."

14
<PAGE>

REGULATORY CONDITIONS AND CAPITAL PLAN

The Acquisition is contingent upon obtaining necessary regulatory approvals
and maintaining certain regulatory capital ratios. In order to maintain
required regulatory capital ratios, the Company and the Bank must raise
additional capital prior to consummation of the Acquisition.

In conjunction with the Acquisition, the Company anticipates raising
approximately $26.7 million (net of expenses) in additional capital through the
Offerings to offset the reduction in regulatory capital ratios associated with
the Acquisition. The Company will contribute the additional capital to the Bank
as capital surplus with the objective of maintaining the Bank's Tier I leverage
ratio following consummation of the Acquisition in the "adequately capitalized"
range, which is defined by the FDIC as between 4.0% and 5.0%. Approximately
$9.7 million of the additional capital will be raised through the Preferred
Stock Offering. See "Description of Capital Stock -- Preferred Stock." The
balance of the additional capital, approximately $17.0 million, is being raised
through the Common Stock Offering.

On March 6, 1995, Inner City Press/Community on the Move ("ICP") through its
Executive Director, Matthew Lee, submitted to the OCC written comments in
opposition to the Bank's application for approval of the Acquisition and
requested a public hearing on the application. ICP's objections to approval of
the application included the Bank's and Chase's Community Reinvestment Act and
fair lending record and the potential anti-competitive effects of the
Acquisition. ICP also incorporated written comments previously filed with the
OCC in connection with an unrelated application filed by Chase, which
application was approved by the OCC on February 10, 1995 notwithstanding ICP's
comments. The Bank and Chase are responding to these comments, and the Bank
does not believe that the comments raise any issues sufficient to warrant
denial of the Bank's application.

POTENTIAL DISPOSITION

Subject to general market conditions and the Company's ongoing assessment of
business objectives, the Bank intends to divest up to $125 million in deposits
through a combination of selling certain branch locations and related deposits
and reducing public funds from the Bank's balance sheet. The purpose of any
such divestitures would be to mitigate any potential adverse impact of the
Acquisition on the Company's earnings per share and tangible book value, reduce
the Company's exposure to interest rate risk, and strengthen the Bank's capital
ratios. Any such divestitures would occur subsequent to the consummation of the
Acquisition, would be structured to maximize the Bank's business objectives at
that time, and would help facilitate the Bank's return to a Tier I leverage
ratio in the "well capitalized" range. There can be no assurance of the size or
impact of any divestiture, or that a divestiture will actually occur. See
"Special Considerations -- Potential Disposition."

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following unaudited pro forma consolidated balance sheet has been derived
from the historical balance sheet of the Company, adjusted to give effect to
the proposed acquisition of selected assets and the assumption of selected
liabilities in connection with the Acquisition, repayment of borrowings and the
issuance and sale of Common Stock and Preferred Stock through the Offerings as
though such transactions had occurred on December 31, 1994. The unaudited pro
forma consolidated balance sheet is not necessarily indicative of the financial
position that would have been achieved had the transactions reflected therein
occurred on such date. The pro forma adjustments with respect to the
Acquisition reflect December 31, 1994 balances which are in accordance with the
terms of the Agreement and are subject to change prior to the closing date in
accordance with the terms of the Agreement. The unaudited pro forma
consolidated balance sheet also does not purport to project the balance sheet
of the Company as of the period shown or for any future period. For unaudited
information regarding the liabilities being assumed and assets being acquired
by the Bank in the Acquisition, see the Schedule of Liabilities to be Assumed
and Assets to be Acquired by Community Bank, N.A. located elsewhere in this
Prospectus.

15
<PAGE>

COMMUNITY BANK SYSTEM, INC.
PRO FORMA CONSOLIDATED STATEMENT OF CONDITION
PENDING ACQUISITION AND OFFERINGS AS IF THEY OCCURRED ON DECEMBER 31, 1994
(UNAUDITED)

<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------
OFFERINGS(2) PRO FORMA
AS REPORTED ACQUISITION(1) AND OTHER TOTAL
----------- -------------- ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Cash, cash equivalents
and due from banks.... $ 30,522 $391,458(3) $(135,612) $ 286,368
Investment securities
(approximate market
value of
$374,117,000)......... 378,520 378,520
Loans.................. 510,739 25,252 535,991
Less: Unearned dis-
count................. 27,660 27,660
Reserve for possible
loan losses......... 6,281 6,281
-------- -------- ----------
Net loans............ 476,798 25,252 502,050
Premises and equipment,
net................... 10,591 5,134 15,725
Accrued interest re-
ceivable.............. 6,657 150 6,807
Intangible assets, net. 6,107 37,876(4) 43,983
Other assets........... 6,306 6,306
-------- -------- --------- ----------
TOTAL ASSETS........... $915,501 $459,870 $(135,612) $1,239,759
======== ======== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Non-interest bearing. $103,007 $ 45,920 $ 148,927
Interest bearing..... 576,631 413,180 989,811
-------- -------- ----------
Total deposits....... 679,638 459,100 1,138,738
Federal funds pur-
chased.............. 57,300 (57,300)(5)
Term borrowings...... 105,550 (105,000)(5) 550
Accrued interest and
other liabilities... 6,724 770(6) 7,494
-------- -------- --------- ----------
Total liabilities.. 849,212 459,870 (162,300) 1,146,782
Shareholders' equity:
Preferred stock...... 10,000 10,000
Common stock......... 3,485 938 4,423
Surplus.............. 14,885 15,750 30,635
Undivided profits.... 49,853 49,853
Unrealized net gains
(losses) on avail-
able-for-sale secu-
rities.............. (1,930) (1,930)
Shares issued under
employee stock plan-
unearned............ (4) (4)
-------- -------- --------- ----------
Total shareholders'
equity............ 66,289 26,688 92,977
-------- -------- --------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY.... $915,501 $459,870 $(135,612) $1,239,759
======== ======== ========= ==========
</TABLE>

The accompanying notes are an integral part of the pro forma consolidated
statement of condition.

16
<PAGE>

COMMUNITY BANK SYSTEM, INC.
NOTES TO PRO FORMA CONSOLIDATED STATEMENT OF CONDITION
DECEMBER 31, 1994
(UNAUDITED)

(1) Reflects pending acquisition of the Chase Branches after giving effect to
consummation of the Acquisition and related purchase accounting
adjustments by the Company as if they occurred on December 31, 1994.

(2) Reflects the Common Stock Offering of 750,000 shares at $26.50 per share
and the Preferred Stock Offering of 100,000 shares at $100.00 per share,
less estimated expenses of $3.2 million.

(3) Consideration received from Chase in connection with the Acquisition in
accordance with the Agreement.

(4) Includes core deposit value of $19.1 million to be amortized over 10 years
using an accelerated method and goodwill of $18.8 million to be amortized
on a straight-line basis over 25 years.

(5) Reflects payment of FHLB borrowings, except $550,000 3-year term borrowing
scheduled to mature in 1996.

(6) Reflects accrued interest payable of $438,991 and estimated post-
retirement benefit obligations other than pensions of $331,200.

CHASE DEPOSITS

The Chase Deposits totaled $459.1 million on December 31, 1994. As of
February 28, 1995, the Chase Deposits totaled $451.7 million, which amount is
subject to further change due to run-off or growth of the aggregate deposit
balance occurring prior to the closing date. The following provides summary
information as of December 31, 1994 regarding the Chase Deposits. Rate
information has been derived from records provided by Chase, and is based on
weighted-average rates in effect at December 31, 1994. Rate information with
respect to public funds is not readily available.

<TABLE>
<CAPTION>
INDIVIDUALS,
PARTNERSHIPS
& CORPORATIONS
--------------- PUBLIC FUNDS TOTAL
BALANCE RATE BALANCE BALANCE
--------- ----- ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Non-interest bearing demand............. $ 41,401 $ 4,519 $ 45,920
Interest bearing demand................. 63,621 2.03% 13,181 76,802
Savings................................. 124,416 3.17% 9,405 133,821
Time deposits........................... 186,796 4.86% 15,761 202,557
--------- ------- --------
Total deposits........................ $ 416,234 3.44% $42,866 $459,100
========= ======= ========
</TABLE>

The following table summarizes the remaining maturities of the Chase
Deposits in amounts of $100,000 or more outstanding at December 31, 1994.
Maturity information with respect to public funds is not readily available.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
--------------------
(IN THOUSANDS)
<S> <C>
Non-public deposits
Less than three months.............................. $ 2,054
Three months to six months.......................... 2,722
Six months to one year.............................. 4,281
Over one year....................................... 3,780
-------
Total non-public deposits............................. 12,837
Public funds.......................................... 15,761
-------
Total............................................. $28,598
=======
</TABLE>

17
<PAGE>

IMPACT OF THE ACQUISITION ON OPERATING PERFORMANCE

The following discussion represents the Company's current assessment of the
impact of the Acquisition on the operating performance of the Company. Numerous
factors, including factors outside the Company's control (such as the general
level of interest rates and both national and regional economic conditions) may
significantly alter the effects described below. As such, there can be no
assurance that the effects of the Acquisition will meet the Company's
expectations. See "Special Considerations."

Net Interest Income. When the Acquisition is consummated and prior to any
expected deposit run-offs and divestitures, the Bank is expected to assume
deposit liabilities which totaled $459.1 million as of December 31, 1994 and
receive approximately $25.3 million in loans and $391.4 million in cash. An
additional $26.7 million in cash is expected to be received from the net
proceeds of the Offerings. The cash from the Acquisition and the Offerings will
be used to fund investment security purchases, repay short-term borrowings of
the Bank, and fund additional growth. The impact of the Acquisition on net
interest income is expected, therefore, to include (i) interest income from
investment securities purchased, (ii) interest income from the Chase Loans,
(iii) interest income from new loans originated through the Chase Branches, and
(iv) interest expense of the Chase Deposits, including the benefit of the lower
interest expense on the Chase Deposits which will replace higher cost short-
term borrowings.

The Company currently estimates that the Bank could make net new loans in an
amount equal to at least 40.0% of the Chase Deposits outstanding within five
years after consummation of the Acquisition, although there can be no assurance
that the Bank will be able to do so. See "Special Considerations -- Lending
Risks -- Credit Quality." New loans are expected to be similar to the Bank's
current loan distribution with respect to types and pricing characteristics,
subject to market conditions.

Since a large portion of the funds received in the Acquisition and the
Offerings will initially be invested in securities, the Company, assisted by an
asset/liability consultant, has undertaken analyses to determine a strategy for
the optimal deployment of these funds. In order to determine this investment
strategy, the Company has conducted an analysis of the impact of the
Acquisition on the Bank's overall asset/liability risk position. A variety of
interest rate simulations was considered, including, but not limited to, a flat
rate environment, a rising rate environment with rates increasing 200 basis
points, and a falling rate environment with rates decreasing 200 basis points.
The Company continues to utilize and update its analysis as conditions warrant.

The analysis combined the Bank's year-end 1994 asset/liability profile with
that of the Chase Branches. A number of investment strategies was then
examined, focusing on the goal of enhancing the profitability of the Bank while
limiting the volatility of earnings under a variety of interest rate
environments. Such an investment strategy could be accomplished with a variety
of approaches, including maturity laddering of bonds (with and without call
features), purchasing mortgage-backed securities whose average life
characteristics meet the investment objective, or a combination of these or
similar securities. The Company has determined that the strategy which it
currently expects will best achieve its goals is investing two-thirds of the
net funds received in the Acquisition and the Offerings in seasoned 15-year
mortgage-backed securities with an average duration of two to four years and
one-third of the net funds in U.S. Treasury and agency securities with an
average maturity of one year.

Since the interest rate environment could change substantially before all the
funds from the Acquisition are invested, however, it is impossible to predict
with certainty which investment combination will ultimately be pursued by the
Bank. It is the Bank's intention that the mix of securities selected will
provide continuing cash flows to help fund expected loan growth and/or to
subsequently invest in other securities.

Given the Company's current expectations for loan growth, the intended
investment strategy, the repayment of the Bank's short-term borrowings and the
acquired deposit liabilities, the Company and its

18
<PAGE>

asset/liability consultant have analyzed potential results for the Company
under a variety of interest rate scenarios. The analysis showed that the
Acquisition could add between $12.0 million and $16.5 million to net interest
income in the first full year of operations. While interest rates will continue
to have a substantial impact on future earnings levels and therefore no
assurance can be given, anticipated loan growth could increase these levels of
net interest income in future years.

Loan Loss Provision. The Chase Loans and any new loans originated by the Bank
through the Chase Branches will meet the underwriting standards of the Bank. As
the loan portfolio grows, the Bank expects to add annually to its allowance for
loan losses by approximately 0.30% to 0.35% (net of charge-offs) of average
loans, building to a loan loss reserve of 1.30% of period-end loans within
approximately four years. Actual loan loss reserves will be based on numerous
factors and may be higher or lower than the Bank's current expectations.

Non-Interest Income. The Company expects to earn additional non-interest
income through deposit service charges and by selling trust and investment
products to the customers of the Chase Branches. The Bank has historically
earned approximately 70 basis points on average assets in non-interest income.
While actual results will be based on numerous factors, many of which are not
in the Company's control, and, therefore, no assurance can be given, the
Company believes that a rate of 50 to 70 basis points of the Chase Deposits is
a reasonable approximation of the level of non-interest income it could earn
after the Acquisition. This could result in additional non-interest income of
$2.3 million to $3.2 million on an annualized basis.

Non-Interest Expense. The Company has estimated the cost of operating the
Chase Branches within the Bank's existing infrastructure. The following is a
breakdown of the additional annual expenses anticipated over the first full
year of operations:

<TABLE>
<CAPTION>
AMOUNT
-------------
(IN MILLIONS)
<S> <C>
Salary and employee benefits.............................. $ 3.6
Occupancy expense......................................... 1.1
Amortization of intangible assets......................... 3.1
Other expense............................................. 3.6
-----
Total incremental non-interest expense................ $11.4
=====
</TABLE>

Salary and employee benefits include approximately 117 full-time equivalent
employees currently at the Chase Branches and approximately 36 full-time
equivalent employees expected to be added, primarily in the Bank's operations
centers to service the Chase Deposits, Chase Loans, and expected loan growth.
Occupancy expense includes estimated costs of refurbishment and other capital
expenditures that the Bank is expected to incur after completion of the
Acquisition.

For income tax purposes, the intangible assets created from the 8.25% deposit
premium paid in the Acquisition are fully tax-deductible and amortizable on a
straight-line basis over a 15 year period under current law. For financial
statement proposes, generally accepted accounting principles as currently in
effect require that a portion of the premium be attributed to the Core Deposit
Value and amortized over the expected life of the Chase Deposits in a manner
approximating their decay rate. The balance of the premium is attributable to
the cost of entering the new banking markets represented by the Chase Branches,
and is amortizable on a straight-line basis over a 25-year period.

The Core Deposit Value is expected to be $19.1 million, amortizable over a
10-year period. For the first full year, amortization of the Core Deposit Value
and other intangibles is expected to be approximately $3.1 million, declining
to $2.8 million and $2.6 million in the second and third years, respectively.

Other expenses include conversion costs and data processing expenses
estimated for the Acquisition as well as the other support costs needed to
operate the Chase Branches, including the impact of increased FDIC

19
<PAGE>

deposit insurance premiums to the Bank of approximately $210,000 (assuming that
the Bank remains in the "adequately capitalized" designation for one year
following the Acquisition). $275,000 of other expenses are one-time charges
(mostly anticipated to be incurred in 1995) necessary in order to effect the
Acquisition. In addition, the Company expects to incur $1.9 million in related
incremental capital expenditures.

IMPACT OF THE ACQUISITION ON OPERATING PERFORMANCE
ASSUMING INTENDED POTENTIAL DISPOSITION

Subsequent to the Acquisition, the Bank intends to divest up to $125 million
in deposits through a combination of selling certain branch locations and
related deposits and reducing public funds from the Bank's balance sheet. See
"The Acquisition -- Potential Disposition." These divestitures, if and when
completed, should have the effect of returning the Bank's Tier I leverage ratio
to the "well capitalized" level more quickly and should reduce potential
variances in earnings levels. If the Bank were to divest $125 million in
deposits, the following are the Company's estimates of the impact to its
operations:

Net Interest Income. Using the same analysis described above, the reduction
in the Bank's size could result in additional net interest income of $8.1
million to $12.2 million rather than $12.0 million to $16.5 million.

Provision for Loan Losses. The only direct effect of divestitures on the
Bank's provision level would be due to lower loan volumes as a result of fewer
branch locations to originate new loans.

Non-Interest Income. The reduction in deposits could reduce the expected
additional income by $0.6 million to $0.9 million which could result in
additional non-interest income to the Bank of $1.7 million to $2.3 million,
rather than $2.3 million to $3.2 million.

Non-Interest Expense. Divesting $125 million of deposits and branches would
result in reduced expenses. The extent of such reductions would be largely
dependent upon the number and identity of branches sold. The Company estimates
the savings to be approximately $1.5 million in the first full year of
operations. This could cause the net impact from the Acquisition on non-
interest expense to be reduced from $11.4 million to approximately $9.9
million.

USE OF PROCEEDS

The primary purpose of the Offerings is to raise additional capital to
support the Bank's continued growth, including capital in form and amount
sufficient to maintain the Bank's Tier I leverage ratio at no lower than 4.0%
upon consummation of the Acquisition.

The net proceeds to be received by the Company from the Common Stock Offering
are estimated to be $17.0 million ($19.5 million if the Underwriters' over-
allotment option is fully exercised). The net proceeds to be received by the
Company from the Preferred Stock Offering are estimated to be $9.7 million. The
aggregate net proceeds from the Offerings are therefore estimated to be $26.7
million ($29.2 million if the Underwriters' over-allotment option is fully
exercised). The net proceeds of the Offerings will be contributed by the
Company to the Bank as capital surplus which is expected to qualify as
regulatory capital of the Bank under the regulatory capital guidelines of the
OCC. The Bank intends to use the net proceeds for general corporate purposes,
including the making of loans and investments in the ordinary course of
business. The Bank presently intends to use a portion of the net proceeds to
repay short-term borrowings. The aggregate outstanding amount of such short-
term borrowings was $158.8 million as of March 31, 1995. The average interest
rate of such borrowings was approximately 6.40% as of March 31, 1995, and all
such borrowings mature no later than April 30, 1995.

20
<PAGE>

CAPITALIZATION

The following table sets forth the consolidated capitalization of the
Company at December 31, 1994, and as adjusted to give effect to the Offerings
(assuming the Underwriters' over-allotment option is not exercised). See
"Underwriting." The following should be read in conjunction with the
consolidated financial statements and notes thereto of the Company appearing
elsewhere in this Prospectus.

<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
-----------------------
ACTUAL AS ADJUSTED(1)
------- --------------
(IN THOUSANDS)
<S> <C> <C>
Shareholders' Equity:
Common Stock, par value $1.25 per share,
5,000,000 shares authorized, 2,788,150 shares
issued (and 3,538,150 shares issued, as
adjusted)....................................... $ 3,485 $ 4,423
Preferred Stock, par value $1.00 per share,
500,000 shares authorized, 100,000 shares issued
and outstanding as adjusted..................... -- 10,000
Surplus............................................ 14,885 30,635
Undivided profits.................................. 49,853 49,853
Unrealized net losses on available-for-sale securi-
ties.............................................. (1,930) (1,930)
Shares issued under employee stock plan -- un-
earned............................................ (4) (4)
------- -------
Total shareholders' equity....................... $66,289 $92,977
======= =======
</TABLE>

(1) Assumes that 750,000 shares of Common Stock are sold at $26.50 per share,
100,000 shares of Preferred Stock are sold at $100.00 per share and that
the net proceeds therefrom are approximately $26.7 million after estimated
expenses. If the Underwriters' over-allotment option is exercised in full,
862,500 shares of Common Stock would be sold, resulting in net proceeds
from the Offerings of approximately $29.2 million.

21
<PAGE>

MARKET FOR COMMON STOCK AND DIVIDENDS

The Common Stock has been traded over-the-counter on the Nasdaq National
Market under the symbol "CBSI" since September 16, 1986. On April 10, 1995, the
last reported sale and bid price of the Common Stock, as reported on the Nasdaq
National Market, was $27.75 and $27.00, respectively. The following table sets
forth the high and low bid quotations for the Common Stock, and the cash
dividends declared with respect thereto, for the periods indicated. The
quotations represent bid prices between dealers, do not include retail mark-
ups, mark-downs or commissions, and do not necessarily represent actual
transactions. There were 2,788,150 shares of Common Stock outstanding on April
10, 1995.

<TABLE>
<CAPTION>
PRICE RANGE CASH DIVIDEND
------------- DECLARED PER
HIGH LOW SHARE
------ ------ -------------
<S> <C> <C> <C>
1995:
First Quarter.................................. $27.00 $25.25 $0.30
Second Quarter (April 1 through April 10)...... 28.25 27.00 --
1994:
First Quarter.................................. $30.75 $28.50 $0.27
Second Quarter................................. 30.50 28.50 0.27
Third Quarter.................................. 31.75 29.00 0.30
Fourth Quarter................................. 31.75 25.75 0.30
-----
$1.14
=====
1993:
First Quarter.................................. $30.50 $27.88 $0.25
Second Quarter................................. 30.00 26.00 0.25
Third Quarter.................................. 30.00 25.00 0.27
Fourth Quarter................................. 30.75 23.00 0.27
-----
$1.04
=====
</TABLE>

The Company has historically paid regular quarterly cash dividends on its
Common Stock, and declared a cash dividend of $0.30 per share for the first
quarter of 1995. 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 Preferred
Stock as and when due, subject to the Company's need for those funds. See
"Description of Capital Stock -- Preferred Stock." 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. See "Certain Regulatory
Considerations -- Limits On Dividends and Other Revenue Sources."

Prior to the Preferred Stock Offering, there has been no public market for
the Preferred Stock. The Company may make an application to have the Preferred
Stock approved for quotation on the Nasdaq National Market or on a national
exchange, although there can be no assurance that the Company will be able to
do so. If the Preferred Stock is approved for quotation on the Nasdaq National
Market, M.A. Schapiro intends to make a market in the Preferred Stock. The
Company anticipates that there will be fewer than 10 holders of Preferred Stock
after the Preferred Stock Offering.

22
<PAGE>

SELECTED CONSOLIDATED FINANCIAL INFORMATION

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, 1994. The historical "Income Statement Data", "End of Period
Balance Sheet Data", "Per Share Data", "Outstanding Shares", and certain
"Selected Ratios" are derived from financial statements which have been audited
by Coopers & Lybrand L.L.P., independent public accountants. All financial
information in this table should be read in conjunction with the information
contained in "Capitalization", "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
Prospectus. See also "The Acquisition -- Impact of the Acquisition on Operating
Performance" for a discussion of the impact of the Acquisition on certain of
the Selected Consolidated Financial Information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Interest income........ $ 61,575 $ 54,642 $ 56,345 $ 59,364 $ 60,200
Interest expense....... 22,130 17,733 21,608 29,838 33,329
---------- ---------- ---------- ---------- ----------
Net interest income.... 39,445 36,909 34,737 29,526 26,871
Provision for possible
loan losses........... 1,702 1,506 2,727 2,516 2,960
---------- ---------- ---------- ---------- ----------
Net interest income af-
ter provision for pos-
sible loan losses..... 37,743 35,403 32,010 27,010 23,911
Non-interest income.... 5,120 4,764 5,082 4,623 4,820
Non-interest expense... 26,498 24,827 26,447 26,665 25,873
---------- ---------- ---------- ---------- ----------
Income before income
taxes................. 16,365 15,340 10,645 4,968 2,858
Provision for income
taxes................. 6,256 5,765 3,139 1,296 753
---------- ---------- ---------- ---------- ----------
Net income............. $ 10,109 $ 9,575 $ 7,506 $ 3,672 $ 2,105
========== ========== ========== ========== ==========
END OF PERIOD BALANCE
SHEET DATA:
Total Assets........... $ 915,501 $ 713,053 $ 669,274 $ 634,492 $ 617,851
Net Loans.............. 483,079 417,871 362,356 348,569 364,733
Earning Assets......... 861,599 671,415 625,342 577,986 569,148
Total Deposits......... 679,638 588,315 557,915 575,876 561,207
Long-term debt and cap-
ital lease obliga-
tions................. 550 592 139 862 1,020
Shareholders' equity... 66,290 61,986 53,417 48,244 46,440
AVERAGE BALANCE SHEET
DATA:
Total Assets........... $ 808,948 $ 684,863 $ 650,804 $ 622,927 $ 613,157
Net Loans.............. 446,135 382,680 351,241 352,921 370,190
Earning Assets......... 756,871 640,070 601,636 576,323 565,770
Total Deposits......... 651,479 598,860 585,571 566,447 556,893
Long-term debt and cap-
ital lease obliga-
tions................. 557 256 379 924 1,095
Shareholders' equity... 64,033 57,298 50,868 47,182 46,611
PER SHARE DATA:
Net Income............. $ 3.59 $ 3.43 $ 2.76 $ 1.36 $ 0.78
Cash dividend declared. 1.14 1.04 0.90 0.76 0.76
Period-end book value.. 23.78 22.55 19.81 17.93 17.18
Period-end tangible
book value............ 21.59 22.39 19.58 17.58 16.62
OUTSTANDING SHARES:
Average during period.. 2,814,710 2,788,330 2,722,093 2,694,101 2,703,698
End of period.......... 2,788,150 2,748,318 2,696,760 2,690,260 2,703,385
SELECTED RATIOS:
Return on average total
assets................ 1.25% 1.40% 1.15% 0.59% 0.34%
Return on average
shareholders' equity.. 15.79 16.71 14.76 7.78 4.52
Dividend payout ratio.. 31.24 29.67 32.26 55.74 97.62
Net interest margin
(taxable equivalent
basis)................ 5.31 5.90 5.82 5.14 4.77
Non-interest income to
average assets (ex-
cluding security gains
and losses)........... 0.69 0.70 0.75 0.78 0.79
Efficiency ratio....... 57.94 58.45 65.48 75.55 78.39
Non-performing assets
to period-end total
loans and other real
estate owned.......... 0.72 0.73 0.67 1.56 1.38
Allowance for loan
losses to period-end
loans................. 1.30 1.37 1.37 1.24 0.99
Allowance for loan
losses to period-end
non-performing loans.. 192.79 238.67 310.05 185.40 112.64
Allowance for loan
losses to period-end
non-performing assets. 179.67 186.06 205.72 78.81 71.35
Net charge-offs (recov-
eries) to average to-
tal loans............. 0.25 0.20 0.59 0.51 0.59
Average net loans to
average total depos-
its................... 68.48 63.90 59.98 62.30 66.47
Period-end total share-
holders' equity to pe-
riod end assets....... 7.24 8.69 7.98 7.60 7.52
Tier I capital to risk-
adjusted assets....... 12.43 14.87 13.13 13.01 11.62
Total risk-based capi-
tal to risk-adjusted
assets................ 13.68 16.12 14.37 13.96 12.56
Tier I leverage ratio.. 6.81 6.81 7.90 7.49 7.88
Ratio of earnings to
fixed charges:
Including interest on
deposits.............. 173.40 185.75 148.72 116.54 108.53
Excluding interest on
deposits.............. 500.78 1,753.02 2,233.27 1,397.39 614.03
</TABLE>

23
<PAGE>

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

The following discussion is intended to facilitate an understanding and
assessment of significant changes in trends related to the financial condition
of the Company and the results of its operations. The following discussion and
analysis should be read in conjunction with the Selected Consolidated Financial
Data and the Company's Consolidated Financial Statements and related notes
thereto appearing elsewhere in this Prospectus. All references in the
discussion to financial condition and results of operations are to the
consolidated position and results of the Company and its subsidiaries taken as
a whole.

RESULTS OF OPERATIONS

In 1994, the Company's net income increased 5.6% from $9.6 million in 1993 to
$10.1 million, a record level for the Company. In 1994, earnings per share
reached $3.59, up 4.7% over the $3.43 reported in 1993. 1992's net income was
$7.5 million or $2.76 per share. The Company's earnings growth in 1994 was
influenced by the following factors:

. Net interest income on a fully tax-equivalent basis increased 6.3% over
1993, reflecting earning asset growth of 18.2%, which more than offset
the impact of a 59 basis point decline in the Company's net interest
margin from its historical annual high in 1993.

. Non-interest income was up 7.5% over 1993 due largely to continued
strength in fiduciary services income, the first-year impact of new
investment product sales, and growth in general service charges,
commissions and fees; excluding net losses on the sale of investment
securities and other assets, non-interest income rose 17.6% over 1993.

. Non-interest expense increased 6.7% over 1993, reflecting increased staff
related to four branches acquired by the Bank in 1994, certain related
conversion costs, and amortization of deposit intangibles associated with
these branch purchases.

. Loan loss provision expense rose 13.0%, generally consistent with record
loan growth of 15.6%; net charge-offs were $1.1 million, or 0.25% of
average loans, with the provision covering net charge-offs by 1.5 times.

These results reflect the fourth consecutive year of increased earnings since
the Company consolidated its five commercial bank subsidiaries into a single-
bank entity and ceased operations of unprofitable non-bank subsidiaries. No
further expenses relating to this consolidation were incurred in 1994. In 1993,
one-time expenditures related to the consolidation amounted to $164,000, due
primarily to costs associated with closing the Bank's marketing representative
office in Ottawa, Canada. In 1992, consolidation-related costs were a
substantially greater $812,000.

The Company's return on average stockholders' equity was 15.79% in 1994, as
compared to 16.71% in 1993 and 14.76% in 1992. The return on average total
assets for 1994 was 1.25%, as compared to 1.40% for 1993 and 1.15% for 1992.

NET INTEREST INCOME

Net interest income, the largest single component of the Company's earnings,
represents the difference between income earned on loans and other interest-
earning assets and interest expense paid on deposits and borrowing. Net
interest margin is the difference between the gross yield on interest-earning
assets and the cost of interest-bearing funds as a percent of average interest-
earning assets.

The Company's net interest income is affected by the change in the amount and
mix of interest-earning assets and interest-bearing liabilities, referred to as
a "volume change." It is also affected by changes in yields earned on assets
and rates paid on deposits and other borrowed funds, referred to as a "rate
change."

24
<PAGE>

The following table sets forth certain information concerning average
interest-earning assets and interest-bearing liabilities and the yields and
rates thereon. Interest income and resultant yield information in the table is
on a fully tax-equivalent basis for the three-year period ended December 31,
1994 using marginal federal income tax rates of 22%, 34% and 34%, respectively.
Averages are computed on daily average balances for each month in the period
divided by the number of days in the period. Yields and amounts earned include
loan fees. Non-accrual loans have been included in interest-earning assets for
purposes of these computations.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1994 1993 1992
------------------------------ ------------------------------ ------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE AMOUNT OF YIELD/RATE AVERAGE AMOUNT OF YIELD/RATE AVERAGE AMOUNT OF YIELD/RATE
BALANCE INTEREST PAID BALANCE INTEREST PAID BALANCE INTEREST PAID
-------- --------- ---------- -------- --------- ---------- -------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Interest-earning assets:
Federal funds sold and
securities purchased
under agreements to
resell................ $ 0 $ 0 0.00% $ 1,669 $ 53 3.18% $ 7,624 $ 285 3.74%
Time deposits in other
banks................. 25 1 4.59 146 20 13.70 453 25 5.52
Taxable investment se-
curities.............. 287,892 19,444 6.75 228,661 16,550 7.24 212,328 17,057 8.03
Non-taxable investment
securities............ 22,819 2,103 9.22 26,914 2,631 9.78 29,990 2,266 7.56
Loans (net of unearned
discount)............. 446,135 40,699 9.12 382,680 36,236 9.47 351,241 36,932 10.52
-------- ------- -------- ------- -------- --------
Total interest-earning
assets................ 756,871 62,247 8.23 640,070 55,490 8.67 601,636 56,565 9.41
Non-interest earning as-
sets:
Cash and due from
banks................. 32,411 29,056 32,832
Premises and equipment. 10,335 10,673 11,858
Other assets........... 15,896 10,439 9,120
Less allowance for loan
losses................ (5,860) (5,375) (4,642)
Net unrealized
gains/(losses) on
available-for-sale
portfolio............. (705) 0 0
-------- -------- --------
Total.................. $808,948 $684,863 $650,804
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing
liabilities
Savings deposits....... $323,443 $ 8,249 2.55% $320,966 $ 8,677 2.70% $301,228 $ 10,442 3.47%
Time deposits.......... 229,449 9,964 4.34 190,166 8,285 4.36 201,229 10,909 5.42
Term borrowings........ 87,334 3,917 4.49 22,979 771 3.36 8,373 257 3.07
-------- ------- -------- ------- -------- --------
Total interest-bearing
liabilities........... 640,226 22,130 3.46 534,111 17,733 3.32 510,830 21,608 4.23
Non-interest-bearing
liabilities
Demand deposits........ 98,587 87,728 83,114
Other liabilities...... 6,102 5,726 5,992
Stockholders' equity.... 64,033 57,298 50,868
-------- -------- --------
Total.................. $808,948 $684,863 $650,804
======== ======== ========
Net interest income..... $40,117 $37,757 $ 34,957
======= ======= ========
Net yield on interest-
earning assets......... 5.31% 5.90% 5.82%
==== ===== =====
</TABLE>

The Company's net interest income, on a fully tax-equivalent basis, was $40.1
million in 1994. This represented a $2.4 million or 6.3% increase from 1993 and
resulted primarily from growth in interest-earning assets. Net interest income
grew $2.8 million or 8.0% in 1993 over 1992. Over $600,000 of 1993's growth
reflects premiums received on $12.9 million in investment securities called for
redemption.

25
<PAGE>

Average interest-earning assets grew by $116.8 million in 1994, after
increasing by $38.4 million in 1993 and $25.3 million in 1992. Slightly less
than half of 1994's growth was made possible by an expanded deposit base, with
branch acquisitions contributing approximately 60% of that deposit increase.
Greater short-term borrowing from the FHLB provided the balance of funding
needed to support 1994 interest-earning asset growth. In 1994, average loans
increased $63.5 million or 16.6% over 1993, while average investments increased
$55.1 million or 21.6% over 1993. The components of 1993's growth were a 9.0%
increase in average loans over 1992 and a 5.5% rise in average investments.

Average net interest margin decreased 59 basis points to 5.31% in 1994, as
compared to 5.90% in 1993 and 5.82% in 1992. For the fourth quarter of 1994,
the average net interest margin was 5.11%. This most recent level reflects a
decline from the peak achieved in the fourth quarter of 1992 of 6.16%. During
1993, rates on interest-bearing liabilities fell more slowly than the decline
in interest-earning asset yields. In 1994, interest-earning asset yields
continued to decrease through early spring before turning up with a lag in
response to the rising prime and other financial market rates. As such, yields
ended the year slightly higher than they began. On the other hand, the average
rate paid on interest-bearing liabilities increased in the first quarter of
1994, coincident with the rise in the Federal Funds rate, and ended the year
almost three quarters of a point higher than where it started.

The above rate patterns reflect the changing financial market environment and
the structure of the Bank's balance sheet. More specifically, the Company's
deposits have a shorter maturity or are subject to repricing more frequently
than its loans and investments, both of which are more fixed-rate in nature but
with a high degree of cash flow. As a result, with the exception of prime rate-
based loans, the Bank's overall yield on interest-earning assets adjusts more
slowly than rates paid on certificates of deposit; moderating this latter
impact is the typical lag of rate changes on regular savings and money market
accounts behind certificates of deposit repricing. Rates on the Bank's FHLB
borrowing, the majority of which are overnight or mature within 30 days, mirror
the rise in the Federal Funds rate.

Net interest income may also be analyzed by segregating the volume and rate
components of interest income and interest expense. The following table sets
forth for the periods indicated a summary of the changes in net interest income
for each major category of interest-earning assets and interest-bearing
liabilities resulting from volume changes and rate changes:

<TABLE>
<CAPTION>
1994 COMPARED TO 1993 1993 COMPARED TO 1992
------------------------------------- -------------------------------------
INCREASE (DECREASE) DUE INCREASE (DECREASE) DUE
TO CHANGE IN (1) TO CHANGE IN (1)
------------------------- -------------------------
VOLUME RATE NET CHANGE VOLUME RATE NET CHANGE
------------ ------------ ---------- ------------ ------------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Interest earned on:
Federal funds sold and
securities purchased
under agreement to
resell................ $ (27) $ (26) $ (53) $ (223) $ (9) $ (232)
Time deposits in other
banks................. (11) (8) (19) (17) 12 (5)
Taxable investment
securities............ 4,070 (1,176) 2,894 1,312 (1,819) (507)
Non-taxable investment
securities............ (384) (144) (528) (232) 597 365
Loans (net of unearned
discount)............. 5,840 (1,377) 4,463 3,158 (3,854) (696)
----------- ------------ ------ ----------- ------------ -------
Total interest-earning
assets(2)............. $ 9,694 $ (2,937) $6,757 $ 3,509 $ (4,584) $(1,075)
=========== ============ ====== =========== ============ =======
Interest paid on:
Savings deposits....... $ 65 $ (493) $ (428) $ 702 $ (2,467) $(1,765)
Time deposits.......... 1,717 (38) 1,679 (600) (2,024) (2,624)
Short-term borrowing... 2,812 334 3,146 455 59 514
Long-term debt......... (6) 6 0 (10) 10 0
----------- ------------ ------ ----------- ------------ -------
Total interest-bearing
liabilities(2)........ $ 3,627 $ 770 $4,397 $ 985 $ (4,860) $(3,875)
=========== ============ ====== =========== ============ =======
Net interest income(2).. $ 6,403 $ (4,043) $2,360 $ 2,304 $ 496 $ 2,800
=========== ============ ====== =========== ============ =======
</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.

26
<PAGE>

As a result of narrower margins, all of the increase in the Company's net
interest income in 1994 was due to interest-earning asset growth. More
specifically, approximately $6.4 million of 1994's growth in net interest
income was due to higher volume offset by $4.0 million from narrower margins.
This mix is in contrast to 1993's improvement in net interest income of $2.8
million of which wider margins contributed approximately $500,000.

NON-INTEREST INCOME

Non-interest income is comprised principally of fees from banking operations
and revenues from one-time events, such as net gains/losses from the sale of
investments, loans, and miscellaneous assets. Management's focus is to build
recurring fee-based income sources and to take advantage of one-time events
when they support a specific business objective.

In 1994, non-interest income was $5.1 million as compared to $4.8 million in
1993 and $5.1 million in 1992. All subcategories of recurring non-interest
income showed an increase in 1994 but were partially offset by non-recurring
investment security losses.

The following table sets forth information by category of non-interest income
for the Company for the years indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Fiduciary and investment services................... $ 1,380 $ 1,113 $ 898
Service charges on deposits......................... 1,621 1,478 1,419
Overdraft fees...................................... 971 901 847
Other service charges and fees...................... 1,519 1,186 1,455
Other operating income.............................. 131 101 279
Investment security gains (losses).................. (502) (15) 184
------- ------- -------
Total............................................. $ 5,120 $ 4,764 $ 5,082
======= ======= =======
Total non-interest income (excluding investment
security gains (losses)) as a percentage of average
assets............................................. 0.69% 0.70% 0.75%
</TABLE>

Income from fiduciary services increased $267,000, or 24.0% from 1993, to
approximately $1.4 million in 1994, primarily attributable to increased
business development efforts. Service charges and overdraft fees grew to
approximately $2.6 million, a 9.0% increase due to a higher deposit base and
the Company's commitment to reduce fee waivers. Investment services (selling
mutual funds and annuities through the Bank's branch network and financial
service representatives in selected geographic markets) was a new product
offered in 1994. Income generated from this product in 1994 was $148,000, and
is included in other service charges and fees.

Investment security losses of $502,000 in 1994 were caused by the sale of
approximately $27.2 million (carrying value) in investment securities.
Investment security losses in 1993 were $15,000, while investment security
gains in 1992 were $184,000. The $318,000 decline in non-interest income from
1992 to 1993 was due to this difference in investment security gains and the
absence of fees associated with the Company's non-bank computer subsidiary,
which was closed in late 1992.

27
<PAGE>

NON-INTEREST EXPENSE

The following table sets forth information by category of non-interest
expenses of the Company for the years indicated:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Salary expense...................................... $10,486 $ 9,631 $ 9,932
Payroll taxes and benefits.......................... 2,612 2,321 2,010
Net occupancy expense............................... 2,043 1,814 1,849
Equipment expense................................... 1,697 1,642 2,327
Professional fees................................... 1,282 1,528 1,417
Data processing expense............................. 2,573 2,193 1,805
Amortization........................................ 355 166 348
Stationary and supplies............................. 739 696 898
Deposit insurance premiums.......................... 1,390 1,317 1,308
Other............................................... 3,321 3,519 4,553
------- ------- -------
Total........................................... $26,498 $24,827 $26,447
======= ======= =======
Total operating expenses as a percentage of average
assets............................................. 3.28% 3.63% 4.06%
Efficiency ratio(1)................................. 57.94% 58.45% 65.48%
</TABLE>

(1) Non-interest expense to recurring operating income

Non-interest expenses increased $1.7 million, or 6.7%, to $26.5 million in
1994, compared to a decline of $1.6 million, or 6.1%, from 1992 to 1993. Salary
expenses comprised the largest share of non-interest expense, increasing 8.9%
from 1993 to 1994 after decreasing 3.0% from 1992 to 1993. The increase in 1994
is a result of 34 additional full-time employees hired largely to support four
new branches and business development efforts. The decrease from 1992 to 1993
was due to the closing of a non-bank subsidiary late in 1992.

Amortization, supplies, data processing, net occupancy, and FDIC insurance
premiums increased in 1994 in comparison to 1993 as a result of the Bank's
acquisition of three Columbia Savings FSA branches from the Resolution Trust
Company in June 1994 and the Bank's acquisition of Chase's Cato, New York
branch in October 1994.

INCOME TAX EXPENSE

Total income tax expense of the Company was approximately $6.3 million, $5.8
million and $3.1 million in 1994, 1993, and 1992, respectively. The Company's
effective income tax rate for the years 1994, 1993 and 1992 was 38.2%, 37.6%,
and 29.5%, respectively. Year-to-year increases are the result of higher
taxable operating revenues and a higher effective tax rate.

Effective January 1993, the Company adopted the provisions of SFAS No. 109,
"Accounting for Income Taxes", which requires an asset-liability approach to
recognizing the tax effects of temporary differences between tax and financial
reporting. In prior years, the Company accounted for the tax effects of timing
differences between tax and financial reporting using Accounting Principle
Board Opinion Number 11. This change had no significant effect on the 1993
consolidated financial statements.

ASSET/LIABILITY MANAGEMENT

Asset/liability management involves the maintenance of an appropriate balance
between interest sensitive assets and interest sensitive liabilities to reduce
interest rate exposure while also providing liquidity to satisfy the cash flow
requirements of operations and to meet customers' fluctuating demands for
funds, either in terms of loan requests or deposit withdrawals.

28
<PAGE>

The Company's management has placed an increased emphasis on interest rate
sensitivity management. Interest-earning assets and interest-bearing
liabilities are those which have yields or rates which are subject to change
within a future time period due to maturity of the instrument or changes in the
rate environment. Gap refers to the difference between interest-earning assets
and interest-bearing liabilities repricing within given time frames. As a
result, major fluctuations in net interest income and net earnings could occur
due to imbalances between the amounts of interest-earning assets and interest-
bearing liabilities, as well as different repricing characteristics.
Asset/liability management seeks to protect earnings by maintaining an
appropriate balance between interest-earning assets and interest-bearing
liabilities in order to minimize fluctuations in the net interest margin and
net earnings in periods of volatile interest rates.

A tool known as a gap maturity matrix is used to isolate interest rate
sensitivity or repricing mismatches between assets and liabilities. The
diagonal band of bold faced numbers in boxes on the matrix indicates basic
matching of asset/liability repricing and maturity opportunities. Outstandings
shown above the band are assets subject to repricing more quickly than their
supporting liabilities (asset sensitivity). Outstandings shown below the band
are liabilities subject to repricing more quickly than the assets which they
support (liability sensitivity).

The following is the Company's gap maturity matrix:

AS OF DECEMBER 31, 1994(1)(2)

<TABLE>
<CAPTION>
USES OF FUNDS
>60 37-60 25-36 13-24 181-360 91-180 61-90 31-60 1-30
ASSETS MONTHS MONTHS MONTHS MONTHS DAYS DAYS DAYS DAYS DAYS DAILY TOTALS
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
915,501 275,982 92,230 98,693 85,118 98,827 41,790 24,007 23,618 175,236 0 915,501
LIABILITIES 8.40% 6.47% 8.60% 9.22% 7.64% 9.72% 10.28% 9.29% 8.85% 9.36% 0.00% 8.30%
-------------------------------------------------------------------------------------------------------------

SOURCES
OF
FUNDS
>60 378,152 275,982 92,230 9,940 378,152
Months............. 1.38% 5.09% 7.22% 7.84%

37-60 18,245 18,245 18,245
Months............. 5.84% 3.38%

25-36 10,896 10,896 10,896
Months............. 5.47% 3.75%

13-24 66,974 59,612 7,362 66,974
Months............. 4.64% 4.58% 3.00%

181-360 113,057 77,756 35,301 113,057
Days............... 4.12% 3.52% 5.60%

91-180 99,866 63,526 36,340 99,866
Days............... 3.74% 5.98% 6.54%

61-90 18,847 5,450 13,397 18,847
Days............... 4.42% 5.86% 4.87%

31-60 56,151 10,610 23,618 21,923 56,151
Days............... 5.43% 3.86% 3.42% 3.93%

1-30 96,013 96,013 96,013
Days............... 5.12% 4.24%

Daily.............. 57,300 57,300 57,300
5.13% 4.23%
------- ------- ------ ------ ------ ------ ------ ------ ------ ------- -------
Totals............. 915,501 275,982 92,230 98,693 85,118 98,827 41,790 24,007 23,618 175,236 0 915,501
------- ------- ------ ------ ------ ------ ------ ------ ------ ------- ----- -------
Net Interest
Margin............. 3.29% 5.09% 7.22% 4.59% 3.48% 5.84% 6.45% 4.42% 3.42% 4.20% 0.00% 5.01%
</TABLE>

(1) Outstandings (dollars in thousands) and yields by repricing interval (days
or months)
(2) 85% of savings from accounts of individuals, partnerships and corporations
("IPC") are treated as core (>60 months). 100% of savings from accounts of
U.S. government, state, and local municipalities ("Public Funds") are
treated as 181-360 days. 95% of IPC Money Markets are treated as core (91-
180 days). 100% of Public Fund Money Markets are treated as 181-360 days.
15% of IPC Savings are spread over 24 months, and 5% of IPC Money Markets
are in 181 to 360 days.
(3) Totals may not foot due to rounding.

29
<PAGE>

As of December 31, 1994, the Bank was structurally liability sensitive in
both its short-term (under one year) strategic planning horizon and in its
long-term (over one year) horizon. As indicated by the matrix, short-term
liability sensitivity was $115.0 million while long-term liability sensitivity
was $17.0 million. Much of this sensitivity was the result of funding longer-
term fourth quarter investment purchases with shorter-term borrowing. Such a
funding mismatch was carried out with the intention that such borrowing would
be temporary in nature. These short-term borrowings are expected to be replaced
with lower cost core deposit liabilities assumed in the Acquisition. See "The
Acquisition."

The following table sets forth supporting information to the gap matrix
concerning interest rate sensitivity of the Company's consolidated assets and
liabilities as of December 31, 1994:

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1994
-----------------------------------------------------------
NON-RATE
DAYS SENSITIVE
---------------------------- 1-5 AND OVER 5
0-90 91-180 181-365 YEARS YEARS TOTAL
-------- -------- -------- -------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Due from banks............... -- -- -- -- $ 30,522 $ 30,522
Investments:
Fixed-rate mortgage-backed. $ 4,339 $ 4,241 $ 8,204 $ 67,625 61,041 145,450
Floating-rate mortgage-
backed.................... 9,926 -- -- -- -- 9,926
Floating-rate debentures... 6,082 -- -- -- -- 6,082
Other investments.......... 19,093 1,039 10,915 111,434 74,580 217,061
-------- -------- -------- -------- --------- --------
Total investments........ 39,440 5,280 19,119 179,059 135,621 378,519
Loans:
Adjustable rate............ 8,160 4,907 17,520 153 -- 30,740
Fixed-rate................. 4,122 4,122 8,244 24,722 71,187 112,397
Home equity................ 32,113 -- -- -- -- 32,113
Commercial variable........ 104,774 -- -- -- -- 104,774
Other commercial........... 5,902 2,002 2,987 18,476 9,305 38,672
Installment, net........... 28,350 25,479 50,957 53,631 5,966 164,383
-------- -------- -------- -------- --------- --------
Total loans.............. 183,421 36,510 79,708 96,982 86,458 483,079
Loan loss reserve............ -- -- -- -- (6,281) (6,281)
Other assets................. -- -- -- -- 29,662 29,662
-------- -------- -------- -------- --------- --------
TOTAL ASSETS................. $222,861 $ 41,790 $ 98,827 $276,041 $ 275,982 $915,501
======== ======== ======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Deposits:
Demand deposits............ -- -- -- -- 103,007 103,007
Savings/NOW................ 3,068 3,069 21,045 12,274 201,860 241,316
Money markets.............. -- 42,608 22,099 -- -- 64,707
CDs/IRA/Other.............. 62,943 54,189 69,913 83,291 272 270,608
-------- -------- -------- -------- --------- --------
Total deposits........... 66,011 99,866 113,057 95,565 305,139 679,638
Short-term funds............. 162,300 -- -- 550 -- 162,850
Other liabilities............ -- -- -- -- 6,723 6,723
Shareholders' equity......... -- -- -- -- 66,290 66,290
-------- -------- -------- -------- --------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY........ $228,311 $ 99,866 $113,057 $ 96,115 $ 378,152 $915,501
======== ======== ======== ======== ========= ========
INTEREST RATE SENSITIVITY
GAP......................... $ (5,450) $(58,076) $(14,230) $179,926 $(102,170)
-------- -------- -------- -------- ---------
CUMULATIVE INTEREST RATE
SENSITIVITY GAP............. $ (5,450) $(63,526) $(77,756) $102,170 0
-------- -------- -------- -------- ---------
</TABLE>

30
<PAGE>

LIQUIDITY AND BORROWING

The primary objective of liquidity management is to maintain a balance
between sources and uses of funds in order that the cash flow needs of the Bank
are met in the most economical and expedient manner. The liquidity needs of a
financial institution require the availability of cash to meet the withdrawal
demands of depositors and the credit commitments of borrowers. Due to the
potential for unexpected fluctuation in deposits and loans, active management
of the Bank's liquidity is critical. In order to respond to these
circumstances, sources of both on- and off-balance sheet funding are in place.

Traditionally, the Bank has relied on such sources as cash on hand, loan and
investment maturities, and large certificates of deposit to fund liquidity
needs. The Bank has chosen to expand its sources to include lines of credit
with the FHLB and other correspondent banks, as well as securities repurchase
agreements with a number of brokerage firms. Excess short-term borrowing
capacity, under lines of credit, available for use as of December 31, 1994
amounted to approximately $62.0 million, compared to $64.5 million as of
December 31, 1993. The Company has additional borrowing capacity under
securities repurchase agreements.

The Bank'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 relationship within 30 days between liquid assets and short term
liabilities which are vulnerable to non-replacement; and second, a projection
of subsequent cash flow funding needs over an additional 60 days. The Bank's
minimum policy level of liquidity under the Basic Surplus/Deficit model is 7.5%
of total assets for both the 30- and 90-day time horizons. At December 31,
1994, this ratio was 12.8% and 13.3%, respectively.

As of December 31, 1994, borrowing amounted to $162.9 million as compared to
$57.6 million at December 31, 1993. Although this increase is attributable in
part to seasonal deposit fluctuations and greater than expected fourth quarter
loan demand, the majority of new funding was to support management's investment
portfolio objectives during 1994. Average borrowing for 1994 totaled $87.3
million versus $23.0 million in 1993. The Chase Deposits are expected to be
used to repay the Bank's currently outstanding short-term borrowing. See "The
Acquisition."

CAPITAL RESOURCES

The Company's Tier I capital to risk-weighted assets ratio at December 31,
1994 was 12.43%, compared to 14.87% at December 31, 1993 and 13.13% at December
31, 1992. These ratios exceed the regulatory Tier I capital requirement of
4.00%. The Company's total risk-based capital to risk-weighted assets ratio at
December 31, 1994 was 13.68% as compared to 16.12% at December 31, 1993 and
14.37% at December 31, 1992. These ratios exceeded the regulatory total risk-
based capital requirement of 8.00%. The Company's Tier I leverage ratio at
December 31, 1994 was 6.81%, compared to 8.46% at December 31, 1993 and 7.90%
at December 31, 1992. These ratios exceeded the regulatory Tier I leverage
ratio requirement of 4.00%.

EFFECTS OF INFLATION

The financial statements and related data presented herein have been prepared
in accordance with generally accepted accounting principles which require the
measurement of financial position and operating results in terms of historical
dollars without considering changes in the relative purchasing power of money
over time due to inflation.

Virtually all of the assets and liabilities of the Company are monetary in
nature. As a result, interest rate changes have a more significant impact on
the Company's performance than the effects of general levels of inflation.

31
<PAGE>

PENDING ACQUISITION

For a discussion of the Company's current assessment of the impact of the
Acquisition on the operating performance of the Company, see "The
Acquisition -- Impact of the Acquisition on Operating Performance."

BUSINESS

GENERAL

The Company is a Delaware corporation, incorporated in 1983 as a bank holding
company subject to the Bank Holding Company Act of 1956, as amended. The
Company's principal business is to serve as a holding company for the Bank. The
Bank is a national bank formed in 1992 by consolidation of the Company's then
existing banking subsidiaries, The St. Lawrence National Bank, Horizon Bank,
N.A., The Exchange National Bank, The Nichols National Bank and Community
National Bank.

The Bank is a full service commercial bank providing a range of commercial
and retail banking services through its two regional offices in Canton, New
York and Olean, New York, as well as through 36 banking offices in the Northern
New York, Finger Lakes and Southern Tier counties of St. Lawrence, Jefferson,
Lewis, Cayuga, Seneca, Ontario, Oswego, Allegany, Cattaraugus, Tioga and
Steuben.

The Bank is a member of the Federal Reserve System and FHLB, and its deposits
are insured by the FDIC up to applicable limits.

BANKING SERVICES

The Bank offers a range of commercial and retail banking services in each of
its market areas to business, individual, agricultural and government
customers.

Account Services. The Bank's account services include checking accounts,
negotiable orders of withdrawal ("NOW") and savings accounts, time deposit
accounts and individual retirement accounts.

Lending Activities. The Bank's lending activities include the making of
residential and farm loans, business lines of credit, working capital
facilities, inventory and dealer floor plans, as well as installment,
commercial, term and student loans.

The Company believes that its predominant focus on the retail borrower
enables its loan portfolio to be highly diversified. As of December 31, 1994,
over 70% of loans outstanding were made to consumers borrowing on an
installment and mortgage loan basis. In addition, the typical loan to the
Company's commercial business borrowers was under $50,000, with less than 15%
of the commercial portfolio being in loans in excess of $500,000.

Other Services. The Bank offers a range of trust services, including
investment management, financial planning and custodial services. The Bank also
offers safe deposit boxes, travelers checks, money orders, wire transfers,
collections, foreign exchange, drive-in facilities and twenty-four hour
depositories. Through an accounts receivable management program, the Bank
provides a service to qualifying businesses by purchasing accounts receivable
on a discounted basis. In addition, through an affiliation with Prime Vest,
Inc., the Bank offers non-bank financial products including fixed- and
variable-rate annuities, mutual funds, and stock investments.

LOAN PORTFOLIO

Net loans grew 15.7% from $412.2 million in 1993 to $476.8 million in 1994.
This increase was achieved in most loan categories and was attributable to
business development efforts by the Bank's lending personnel. The largest
volume gain was realized in installment loans to individuals.

32
<PAGE>

The amounts of the Bank's loans outstanding (net of deferred loan fees or
costs) at the dates indicated are shown in the following table according to
type of loan:

<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Real estate mortgages
Residential..................... $196,548 $177,059 $146,135 $121,982 $109,995
Commercial loans secured by real
estate......................... 34,677 31,851 23,411 14,270 10,627
Commercial real estate.......... 927 1,063 1,647 2,316 2,237
Farm............................ 7,625 7,421 6,670 1,105 1,115
-------- -------- -------- -------- --------
Total......................... 239,777 217,394 177,863 139,673 123,974
-------- -------- -------- -------- --------
Commercial, financial, and
agricultural
Agricultural loans.............. 13,295 11,564 10,152 16,664 16,823
Commercial loans................ 67,976 58,252 40,524 44,301 48,875
-------- -------- -------- -------- --------
Total......................... 81,271 69,816 50,676 60,965 65,698
-------- -------- -------- -------- --------
Installment loans to individuals
Direct.......................... 58,371 58,963 64,486 74,848 83,328
Indirect........................ 121,148 89,513 88,068 100,140 120,972
Student and other............... 8,690 6,337 6,492 3,353 7,888
-------- -------- -------- -------- --------
Total......................... 188,209 154,813 159,046 178,341 212,188
-------- -------- -------- -------- --------
Other loans....................... 1,482 1,578 3,778 4,419 5,109
-------- -------- -------- -------- --------
Gross loans....................... 510,739 443,601 391,363 383,398 406,969
Less: Unearned discount........... 27,660 25,730 29,007 34,829 42,235
Reserve for possible loan
losses......................... 6,281 5,706 4,982 4,312 3,607
-------- -------- -------- -------- --------
Net loans......................... $476,798 $412,165 $357,374 $344,257 $361,127
======== ======== ======== ======== ========
</TABLE>

Real Estate Mortgages. Real estate mortgages increased 10.3% in 1994, as
compared to 22.2% in 1993 and 27.3% in 1992. Significant increases in
residential real estate mortgages reflected the nationwide surge in
refinancing, but slowed in 1994 due to increasing interest rates. Outstandings
of the Bank's home equity loan product have continued to grow in recent years
in response to its tax-deductible nature and the Bank's marketing efforts.

Commercial, Financial, and Agricultural. Growth in this category of 16.4% in
1994 and 37.8% in 1993 was due to increased business development efforts as a
result of adding commercial lenders to marketplaces in the Southern Region and
an agricultural lender in the Bank's Northern Region. The economic recession
which began in mid-1990 caused the decrease in volumes from 1990 to 1992.
Approximately 90% of the Bank's commercial customers borrow less than $100,000,
which as a group constitute half of commercial loans outstanding.

Installment Loans to Individuals. The 21.6% increase in this category in 1994
reflects a reversal of the declining trend reflected for 1990 through 1993.
This reversal resulted from increased demand for installment debt indirectly
originated through automobile, marine and mobile home dealers. This type of
lending has been strong in the Bank's Northern Region for a number of years,
while the commitment to indirect lending in the Southern Region was re-
emphasized in late 1993 with continued growth in 1994. The declining trend from
1990 through 1993 resulted from the 1990-91 national recession and the lag in
economic rebound in the rural New York State markets in which the Bank does
business.

33
<PAGE>

MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES

The following table shows the amount of loans outstanding as of December 31,
1994 which, based on remaining scheduled repayments of principal, are due in
the periods indicated:

<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
------------------------------------------
MATURING
MATURING AFTER ONE MATURING TOTAL
IN ONE YEAR BUT WITHIN AFTER BOOK
OR LESS FIVE YEARS FIVE YEARS VALUE
----------- ---------- ---------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial, financial, and
agricultural....................... $19,398 $ 43,120 $ 18,753 $ 81,271
Real estate -- mortgage............. 1,440 17,275 221,062 239,777
Installment......................... 53,162 101,967 6,902 162,031
------- -------- -------- --------
Total............................. $74,000 $162,362 $246,717 $483,079
======= ======== ======== ========
</TABLE>

The following table sets forth the sensitivity of the loan amounts due after
one year to changes in interest rates:

<TABLE>
<CAPTION>
DECEMBER 31, 1994
------------------------
FIXED RATE VARIABLE RATE
---------- -------------
<S> <C> <C>
Due after one year but within five years.......... $109,611 $ 52,751
Due after five years.............................. 166,559 80,158
-------- --------
Total........................................... $276,170 $132,909
======== ========
</TABLE>

NON-PERFORMING ASSETS

The following table presents information concerning the aggregate amount of
non-performing assets:

<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Loans accounted for on a non-accrual
basis................................ $2,396 $1,738 $ 881 $1,369 $2,064
Accruing loans which are contractually
past due 90 days or more as to
principal or interest payments....... 862 653 726 957 1,138
------ ------ ------ ------ ------
Total non-performing loans............ 3,258 2,391 1,607 2,326 3,202
Loans which are "troubled debt
restructurings" as defined in
Statement of Financial Accounting
Standards No. 15 "Accounting by
Debtors and Creditors for Troubled
Debt Restructurings"................. 15 243 356 1,720 1,423
Other real estate..................... 223 433 459 1,426 430
------ ------ ------ ------ ------
Total non-performing assets......... $3,496 $3,067 $2,422 $5,472 $5,055
====== ====== ====== ====== ======
Ratio of allowance for loan losses to
period-end loans..................... 1.30% 1.37% 1.37% 1.24% 0.99%
Ratio of allowance for loan losses to
period-end non-performing loans...... 192.79% 238.67% 310.05% 185.40% 112.64%
Ratio of allowance for loan losses to
period-end non-performing assets..... 179.67% 186.06% 205.72% 78.81% 71.35%
Ratio of non-performing assets to
period-end total loans and other real
estate owned......................... 0.72% 0.73% 0.67% 1.56% 1.38%
</TABLE>

The impact of interest not recognized on non-accrual loans, and interest
income that would have been recorded if the restructured loans had been current
in accordance with their original terms, was immaterial.

34
<PAGE>

The Bank's policy is to place a loan on a non-accrual status and recognize
income on a cash basis when it is more than 90 days past due, except when in
the opinion of management it is well secured and in the process of collection.

Non-performing loans, defined as non-accrual loans plus accruing loans 90
days or more past due, totaled $3.3 million at December 31, 1994. This level is
approximately $870,000 higher than at year-end 1993, largely due to a
construction loan where recent cost overruns delayed permanent financing by the
Farmers' Home Administration. At year-end 1993, a more critical view of certain
commercial credits was taken by the Company's then new chief executive officer
and lending personnel added as a result of organizational turnover; the result
was an increase in non-performing loans of about $780,000 to $2.4 million.

Total delinquencies, defined as all loans over 30 days past due, decreased
2.7% in 1994 to $6.8 million. The general reduction in delinquencies reflects
the consolidation of the Southern Region collection department, heavy emphasis
on taking prompt corrective action, and adherence to a strict and timely
charge-off policy. Other real estate owned totaled approximately $223,000, or
0.02% of total assets.

During 1993, the Financial Accounting Standards Board issued Statement No.
114, "Accounting By Creditors for Impairment of a Loan." This pronouncement,
effective for fiscal years beginning 1995, is not expected to have a material
effect on the Company's financial statements.

SUMMARY OF LOAN LOSS EXPERIENCE

The following table summarizes loan balances at the end of each period
indicated and the daily average amount of loans. Also summarized are changes in
the allowance for possible loan losses arising from loans charged off and
recoveries on loans previously charged off and additions to the allowance which
have been charged to expenses.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Amount of loans outstanding
at end of period............ $510,739 $443,601 $391,363 $383,398 $406,968
======== ======== ======== ======== ========
Daily average amount of loans
(net of unearned discounts). $446,135 $382,680 $351,034 $352,960 $370,190
======== ======== ======== ======== ========
Balance of allowance for
possible loan losses at
beginning of period......... $ 5,706 $ 4,982 $ 4,312 $ 3,607 $ 2,848
Loans charged off:
Commercial, financial, and
agricultural.............. 502 236 951 244 893
Real estate mortgage....... 41 19 92 41 90
Installment................ 1,072 1,155 1,558 1,983 1,577
-------- -------- -------- -------- --------
Total loans charged off.. 1,615 1,410 2,601 2,268 2,560
Recoveries of loans
previously charged off:
Commercial, financial, and
agricultural.............. 38 85 25 28 69
Real estate mortgage....... 1 1 0 0 16
Installment................ 449 542 517 429 274
-------- -------- -------- -------- --------
Total recoveries......... 488 628 544 457 359
-------- -------- -------- -------- --------
Net loans charged off........ 1,127 782 2,057 1,811 2,201
-------- -------- -------- -------- --------
Additions to allowance
charged to expense (1)...... 1,702 1,506 2,727 2,516 2,960
-------- -------- -------- -------- --------
Balance at end of period..... $ 6,281 $ 5,706 $ 4,982 $ 4,312 $ 3,607
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding... 0.25% 0.20% 0.59% 0.51% 0.59%
</TABLE>

(1) The additions to the allowance during 1990 through 1994 were determined
using actual loan loss experience and future projected loan losses and
other factors affecting the estimate of possible loan losses.

35
<PAGE>

Loans charged off in 1994 totaled $1.6 million as compared to $1.4 million in
1993 and $2.6 million in 1992. Net loans charged off totaled $1.1 million in
1994, $782,000 in 1993, and $2.1 million in 1992.

The allowance for possible loan losses has been allocated according to the
amount deemed to be reasonably necessary to provide for the possibility of
losses being incurred within the following categories of loans at the dates
indicated:

<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990
--------------------- --------------------- --------------------- --------------------- ---------------------
PERCENT OF PERCENT OF PERCENT OF PERCENT OF PERCENT OF
LOANS IN LOANS IN LOANS IN LOANS IN LOANS IN
EACH EACH EACH EACH EACH
AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO AMOUNT OF CATEGORY TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ----------- --------- ----------- --------- ----------- --------- ----------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial,
financial, &
agricultural.... $1,832 15.91% $3,464 15.74% $1,864 12.95% $1,241 15.45% $1,039 16.35%
Real estate --
mortgage........ 2,222 46.95% 341 49.01% 220 45.45% 130 37.16% 46 30.84%
Installment...... 1,422 37.14% 1,342 35.25% 1,400 41.60% 2,015 47.39% 1,252 52.80%
Unallocated...... 805 N/A 559 N/A 1,498 N/A 926 N/A 1,270 N/A
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total........... $6,281 100.00% $5,706 100.00% $4,982 100.00% $4,312 100.00% $3,607 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

INVESTMENT PORTFOLIO

As of December 31, 1994, the carrying value of the Company's total investment
portfolio was $378.5 million, up $125.1 million from the prior year.
Approximately 77.2% of the carrying value of the Company's total investment
portfolio is designated "held-to-maturity" and the balance is designated held
"available-for-sale."

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

36
<PAGE>

The following table sets forth the amortized cost and market value for the
Company's available-for-sale investment portfolio, followed by the carrying
value of the total investment portfolio:

<TABLE>
<CAPTION>
AT DECEMBER 31,
-------------------------------------
1994 1993
------------------ ------------------
AMORTIZED AMORTIZED
COST/BOOK MARKET COST/BOOK MARKET
VALUE VALUE VALUE VALUE
--------- ------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. Government corporations and
agencies............................... $ 33,691 $32,415 $ 58,722 $ 60,418
Obligations of states and political
subdivisions........................... 3,432 3,472 7,194 7,420
Corporate securities.................... 567 568 1,109 1,153
Mortgage-backed securities.............. 37,235 35,199 53,177 53,362
Equity securities(1).................... 14,149 14,158 4,740 4,753
Federal Reserve Bank common stock....... 552 552 500 500
-------- ------- -------- --------
Totals................................ $ 89,626 $86,364 $125,442 $127,606
======= ========
Net unrealized gains/(losses) on
available-for-sale portfolio........... (3,262) 2,164
-------- --------
Total available-for-sale portfolio.... 86,364 127,606
Total held-to-maturity portfolio...... 292,156 125,847
-------- --------
Total carrying value of investment
portfolio.......................... $378,520 $253,453
======== ========
</TABLE>

(1) Includes $13,805, $13,805, $4,396 and $4,396 of FHLB common stock.

The following table sets forth the amortized cost and market value of the
Company's investment portfolio as of December 31, 1992:

<TABLE>
<CAPTION>
AMORTIZED MARKET
COST VALUE
--------- --------
(IN THOUSANDS)
<S> <C> <C>
U.S. Treasury securities and obligations of U.S.
government corporations and agencies................ $106,797 $112,679
Obligations of states and political subdivisions..... 27,940 29,207
Corporate securities................................. 5,182 5,254
Mortgage-backed securities........................... 117,931 120,936
Equity securities.................................... 4,448 4,459
Federal Reserve Bank common stock.................... 500 500
-------- --------
Totals............................................. $262,798 $273,035
======== ========
</TABLE>

The 49.3% increase between 1993 and 1994 in the carrying value of the
Company's investment portfolio is largely attributed to an unusually low
starting balance at the beginning of 1994 as well as by investment of the net
proceeds from $75.2 million in deposits assumed in 1994 through the acquisition
of four branches. In late 1993, the Company allowed the portfolio to mature
rather than aggressively purchase new securities during a time of historically
low interest rates. This decision continued into the first quarter of 1994
until February, when the initial increase in overnight rates by the Federal
Reserve Bank occurred. In addition to the funds provided by the branch
acquisitions, growth in the investment portfolio was supported by $85.8 million
in increased FHLB borrowing during the last nine months of 1994.

As interest rates began their rise in the first quarter of 1994, the Company
began to pursue a strategy that focused on purchasing securities with high cash
flow characteristics. Bonds purchased during this period included premium 15-
year and balloon mortgage-backed securities. The average duration of these
instruments principally ranged from 1.5 to 3.4 years.

As the movement in longer-term rates began to stabilize further in 1994, the
Company's investment securities objective moved away from cash flow production
to call protection. Bonds purchased during this period included ten-year agency
debentures with three- and five-year embedded call options. Depending on

37
<PAGE>

whether the embedded call options are exercised at a future date, the average
duration of these instruments ranged between 2.5 and 6.9 years.

Finally, as the yield curve flattened late in the fourth quarter, purchases
were largely confined to slightly discounted, intermediate-term mortgage-
backed securities. The average duration of these instruments ranged between
4.0 and 5.0 years while providing a modest level of cash flow for reinvestment
purposes.

During 1994, the composition of the Company's investment portfolio continued
to shift away from the municipal, corporate and private sectors to U.S.
Government agency bonds and agency mortgage-backed obligations. As of December
31, 1994, the latter two security types represented approximately 90% of total
portfolio investments, up from a level of 88% at year-end 1993. The
portfolio's weighting under risk-based capital requirements at December 31,
1994 was 18.1%, up slightly from 16.6% as of December 31, 1993.

The average life of the portfolio, including the exercise of embedded call
options, extended to 3.5 years as of December 31, 1994. As of December 31,
1993, the average life of the portfolio stood at 2.3 years. The investment
strategies pursued during 1994 were largely responsible for this extension.

Average investment yields for 1994 declined to 6.95% from 7.24% for 1993
(adjusted for a one-time benefit in 1993 of approximately $600,000 in option-
adjusted premiums received from agency debentures called prior to maturity).
This decrease is attributed to lower investment yields on securities purchased
in the latter half of 1993 and early 1994.

During the fourth quarter of 1994, the Company chose to sell $27.2 million
(carrying value) in securities from its available-for-sale portfolio,
replacing lower yielding investments with higher yielding investments.
Although these sales produced a net pre-tax loss of approximately $502,000 for
the quarter, the loss is expected to be recaptured in 1995 through the higher
yields earned from reinvestment of the sales proceeds. In addition, the
reinvestment will produce a higher level of future earnings, net of the pre-
tax loss, over the average term-to-maturity of the investments sold.

The following table sets forth as of December 31, 1994, the maturities of
investment securities and the weighted-average yields of such securities,
which have been calculated on the basis of the cost, weighted for scheduled
maturity of each security, and adjusted to a fully tax-equivalent basis:

<TABLE>
<CAPTION>
AT DECEMBER 31, 1994
-----------------------------------------------------------
AMOUNT AMOUNT AMOUNT
MATURING MATURING MATURING AFTER AMOUNT
WITHIN ONE AFTER ONE BUT FIVE BUT MATURING
YEAR WITHIN FIVE WITHIN TEN AFTER TEN TOTAL
HELD-TO-MATURITY PORTFOLIO OR LESS YEARS YEARS YEARS COST
- -------------------------- ---------- ------------- -------------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies. $ 0 $ 7,794 $146,878 $ 0 $154,672
Mortgage-backed
securities............... 5 11,075 5,948 103,150 120,178
States and political
subdivisions............. 4,509 10,725 2,071 0 17,305
Other..................... 0 2 0 0 2
------ ------- -------- -------- --------
Total investment
securities............. $4,514 $29,596 $154,897 103,150 $292,157
====== ======= ======== ======== ========
Weighted-average yield for
year (1)................. 4.68% 7.06% 7.39% 7.66% 7.41%
<CAPTION>
AVAILABLE-FOR-SALE
PORTFOLIO
- ------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury and other
U.S. government agencies. $ 999 $ 2,107 $ 30,585 $ 0 $ 33,691
Mortgage-backed
securities............... 0 1,739 6,016 29,480 37,235
States and political
subdivisions............. 2,998 252 182 0 3,432
Other..................... 567 0 0 0 567
------ ------- -------- -------- --------
Total investment
securities............. $4,564 $ 4,098 $ 36,783 $ 29,480 $ 74,925
====== ======= ======== ======== ========
Weighted-average yield for
year (1)................. 7.54% 6.93% 6.85% 6.68% 6.83%
</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
34%. 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.

38
<PAGE>

DEPOSITS

The Bank offers a variety of deposit instruments typical of most commercial
banks. Total deposits averaged $651.5 million in 1994, $598.9 million in 1993
and $585.6 million in 1992. The deposit growth of 8.8% in 1994 was almost four
times the growth rate in 1993. This rate is attributed largely to the Bank's
three branch purchases in the middle of 1994 and one in the fourth quarter of
1994. The growth rate in 1992 was 3.4%.

With the exception of 1994, the Bank's level of stable core deposits has
climbed at a faster rate than total deposits; the 1990-1994 average core
deposit growth rate was 6.3% versus 4.7% for all deposits. The difference
represents the Company's objective to reduce certificates of deposit of
$100,000 or more when a satisfactory margin cannot be earned over the
prevailing large deposit market rate or when other more cost effective forms of
temporary borrowing can be obtained. In 1994 certificates of deposit increased
over the prior year because rates in certain maturities were competitive with
FHLB borrowings.

Deposits of local municipalities accounted for $81.2 million or 13.2% of
average core deposits in 1994.

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1993 1992
------------------ ------------------ ------------------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID BALANCE RATE PAID
-------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing
demand deposits........ $ 98,587 N/A $ 87,728 N/A $ 83,114 N/A
Interest-bearing demand
deposits............... 65,805 1.68% 63,607 1.88% 62,525 2.84%
Regular savings
deposits............... 183,881 2.85 179,128 3.03 156,964 3.79
Money market deposits... 73,757 2.57 78,231 2.63 81,739 3.32
Time deposits........... 229,449 4.34 190,166 4.36 201,229 5.42
-------- -------- --------
Total average daily
amount of domestic
deposits............. $651,479 2.80% $598,860 2.83% $585,571 3.65%
======== ======== ========
</TABLE>

The remaining maturities of time deposits in amounts of $100,000 or more
outstanding at December 31, 1994 and 1993 are summarized below:

<TABLE>
<CAPTION>
AT DECEMBER 31,
---------------
1994 1993
------- -------
(IN THOUSANDS)
<S> <C> <C>
Less than three months......................................... $29,963 $12,410
Three months to six months..................................... 9,983 7,869
Six months to one year......................................... 4,248 1,881
Over one year.................................................. 3,589 85
------- -------
Total........................................................ $47,783 $22,245
======= =======
</TABLE>

39
<PAGE>

BORROWING

The following table summarizes the outstanding balances of short-term
borrowing of the Company for the years indicated:

<TABLE>
<CAPTION>
AT DECEMBER 31,
--------------------------
1994 1993 1992
-------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Federal funds purchased............................. $ 57,300 $57,000 $32,836
Term borrowing at banks (original term)
90 days or less................................... 80,000 0 20,000
1 year............................................ 25,000 0 0
-------- ------- -------
Balance at end of period........................ $162,300 $57,000 $52,836
======== ======= =======
Daily average during the year....................... $ 86,777 $22,892 $ 8,034
Maximum month-end balance........................... $163,700 $57,000 $52,836
Weighted-average rate during the year............... 4.48% 3.35% 3.02%
Year-end average rate............................... 5.44% 3.00% 3.13%
</TABLE>

Year-end 1994 total short-term borrowing amounted to $162.3 million as
compared to $57.0 million at year-end 1993. While a portion of this borrowing
was attributable to seasonal deposit fluctuations and greater than expected
fourth quarter loan demand, the majority of new funding was to support the
Company's investment portfolio objectives during 1994. Average borrowing for
the year totaled $87.3 million versus $23.0 million in 1993. The Chase Deposits
are expected to be used in part to repay the Bank's currently outstanding
short-term borrowings. See "The Acquisition."

RETURN ON ASSETS AND EQUITY

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

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Percentage of net income to average total
assets........................................ 1.25% 1.40% 1.15%
Percentage of net income to average
shareholders' equity.......................... 15.79 16.71 14.76
Percentage of dividends declared per common
share to net income per common share.......... 31.24 29.67 32.26
Percentage of average shareholders' equity to
average total assets.......................... 7.92 8.37 7.82
</TABLE>

COMPETITION

The Company, through the Bank, competes in three distinct banking markets in
the Northern ("Northern Market"), Finger Lakes ("Finger Lakes Market"), and
Southern Tier ("Southern Tier Market") regions of New York State. The Bank
considers its primary market areas in these regions to be the counties in which
it has banking facilities. Major competitors in these markets include local
branches of regional affiliates of banks based in New York City, Albany or
Buffalo, New York, as well as local independent banking and thrift institutions
and federal credit unions. Other competitors for deposits and loans within the
Bank's market areas include insurance companies, money market funds, consumer
finance companies and financing affiliates of consumer durable goods
manufacturers. Lastly, personal and corporate trust and investment counseling
services in competition with the Bank are offered by insurance companies,
investment counseling firms and other financial service firms and individuals.

The Bank is predominantly a 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 cities and villages within

40
<PAGE>

its geographic market areas. The Company believes that the local character of
business, the Bank's knowledge of the customer and customer needs, and its
comprehensive retail and small business products, together with rapid
decision-making at the branch and regional level, enable the Bank to compete
effectively.

NORTHERN MARKET. Branches in the Northern Market compete for loans and
deposits in the three county primary market area of St. Lawrence, Jefferson
and Lewis Counties in Northern New York State. Within this market area, the
Bank maintains a market share of 14.2% including commercial banks, credit
unions, savings and loan associations and savings banks./1/ The Northern
Region operates 18 office locations, and the Bank is ranked either first or
second in market share in 13 of the 14 towns where these offices are located.
The Bank's Northern Region also competes for loans where it has no banking
facilities; this secondary market area includes Franklin County.

FINGER LAKES MARKET. In the Finger Lakes Market, the Bank operates seven
office locations competing for loans and deposits in the four-county primary
market area of Seneca, Oswego, Ontario and Cayuga Counties. Within the Finger
Lakes Market area, the Bank maintains a market share of 1.3% including
commercial banks, credit unions, savings and loan associations and savings
banks./1/ The Bank is ranked either first or second in market share in five of
the seven Finger Lakes Market area towns where its offices are located.

SOUTHERN TIER MARKET. The Bank's Southern Tier Market consists of two
submarkets, the Olean submarket and the Corning submarket.

Olean Submarket. The Olean Submarket competes for loans and deposits in the
primary market area of Cattaraugus and Allegany Counties in the Southern Tier
of New York State. Within this area, the Bank maintains a market share of
13.1% including commercial banks, credit unions, savings and loan associations
and savings banks./1/ The Olean Submarket operates four office locations, and
the Bank is ranked either first or second in market share in three of the four
towns where these offices are located. The Bank also competes for loans where
it has no banking facilities; this secondary market area includes Chautauqua
County.

Corning Submarket. The Corning Submarket competes for loans and deposits in
the primary market area of Steuben and Tioga Counties in the Southern Tier of
New York State. Within this area, the Bank maintains a market share of 6.7%
including commercial banks, credit unions, savings and loan associations and
savings banks./1/ The Corning Submarket operates seven office locations, and
the Bank is ranked either first or second in market share in four of the five
towns where these offices are located. The Bank also competes for loans where
it has no banking facilities; this secondary market area includes Chemung and
Schuyler Counties in New York State, and Tioga County in Pennsylvania.

LEGAL PROCEEDINGS

The Company, the Bank and each of the directors of the Company and the Bank
are defendants in a shareholder derivative action brought in New York Supreme
Court, Albany County. The Plaintiffs allege in substance that the directors
failed to exercise due care and breached their fiduciary duties to the Company
in pursuing and approving the Acquisition. The Plaintiffs sought to
preliminarily and permanently enjoin consummation of the Acquisition, the
Offerings and any other acts in furtherance of the Acquisition or the
Offerings. However, on April 6, 1995, the Court denied the Plaintiffs' motion
for preliminary injunction, stating that "[i]t does not appear likely to this
Court that the Plaintiffs will succeed on the merits." In addition, the Court
dismissed the claims of one of the Plaintiffs who did not meet the
requirements for bringing a shareholder derivative action and required the
remaining two Plaintiffs to post a bond covering the reasonable expenses,
including attorney's fees, which may be incurred by the defendants. The
Company believes that the Plaintiffs' allegations are without merit and
intends to defend the lawsuit vigorously. Although the Court has indicated
that the Plaintiffs are not likely to prevail on the merits, there can be no
assurance that the Court will ultimately find for the Company and against the
Plaintiffs. Any judgment against the Company in this action is likely to have
a material adverse effect on the Acquisition and the Offerings. See "Special
Considerations--Pending Litigation."

- --------

/1/ Deposit market share data as of June 30, 1994, as calculated from
information provided by Sheshunoff Information Services, Inc.

41
<PAGE>

In addition to the lawsuit described above, the Company and the Bank are
subject to ordinary routine litigation incidental to their business, none of
which is considered by management to be likely to have a material adverse
effect on the Company or the Bank.

EMPLOYEES

As of December 31, 1994, the Bank employed approximately 440 full-time
equivalent employees. The Bank provides a variety of employment benefits and
considers its relationship with its employees to be good. Upon consummation of
the Acquisition the Bank will retain approximately 117 full-time equivalent
employees currently employed by Chase at the Chase Branches and add
approximately 36 additional full-time equivalent employees. Neither the Company
nor the Bank is a party to any collective bargaining agreement.

PROPERTIES

The Company leases its administrative offices at 5790 Widewaters Parkway,
DeWitt, New York. The Bank owns its regional offices in Olean, New York and
Canton, New York. Of the Bank's 36 branch offices, 32 are owned by the Bank,
and four are located on long-term leased premises.

Real property and related banking facilities owned by the Company at December
31, 1994 had a net book value of $10.6 million and none of the properties was
subject to any encumbrances. For the year ended December 31, 1994, rental fees
of $502,312 were paid on facilities leased by the Bank for its operations.

42
<PAGE>

MANAGEMENT

DIRECTORS

The Company's Board of Directors currently consists of 13 persons. Each of
the directors of the Company is also a director of the Bank. In accordance with
the Bylaws of the Company, the Board is divided into three classes as nearly
equal in number as possible. The members of each class are elected for a term
of three years with one class of directors elected annually. The Board of
Directors holds regular quarterly meetings in its capacity as the Board of
Directors of the Company and regular monthly meetings in its capacity as the
Board of Directors of the Bank.

The following table sets forth certain information with respect to the
directors of the Company and the Bank.

<TABLE>
<CAPTION>
TERM
NAME AGE EXPIRES DIRECTOR SINCE
---- --- ------- --------------
<S> <C> <C> <C>
Sanford A. Belden 52 1997 1992
John M. Burgess 58 1995 1991
Richard C. Cummings 64 1996 1983
William M. Dempsey 56 1996 1984
Nicholas A. DiCerbo 47 1997 1985
Benjamin Franklin 69 1997 1984
James A. Gabriel 47 1995 1984
Lee T. Hirschey 59 1997 1991
Earl W. MacArthur (Chairman) 66 1995 1983
David C. Patterson 53 1997 1991
William N. Sloan 60 1996 1991
William D. Stalder 69 1996 1983
Hugh G. Zimmer 68 1995 1989
</TABLE>

DIRECTOR COMPENSATION

As directors of both the Company and the Bank, Board members receive an
annual retainer of $8,000; $500 for each Board meeting they attend; $500 for
each Executive Committee meeting they attend; and $350 for each committee
meeting they attend. Mr. Belden does not receive an annual retainer or
compensation for attending Board or committee meetings. The Chair of the Board
receives an all inclusive $46,000 annual retainer for serving in that capacity.
The Chairs of the Loan Committee and the Personnel Committee each receive an
annual retainer of $2,500; and the Chairs of the Investment Committee, the
Trust Committee and the Audit/Compliance/Risk Management Committee each receive
an annual retainer of $750. The Company also pays the travel expenses incurred
by each director in attending meetings of the Board.

Directors may elect to defer all or a portion of their director fees pursuant
to a Deferred Compensation Plan for Directors. Directors who elect to
participate in the Plan designate the percentage of their director fees which
they wish to defer (the deferred fees) and the date to which they wish to defer
payment of benefits under the plan (the distribution date). The plan
administrator establishes an account for each participating director and
credits to such account (i) on the date a participating director would have
otherwise received payment of his deferred fees, the number of shares of Common
Stock which could have been purchased with the deferred fees, and (ii) from
time to time such additional number of shares of Common Stock which could have
been purchased with any dividends which would have been received had shares
equal to the number of shares credited to the account actually been issued and
outstanding. On the distribution date, the participating director shall be
entitled to receive either (i) shares of Common Stock equal to the number of
shares credited to the director's account, or (ii) at the Company's election,
cash equal to the fair market value of the number of shares credited to the
account as of the distribution date. The effect of the plan is to permit
directors to

43
<PAGE>

invest deferred director fees in stock of the Company, having the benefit of
any stock price appreciation and dividends as well as the risk of any decrease
in the stock price. To the extent that directors participate in the plan, the
interests of participating directors will be more closely associated with the
interests of shareholders in achieving growth in the Company's stock price.

EXECUTIVE OFFICERS OF THE COMPANY AND BANK

The following table sets forth certain information about the principal
executive officers of the Company and the Bank, each of whom is elected by the
Board of Directors and each of whom holds office at the discretion of the Board
of Directors.

<TABLE>
<CAPTION>
NAME AND AGE POSITION
------------ --------
<C> <S>
Sanford A. Belden, Age 52 President and Chief Executive Officer of the
Company and the Bank
David G. Wallace, Age 50 Treasurer of the Company and Senior Vice
President and Chief Financial Officer of the
Bank
James A. Wears, Age 45 Regional President, Northern Region of the Bank
Michael A. Patton, Age 49 Regional President, Southern Region of the Bank
</TABLE>

EMPLOYMENT AGREEMENTS

The Company has an employment agreement with Mr. Belden dated January 1, 1995
providing for his employment as the Company's President and Chief Executive
Officer until December 31, 1997. The agreement may be terminated by the Board
for good cause at any time. The agreement requires that Mr. Belden devote his
full business time and attention to the performance of his duties for a base
salary of $240,000 for 1995, $275,000 for 1996 and $300,000 for 1997. In the
event that the Company's average assets during any monthly reporting period
reach $1.75 billion, Mr. Belden's base salary will be reviewed by the Board.
The agreement also provides Mr. Belden with a supplemental retirement benefit
which amounts to 4% of his final five year average salary, multiplied by his
years of service (15 year maximum), payable at age 65 in the form of an
actuarially reduced joint and 50% survivor benefit. Benefits payable prior to
age 65, or in another form, are subject to the same actuarial adjustments as
benefits payable under the Company's pension plan. The supplemental retirement
payments are reduced by the benefit payable under the Company's pension plan,
plus Mr. Belden's social security benefit, plus the benefits payable from two
other pension plans in which Mr. Belden participated prior to joining the
Company in 1992. If, upon expiration of Mr. Belden's employment agreement, the
Company elects not to renew, Mr. Belden will be entitled to severance pay equal
to one year of his then current base salary, provided that such severance
payments shall cease if Mr. Belden subsequently obtains employment or becomes
self-employed during the severance period. If Mr. Belden's employment is
terminated for reasons other than cause within two years following a change of
control of the Company, the Company will retain him as a consultant for two
years at an annual consulting fee equal to his base salary, will reimburse him
for any loss incurred on the sale of his home, and all of his stock options
shall become fully exercisable. Additionally, in the event of a change of
control, Mr. Belden's years of service for supplemental retirement benefit
purposes shall include his consultation period plus an additional three years.

The Company also maintains one year employment agreements with Messrs. Wears,
Patton and Wallace. These agreements provide for severance pay equal to the
employee's base salary for the balance of the term of the agreement plus
benefits under the Company's regular severance policy, and change of control
benefits which include a two-year consulting engagement, accelerated vesting on
all outstanding stock options, and in the case of Mr. Wallace, crediting for
retirement funding purposes in the greater amount of actual years of service or
20 years. The agreements may be terminated by the Board for good cause at any
time.

BUSINESS EXPERIENCE OF DIRECTORS AND OFFICERS

The following is a brief description of the principal occupation and business
experience of each director and executive officer of the Company and Bank named
above for the last five years.

44
<PAGE>

SANFORD A. BELDEN (Director; President and Chief Executive Officer of the
Company and the Bank). Mr. Belden has been President and Chief Executive
Officer of the Company and the Bank since October 1, 1992. Mr. Belden was
formerly Manager, Eastern Region, Rabobank Nederland, New York, New York from
1990 to 1992 and prior thereto served as President, Community Banking for First
Bank System, Minneapolis, Minnesota, a multi-state bank holding company.

JOHN M. BURGESS (Director). Until his retirement in 1991, Mr. Burgess was
President of Kinney Drugs, Inc., a drug and retail chain with stores located
throughout Northern New York.

RICHARD C. CUMMINGS (Director). Mr. Cummings is a partner in the law firm of
Cummings, McGuire, Dunckel & Company in Lowville, New York.

WILLIAM M. DEMPSEY (Director). Mr. Dempsey is the Vice President of Finance
and Administration of Rochester Institute of Technology in Rochester, New York.

NICHOLAS A. DICERBO (Director). Mr. DiCerbo is a partner with the law firm of
DiCerbo and Palumbo in Olean, New York.

BENJAMIN FRANKLIN (Director). Mr. Franklin is retired and formerly of counsel
to the law firm of Franklin & Gabriel in Ovid, New York.

JAMES A. GABRIEL (Director). Mr. Gabriel is a partner with the law firm of
Franklin & Gabriel in Ovid, New York.

LEE T. HIRSCHEY (Director). Mr. Hirschey is the President and Chief Executive
Officer of Climax Manufacturing Company, a converter and manufacturer of paper
products with facilities in Castorland, Lowville and West Carthage, New York.

EARL W. MACARTHUR (Chairman of the Board). Dr. MacArthur is the Vice
President of WMASC Educational Search Specialists, an employment search firm
specializing in placement of presidents and senior academic officers for
colleges and universities located in the United States. Prior to 1993, Dr.
MacArthur was the President of the State University of New York at Canton, New
York.

DAVID C. PATTERSON (Director). Mr. Patterson is the President and owner of
Wight and Patterson, Inc., a manufacturer and seller of livestock feed located
in Canton, New York.

MICHAEL A. PATTON (Regional President, Southern Region of the Bank). Mr.
Patton was the President and Chief Executive Officer of The Exchange National
Bank, a former subsidiary of the Company, from 1984 until January 1992, when,
in connection with the consolidation of the Company's five subsidiary banks
into the Bank, he was named to his current position as Regional President for
the Southern Region of the Bank.

WILLIAM N. SLOAN (Director). Mr. Sloan is an Associate Professor of
Mathematics at Potsdam College of the State University of New York in Potsdam,
New York.

WILLIAM D. STALDER (Director). Until his retirement in 1990, Mr. Stalder was
a partner in the firm of Witherbee & Whelan, a retail cemetery monument and
burial vault business.

DAVID G. WALLACE (Treasurer of the Company; Senior Vice President and Chief
Financial Officer of the Bank). Mr. Wallace became Vice President and Chief
Financial Officer in November 1988, and has been Senior Vice President and
Chief Financial Officer since August 1991.

JAMES A. WEARS (Regional President, Northern Region of the Bank). Mr. Wears
served as Senior Vice President of The St. Lawrence National Bank, a former
subsidiary of the Company, from 1988 through January 1991, and as its President
and Chief Executive Officer from January 1991 until January 1992.

45
<PAGE>

Following the January 1992 consolidation of the Company's five subsidiary banks
into the Bank, Mr. Wears was named to his current position as Regional
President for the Northern Region of the Bank.

HUGH G. ZIMMER (Director). Prior to his retirement in 1989, Mr. Zimmer was
President of The Nichols National Bank, Nichols, New York, which was
consolidated into the Bank, as of January 1, 1992.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The following table sets forth, as of March 10, 1995, certain information
regarding the beneficial ownership of Common Stock by (i) each director and
named executive officer of the Company and (ii) all named directors and
executive officers of the Company as a group. Based on the Company's records,
no person owned 5% or more of the outstanding Common Stock.

<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1)(2) PERCENT OF CLASS
------------------------------------ --------------------------- ----------------
<S> <C> <C>
Sanford A. Belden............ 2,000 0.07%
Fayetteville, New York
John M. Burgess.............. 3,210 0.12%
Governeur, New York
Richard C. Cummings ......... 5,676 0.20%
Glenfield, New York
William M. Dempsey .......... 800 0.03%
Rochester, New York
Nicholas A. DiCerbo ......... 19,791 0.71%
Olean, New York
Benjamin Franklin ........... 35,088 1.26%
Ovid, New York
James A. Gabriel............. 8,675 0.31%
Ovid, New York
Lee T. Hirschey.............. 8,356 0.30%
Carthage, New York
Earl W. MacArthur............ 1,420 0.05%
Morristown, New York
David C. Patterson........... 3,046 0.11%
Canton, New York
Michael A. Patton............ 9,074 0.33%
Olean, New York
William N. Sloan............. 234 0.01%
Potsdam, New York
William D. Stalder........... 13,237 0.47%
Morristown, New York
David G. Wallace............. 7,468 0.27%
Cazenovia, New York
James A. Wears............... 10,386 0.37%
Ogdensburg, New York
Hugh G. Zimmer............... 20,347 0.73%
Nichols, New York
All Directors and Officers as
a Group 148,808 5.34%
</TABLE>

46
<PAGE>

(1) Represents all shares as to which the named individual possessed sole or
shared voting or investment power as of March 10, 1995, including shares
held by, in the name of, or in trust for, spouse and dependent children of
named individual and other relatives living in the same household, even if
beneficial ownership has been disclaimed as to any of these shares by the
nominee or director.

(2) The listed amounts include shares as to which certain directors are
beneficial owners but not the sole beneficial owners as follows: Mr.
Burgess' wife holds 300 shares in her own name; Dr. MacArthur's wife holds
150 shares; Mr. Zimmer holds 20,076 shares jointly with his wife; Mr.
Cummings' wife holds 140 shares in her own name; Mr. Sloan holds 234
shares jointly with his wife; Mr. DiCerbo holds 5,933 shares jointly with
his wife, 12,158 shares are held in the name of the law partnership of
DiCerbo and Palumbo, 140 shares are held by his wife, 160 shares are held
by his daughter, 400 shares are held by his son, and 1,000 shares are held
in trust for his children; Mr. Franklin's wife holds 2,352 shares in her
own name; Mr. Hirschey's wife holds 1,000 shares in her own name and Mr.
Hirschey holds 1,000 shares as Trustee for the Retirement Plan of Climax
Manufacturing Company; Mr. Stalder's wife holds 126 shares in her name;
and Mr. Patterson holds 1,190 shares jointly with his wife. Mr. Zimmer
owns presently exercisable stock options to purchase 1,000 shares of
common stock.

CERTAIN REGULATORY CONSIDERATIONS

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.

BANK HOLDING COMPANY SUPERVISION

The Company is registered as a bank holding company under the Bank Holding
Company Act of 1956, as amended (the "BHCA") and as such is subject to
regulation by the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). As a bank holding company, the Company's activities
and those of its subsidiary are limited to the business of banking and
activities closely related or incidental to banking. Under Federal Reserve
Board policy, a bank holding company is expected to act as a source of
financial strength to its subsidiary banks and to make capital contributions
to a troubled bank subsidiary. The Federal Reserve Board may charge the bank
holding company with engaging in unsafe and unsound practices for failure to
commit resources to a subsidiary bank when required. A required capital
injection may be called for at a time when the Company does not have the
resources to provide it. Any capital loans by the Company to its subsidiary
bank would be subordinate in right of payment to depositors and to certain
other indebtedness of such subsidiary banks.

The BHCA requires the prior approval of the Federal Reserve Board in any
case where a bank holding company proposes to acquire direct or indirect
ownership or control of more than 5% of any class of the voting shares of, or
substantially all of the assets of, any bank (unless it owns a majority of
such bank's voting shares) or otherwise to control a bank or to merge or
consolidate with any other bank holding company. The BHCA also prohibits a
bank holding company, with certain exceptions, from acquiring more than 5% of
the voting shares of any company that is not a bank. The BHCA would prohibit
the Federal Reserve Board from approving an application from the Company to
acquire shares of a bank located outside of New York, unless such an
acquisition is specifically authorized by statute of the state in which the
bank whose shares are to be acquired is located.

However, the Riegal-Neal Interstate Banking and Efficiency Act of 1994
(enacted on September 29, 1994) provides that, among other things,
substantially all state law barriers to the acquisition of banks by out-of-
state bank holding companies will be eliminated effective September 29, 1995.
The law will also permit interstate branching by banks effective as of June 1,
1997, subject to the ability of states to opt-out completely or to set an
earlier effective date. The Company anticipates that the effect of the new law
may be to increase competition within the markets in which the Company
operates, although the Company cannot predict the effect to which competition
will increase in such markets or the timing of such increase.

47
<PAGE>

OCC SUPERVISION

The Bank is supervised and regularly examined by 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, and affect 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.

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 OCC for the payment of dividends if the total
of all dividends declared in any calendar year would exceed the total of the
Bank's net profits, as defined by applicable regulations, for that year,
combined with its retained net profits for the preceding two years.
Furthermore, the Bank may not pay a dividend in an amount greater than its
undivided profits then on hand after deducting its losses and bad debts, as
defined by applicable regulations. At December 31, 1994, the Bank had $18.0
million in undivided profits legally available for the payment 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
payment of dividends that deplete a bank's capital base could be deemed to
constitute such an unsafe or an unsound practice. 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 asset purchases. Such transfers by the Bank to the
Company generally are 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 specified amounts.

CAPITAL REQUIREMENTS

The Federal Reserve Board has established risk-based capital guidelines which
are applicable to bank holding companies. The guidelines establish a framework
intended to make regulatory capital requirements more sensitive to differences
in risk profiles among banking organizations and take off-balance sheet
exposures into explicit account in assessing capital adequacy. The Federal
Reserve Board guidelines define the components of capital, categorize assets
into different risk classes and include certain off-balance sheet items in the
calculation of risk-weighted assets. At least half of the total capital must be
comprised of common equity, retained earnings and a limited amount of perpetual
preferred stock, less goodwill ("Tier I capital"). Banking organizations that
are subject to the guidelines are required to maintain a ratio of Tier I
capital to risk-weighted assets of at least 4.00% and a ratio of total capital
to risk-weighted assets of at least 8.00%. The appropriate regulatory authority
may set higher capital requirements when an organization's particular
circumstances warrant. The remainder ("Tier 2 capital") may consist of a
limited amount of subordinated debt, limited-life preferred stock, certain
other instruments and a limited amount of loan and lease loss reserves. The sum
of Tier I capital and Tier 2 capital is "total risk-based capital." The
Company's Tier I and total risk-based capital ratios as of December 31, 1994
were 12.43% and 13.68%, respectively.

In addition, the Federal Reserve Board has established a minimum leverage
ratio of Tier I capital to quarterly average assets less goodwill ("Tier I
leverage ratio") of 3.00% for bank holding companies that meet certain
specified criteria, including that they have the highest regulatory rating. All
other bank holding companies are required to maintain a Tier I leverage ratio
of 3.00% plus an additional cushion of at least 100

48
<PAGE>

to 200 basis points. The Company's Tier I leverage ratio as of December 31,
1994 was 6.81%, which exceeded its regulatory requirement of 4.00%. The
guidelines also provide that banking organizations experiencing internal growth
or making acquisitions will be expected to maintain strong capital positions
substantially above the minimum supervisory levels, without significant
reliance on intangible assets. The Company is subject to the same OCC capital
requirements as those that apply to the Bank.

In February 1994, the federal banking agencies proposed amendments to their
respective risk-based capital requirements that would explicitly identify
concentration of credit risk and certain risks arising from nontraditional
activities, and the management of such risks, as important factors to consider
in assessing an institution's overall capital adequacy. The proposed amendments
do not, however, mandate any specific adjustments to the risk-based capital
calculations as a result of such factors. On August 24, 1994, the Federal
Reserve Board issued proposed amendments to its risk-based capital standards
that would increase the amount of capital required under such standards for
long-dated interest rate and exchange rate contracts and for derivative
contracts based on equity securities and indexes, precious metals (other than
gold) and other commodities. The proposed amendments would also permit banking
institutions to recognize the effect of bilateral netting arrangements in
calculating their exposure to derivative contracts for risk-based capital
purposes. The Company and the Bank do not expect that these proposals, if
adopted in their current form, would have a material effect on its financial
condition or results of operations.

For a discussion of the impact of the Acquisition and the Offerings on the
Company's capital and leverage ratios, see "Special Considerations--Dilution"
and "The Acquisition--Regulatory Conditions and Capital Plan."

FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991

In December, 1991, Congress enacted the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to several other federal banking statutes. FDICIA
provides for, among other things, (i) a recapitalization of the Bank Insurance
Fund of the FDIC (the "BIF") by increasing the FDIC's borrowing authority and
providing for adjustments in its assessment rates; (ii) annual on-site
examinations of federally-insured depository institutions by banking
regulators; (iii) publicly available annual financial condition and management
reports for financial institutions, including audits by independent
accountants; (iv) the establishment of uniform accounting standards by federal
banking agencies; (v) the establishment of a "prompt corrective action" system
of regulatory supervision and intervention, based on capitalization levels,
with more scrutiny and restrictions placed on depository institutions with
lower levels of capital; (vi) additional grounds for the appointment of a
conservator or receiver; (vii) a requirement that the FDIC use the least-cost
method of resolving cases of troubled institutions in order to keep the costs
to insurance funds at a minimum; (viii) more comprehensive regulation and
examination of foreign banks; (ix) consumer protection provisions including a
Truth-in-Savings Act; (x) a requirement that the FDIC establish a risk-based
deposit insurance assessment system; (xi) restrictions or prohibitions on
accepting brokered deposits, except for institutions which significantly exceed
minimum capital requirements; and (xii) certain additional limits on deposit
insurance coverage.

Under the FDIC's risk-related premium schedule for insured depository
institutions, FDIC insurance premiums range from 0.23% for the best
capitalized, healthiest institutions, to 0.31% for the weakest institutions.
The Bank's premium for the semi-annual assessment period ending December 31,
1994, was 0.23% of insured deposits. Following the Acquisition, it is
anticipated that the Bank's premium will increase to 0.26%.

On January 31, 1995, the FDIC published two proposed rules which outline the
agency's plan for semi-annual assessment rates applicable to institutions
insured by the Bank Insurance Fund ("BIF") and the Savings Association
Insurance Fund ("SAIF"). Under the proposals, BIF members such as the Bank
would pay assessment rates ranging from 0.04% to 0.31% depending on their risk
classification, while SAIF

49
<PAGE>

members would pay assessment rates ranging from 0.23% to 0.31%. Presently, both
BIF and SAIF members pay according to the 0.23% to 0.31% schedule. The proposed
BIF rates are expected to become effective in mid-1995. If the FDIC's proposed
BIF rule becomes effective, the Company anticipates that the Bank's premium
following the Acquisition will be 0.07% as an "adequately capitalized" bank.
When the Bank's Tier I leverage ratio reaches 5%, the premium will be 0.04% as
a "well capitalized" bank.

FDICIA requires federal banking agencies to take "prompt corrective action"
with respect to banks that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." The following table sets forth the minimum capital ratios
that a bank must satisfy in order to be considered "well capitalized" or
"adequately capitalized" under Federal Reserve Board regulations:

<TABLE>
<CAPTION>
ADEQUATELY CAPITALIZED WELL CAPITALIZED
---------------------- ----------------
<S> <C> <C>
Total Risk-Based Capital Ratio..... 8% 10%
Tier I Risk-Based Capital Ratio.... 4% 6%
Tier I Leverage Ratio.............. 4% 5%
</TABLE>

If a bank does not meet all of the minimum capital ratios necessary to be
considered "adequately capitalized," it will be considered "undercapitalized,"
"significantly undercapitalized," or "critically undercapitalized," depending
upon the amount of the shortfall in its capital. As of December 31, 1994, the
Bank's total risk-based capital ratio and Tier I risk-based capital ratio were
13.48% and 12.23%, respectively, and its Tier I leverage ratio as of such date
was 6.70%. As a result of the Acquisition and the infusion of additional
capital from the Offerings, it is anticipated that the Bank will be classified
as "adequately capitalized." See "The Acquisition -- Regulatory Conditions and
Capital Plan."

Notwithstanding the foregoing, if its principal federal regulator determines
that an "adequately capitalized" institution is in an unsafe or unsound
condition or is engaging in an unsafe or unsound practice, it may require the
institution to submit a corrective action plan, restrict its asset growth and
prohibit branching, new acquisitions and new lines of business. Among other
things, an institution's principal federal regulator may deem the institution
to be engaging in an unsafe or unsound practice if it receives a less than
satisfactory rating for asset quality, management, earnings or liquidity in its
most recent examination.

Possible sanctions for undercapitalized depository institutions include a
prohibition on the payment of dividends and a requirement that an institution
submit a capital restoration plan to its principal federal regulator. The
capital restoration plan of an undercapitalized bank will not be approved
unless any holding company that controls the bank guarantees the bank's
performance. The obligation of a controlling bank holding company to fund a
capital restoration plan is limited to the lesser of five percent (5%) of an
undercapitalized subsidiary's assets or the amount required to meet regulatory
capital requirements. If an undercapitalized depository institution fails to
submit or implement an acceptable capital restoration plan, it can be subjected
to more severe sanctions, including an order to sell sufficient voting stock to
become adequately capitalized. Critically undercapitalized institutions are
subject to the appointment of a receiver or conservator.

In addition, FDICIA requires regulators to impose new non-capital measures of
bank safety, such as loan underwriting standards and minimum earnings levels.
Regulators are also required to perform annual on-site bank examinations, place
limits on real estate lending by banks and tighten auditing requirements.

Many of the provisions of FDICIA will be implemented through the adoption of
regulations by the various federal banking agencies. Although the precise
effect of the legislation on the Company and the Bank therefore cannot be
assessed at this time, the Company does not anticipate that such regulations
will materially affect its operating results, financial condition or liquidity.

50
<PAGE>

DESCRIPTION OF CAPITAL STOCK

GENERAL

The Company is authorized to issue 5,000,000 shares of common stock, $1.25
par value per share and 500,000 shares of preferred stock, $1.00 par value per
share. As of March 10, 1995, 2,788,150 shares of Common Stock were issued and
outstanding. The remaining authorized but unissued shares of the Company's
Common Stock may be issued by the Board without further shareholder approval.

On , 1995, the Company's Board of Directors duly adopted a resolution
fixing the designation, number, preferences and other rights and limitations of
the Preferred Stock. The terms of the Preferred Stock are more fully set forth
in the Certificate of the Powers, Designations, Preferences and Rights of the
Series A Cumulative Perpetual Preferred Stock (the "Preferred Stock
Certificate") which is filed as an exhibit to the Registration Statement. Upon
consummation of the Preferred Stock Offering, all shares of the Preferred Stock
will be issued and outstanding.

The Company's Certificate of Incorporation also authorizes the Company's
Board of Directors, without shareholder approval, to issue up to 400,000 shares
of additional preferred stock (which amount excludes the Series A Preferred
Stock) and to establish the relative rights, designations, preferences and
limitations or restrictions of the preferred stock (the "Blank Check Preferred
Stock.") As of the date of this Prospectus there were no shares of Blank Check
Preferred Stock outstanding.

COMMON STOCK

Voting Rights. The holders of Common Stock are entitled to one vote per share
on all matters to be voted on by the shareholders. Such shareholders do not
have cumulative voting rights in the election of directors.

Dividends. The Company may pay dividends as declared from time to time by the
Board of Directors out of funds legally available therefor, subject to certain
restrictions. Although the Board of Directors of the Company has indicated its
intention to continue the payment of cash dividends on the Common Stock, no
assurance can be given that any dividends will be declared or, if declared,
what the amount of the dividends will be or whether such dividends, once
declared, will continue. As a bank holding company, the Company's ability to
pay such dividends is primarily a function of the dividend payments it receives
from the Bank. See "Dividends" and "Certain Regulatory Considerations -- Limits
on Dividends and Other Revenue Sources." The holders of Common Stock will be
entitled to receive any dividends on the Common Stock in proportion to their
holdings of Common Stock.

Rights in Liquidation. In the event of a liquidation, dissolution or winding
up of the Company, each holder of Common Stock would be entitled to receive,
after payment of all debts and liabilities of the Company and after any
required distribution to holders of any issued and outstanding preferred stock,
a pro rata portion of all assets of the Company available for distribution to
holders of Common Stock.

No Preemptive Rights; No Redemption. Holders of shares of Common Stock are
not entitled to preemptive rights with respect to any shares of any capital
stock of the Company that may be issued. The Common Stock is not subject to
call or redemption and is fully paid and non-assessable.

PREFERRED STOCK

General. The Preferred Stock has no preemptive rights and is not convertible
into any shares of Common Stock. The rights of the holders of shares of
Preferred Stock will be subordinate to the rights of the Company's general
creditors. There is no sinking fund with respect to the Preferred Stock. Upon
issuance the Preferred Stock will be fully paid and non-assessable.

51
<PAGE>

Rank. The Preferred Stock will rank, with respect to dividend rights and
rights on liquidation, winding up or dissolution of the Company, senior to the
Common Stock and to all other classes and series of equity securities of the
Company, now or hereafter authorized, issued or outstanding (the Common Stock
and such other classes of equity securities referred to herein as the "Junior
Stock"), other than classes of series of equity securities ranking on a parity
with the Preferred Stock (the "Parity Stock"). The Preferred Stock will be
subject to the creation of such Parity Stock and Junior Stock to the extent not
expressly prohibited by the Company's Certificate of Incorporation.

Dividend Rights. Holders of Preferred Stock are entitled to be paid, if and
when declared by the Board of Directors, out of funds legally available
therefor, cumulative semi-annual cash dividends at the rate of % per annum
(the "Preferred Dividend"). The Preferred Dividend will have priority over any
dividends with respect to the Junior Stock. The Preferred Dividend will
accumulate from and including the earliest date of original issuance of the
Preferred Stock and will be payable on March 31 and September 30 of each year
(each a "Dividend Payment Date") with the first payment on September 30, 1995
representing a pro rated amount from the date of issuance. Dividends will be
payable to holders of record as they appear on the books of the Company at the
close of business on a date not more than 30 calendar days and not less than 10
calendar days preceding the Dividend Payment Date therefor, as determined by
the Board of Directors (the "Record Date").

As long as the Preferred Stock is outstanding and any payment of the
Preferred Dividend is in arrears, the Company may not (i) declare, pay or set
apart for payment any dividends on any shares of Common Stock or other Junior
Stock, or (ii) make any payment on account of, or set apart payment for, the
purchase, redemption or other retirement of, or with respect to any sinking or
other similar fund or agreement for the purchase, redemption or other
retirement of, any shares of Common Stock or Junior Stock, or (iii) make any
distribution in respect thereof, whether directly or indirectly, and whether in
cash, obligations or securities of the Company or other property, other than
dividends or distributions of Junior Stock which is neither convertible into,
nor exchangeable for, any securities of the Company other than Junior Stock or
rights, warrants options or calls exercisable or exchangeable for or
convertible into Junior Stock, or (iv) permit any corporation or other entity
controlled directly or indirectly by the Company to purchase or otherwise
acquire or redeem any shares of Common Stock or other Junior Stock or any
warrants, calls or options exercisable or exchangeable for or convertible into
shares of Common Stock or Junior Stock.

Dividends in arrears with respect to the Preferred Stock may be declared and
paid at any time, without reference to any regular Dividend Payment Date, to
holders of record at the close of business as they appear on the books of the
Company on the Record Date established with respect to such payment in arrears.
If there is any Parity Stock outstanding, and if the Payment of dividends on
any shares of Preferred Stock or Parity Stock is in arrears, the Company, in
making any dividend payment on account of the Preferred Stock or Parity Stock,
is required to make such payment ratably upon all outstanding shares of the
Preferred Stock and the Parity Stock in proportion to the respective amounts of
accrued dividends in arrears upon such shares of Preferred Stock and Parity
Stock to the date of such dividend payment.

Holders of shares of Preferred Stock will not be entitled to any dividends,
whether payable in cash, obligations or securities of the Company or other
property, in excess of full accrued dividends on the Preferred Stock. No
interest, or sum of money in lieu of interest, will be payable in respect of
any dividend or other payment or payments which may be in arrears with respect
to the Preferred Stock. All dividends paid with respect to the Preferred Stock
will be paid ratably to the holders entitled thereto.

The ability of the Company to pay dividends on the Preferred Stock may be
limited by the Delaware General Corporation Law and will depend on the
Company's ability to obtain funds for such purpose from the Bank. See "Certain
Regulatory Considerations--Limits on Dividends and Other Revenue Sources."

Liquidation Preference. In the event of any liquidation, dissolution or
winding up of the Company, voluntary or involuntary, the holders of Preferred
Stock will be entitled to receive out of the assets of the

52
<PAGE>

Company available for distribution to stockholders, before any distribution of
assets is made to the holders of Common Stock or other Junior Stock, the amount
of $100 per share plus an amount equal to all accrued and unpaid dividends
thereon to the date fixed for such liquidation, dissolution or winding up. If,
upon any voluntary or involuntary liquidation, dissolution or winding up of the
Company, the amounts payable with respect to the Preferred Stock and any Parity
Stock are not paid in full, the holders of Preferred Stock and of such Parity
Stock will share ratably in any such distribution of assets of the Company in
proportion to the full respective preferential amounts (including accrued and
unpaid dividends) to which they are entitled. After payment to the holders of
Preferred Stock of the full preferential amount of the liquidating distribution
(including accrued and unpaid dividends) to which they are entitled, the
holders of the Preferred Stock will be entitled to no further participation in
any distribution of assets by the Company. All distributions made with respect
to the Preferred Stock in connection with such liquidation, dissolution or
winding up of the Company will be made pro rata to the holders entitled
thereto. Neither the voluntary sale, conveyance, exchange or transfer of all or
any part of the property or assets of the Company, nor the consolidation,
merger or other business combination of the Company with or into any other
corporation, will be considered a voluntary or involuntary liquidation,
dissolution or winding up of the Company.

Optional Redemption. The Preferred Stock may not be redeemed, in whole or in
part, before September 30, 1998. On and after September 30, 1998, the Preferred
Stock is redeemable ratably at the option of the Company for cash, in whole or
in part, at any time and from time to time, at the declining redemption price
per share set forth below plus accrued and unpaid dividends, without interest,
to the extent that the Company has funds legally available therefor:

<TABLE>
<CAPTION>
IF REDEEMED DURING
THE REDEMPTION PRICE PER
12 MONTHS BEGINNING SHARE OF PREFERRED
SEPTEMBER 30, STOCK
------------------- --------------------
<S> <C>
1998 $
1999
2000 and thereafter
</TABLE>

The Company will mail notice of redemption to each holder of record of the
shares of Preferred Stock to be redeemed as they appear on the books of the
Company at the close of business on a date not less than 30 nor more than 60
calendar days prior to the redemption date, as determined by the Board of
Directors. From and after the redemption date (unless the Company defaults in
providing for the payment of the redemption price plus accrued and unpaid
dividends), dividends will cease to accrue on the shares of the Preferred Stock
called for redemption, all rights of the holders thereof (except the right to
receive the redemption price plus accrued and unpaid dividends, without
interest) will cease with respect to such shares, and such shares of the
Preferred Stock will no longer be deemed to be outstanding and shall not have
the status of the Preferred Stock.

As long as the payment of any dividends on shares of the Preferred Stock or
any Parity Stock is in arrears, no shares of the Preferred Stock or Parity
Stock will be redeemed unless all such shares are simultaneously redeemed, and
the Company may not (i) make payment on account of, or set apart payment for,
the purchase or other acquisition, redemption, retirement or other requirement
of, or with respect to, any Parity Stock or any warrants, rights, calls or
options exercisable or exchangeable for or convertible into Parity Stock or
(ii) permit any corporation or other entity controlled directly or indirectly
by the Company to purchase or otherwise acquire or redeem any Parity Stock or
any warrants, rights, calls or options exercisable or exchangeable for or
convertible into Parity Stock; provided, however, that the foregoing will not
prevent the purchase or other acquisition of such shares pursuant to a purchase
or exchange offer made on the same terms to holders of all such shares
outstanding.

Voting Rights. Except as indicated below and except as required by applicable
law, the holders of the Preferred Stock will not be entitled to vote for any
purpose. To the extent that the holders of Preferred Stock are entitled to
vote, each holder shall be entitled to one vote for each share of the Preferred
Stock held by such holder.

53
<PAGE>

As long as any shares of the Preferred Stock remain outstanding, the
affirmative vote of the holders of at least two-thirds of the votes entitled to
be cast with respect to the then outstanding shares of the Preferred Stock,
voting separately as one class, at a meeting duly held for that purpose, will
be necessary (i) to authorize, create or issue or increase the authorized or
issued amount of any class or series of equity securities of the Company
ranking senior or on a parity with the Preferred Stock as to dividend rights or
rights upon liquidation, winding up or dissolution of the Company, or (ii) to
repeal, amend or otherwise change any of the provisions of the Certificate of
Incorporation (including the Preferred Stock Certificate) in any manner which
adversely affects the powers, preferences, voting power or other rights or
privileges of the Preferred Stock, or (iii) to sell, lease or convey all or
substantially all of the Company's assets if as a result of such transaction
the Preferred Stock would be purchased for or otherwise converted into
consideration of less than its Liquidation Preference plus any accrued and
unpaid dividends or as a result of which the Preferred Stock would continue in
existence but with an adverse alteration in its specified designations, rights,
preferences or privileges.

If at any time three Preferred Dividends, whether consecutive or not, shall
be in arrears, in whole or in part, and shall not be paid in cash, then,
without further action, the Board of Directors shall be increased by two and
the holders of Preferred Stock will have the exclusive right at the next annual
meeting of stockholders for the election of directors or special meeting called
for such purpose, voting separately as one class, to elect two directors.

Unless otherwise required by law, such newly elected directors will not
become members of any of the three classes of directors otherwise required by
the Certificate of Incorporation and bylaws of the Company. All rights of the
holders of the Preferred Stock to elect such directors will continue in effect
until the Company is no longer in arrears or in default in respect of the
payment of dividends on the Preferred Stock, at which time such voting right of
the holders of the Preferred Stock shall terminate, without further action,
subject to revesting in the event of each and every subsequent failure of the
Company to pay such dividends for the requisite number of periods as described
above.

The term of office of all directors elected by the holders of the Preferred
Stock in office at any time when the aforesaid voting right is vested in such
holders shall terminate upon the election of the successors at any meeting of
stockholders entitled to vote thereon for the purpose of electing directors.
Any director who shall have been elected by holders of the Preferred Stock may
be removed at any time, either with or without cause, by the affirmative vote
of the holders of record of a majority of the outstanding shares of the
Preferred Stock, voting separately as one class, at a duly held stockholders'
meeting.

CERTAIN CERTIFICATE OF INCORPORATION AND BYLAWS PROVISIONS

There are provisions in the Company's Certificate of Incorporation, Bylaws,
and Stockholder Protection Rights Plan which are intended to discourage non-
negotiated takeover attempts. These provisions are intended to avoid costly
takeover battles and lessen the Company's vulnerability to a hostile change in
control, thereby enhancing the possibility that the Board of Directors can
maximize shareholder value in connection with an unsolicited offer to acquire
the Company. However, anti-takeover provisions can also have the effect of
depressing the Company's stock price because they are an impediment to
potential investors and their ability to gain control of the Company, and thus
discourage activities such as unsolicited merger proposals, acquisitions, or
tender offers by which shareholders might otherwise receive enhanced
consideration for their shares.

The Company's Certificate of Incorporation authorizes 5,000,000 shares of
Common Stock, of which 2,788,150 shares are outstanding. The Certificate of
Incorporation also authorizes the issuance of 500,000 shares of preferred
stock, of which 100,000 constitute the Preferred Stock and of which 400,000 are
available for issuance as Blank Check Preferred Stock. The remaining 2,211,850
shares of authorized but unissued Common Stock, and the 400,000 shares of
authorized but unissued Blank Check Preferred Stock, may be issued by the Board
without further shareholder approval (if consistent with its fiduciary
responsibilities),

54
<PAGE>

except as may be required with respect to a particular transaction by
applicable law or by regulatory agencies having jurisdiction over the Company,
and could be utilized to deter future attempts to gain control of the Company.

The Company has a classified Board which provides for the Board to be divided
into three classes, as nearly equal in number as possible, with approximately
one third of the directors to be elected annually for three-year terms. A
classified board helps to assure continuity and stability of corporate
leadership and policy by extending the time required to elect a majority of the
directors to at least two successive annual meetings. This extension of time
may also tend to discourage a tender offer or takeover bid by making it more
difficult for a majority of shareholders to change the composition of the Board
of Directors.

The Company's Certificate of Incorporation contains a provision which
provides that certain business combinations require the affirmative vote of
either (a) the holders of three-fourths of the Company's outstanding Common
Stock and a majority of the continuing directors; or (b) the holders of two-
thirds of the Company's outstanding Common Stock and two-thirds of the
continuing directors. These "supermajority" requirements could result in the
Company's board and management (who owned or controlled approximately 5.34% of
the Company's Common Stock as of December 31, 1994) exercising a stronger
influence over any proposed takeover by refusing to approve a proposed business
combination and by obtaining sufficient additional votes, including votes
obtained through the issuance of additional shares to parties friendly to their
interests, to preclude the two-thirds or three-fourths shareholder approval
requirement.

The Company's Certificate of Incorporation also provides that the provisions
designed to protect the Company from unfriendly takeover attempts can only be
amended by an affirmative vote of (a) holders of at least three-fourths of the
outstanding Common Stock of the Company and a majority of the continuing
directors, or (b) holders of at least two-thirds of the outstanding Common
Stock of the Company and two-thirds of the continuing directors.

RIGHTS PLAN

On February 21, 1995, the Company's Board of Directors adopted a Stockholder
Protection Rights Plan ("Plan") and declared a distribution on February 24,
1995 to shareholders of record as of February 21, 1995 of one Right for each
outstanding share of the Common Stock. The Plan is intended to protect
shareholders in the event an unsolicited offer or attempt to acquire control of
the Company is made, including a coercive or unfair offer or other takeover
attempt that could impair the ability of the Company's Board of Directors to
fully represent the interests of the Company's shareholders. One Right will
attach to each share of Common Stock offered hereby.

The Rights become exercisable in the event that a person, entity or group
("Person") acquires, or commences a tender offer which, if successful, would
enable such Person to acquire, 15% or more of the outstanding shares of the
Common Stock. Each Right initially entitles stockholders to purchase one share
of Common Stock at an exercise price of $85.00 per share, subject to
adjustments. If, after the Rights become exercisable, a Person acquires 15% or
more of the outstanding shares of the Common Stock, the holder of each Right
may purchase, for the then current exercise price of the Right, that number of
shares having a market value equal to twice the exercise price. If, after the
Rights become exercisable, the Company merges or consolidates with, sells or
transfers 50% if its assets (as measured by book value, market value, or
operating income or cash flow productivity) to, or engages in certain other
transactions with, another Person, the Company shall take such steps as are
necessary to ensure, and shall not consummate or permit such transaction to
occur until it shall have entered into an agreement with the other Person
providing, that upon consummation of the transaction, holders of each Right
shall be entitled to purchase, for the then current exercise price of the
Right, that number of shares of the Common Stock of the other Person having a
market value equal to twice the exercise price, and further providing that the
other Person shall assume all of the Company's obligations under the Plan.

55
<PAGE>

The Rights may be redeemed by the Company under certain circumstances at a
price of $ 0.01 per Right, and will expire on February 21, 2005 if not redeemed
or exercised earlier. If there are not sufficient shares of the Common Stock
authorized at the time the Rights become exercisable, the Board of Directors
will secure stockholder authorization for sufficient additional shares or,
alternatively, will provide for the issuance of other securities or assets of
the Company having an equivalent value upon exercise of the Rights.

UNDERWRITING

SALE OF COMMON STOCK

Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement") dated the date hereof, M.A. Schapiro and First
Albany Corporation (the "Underwriters") have severally agreed to purchase, and
the Company has agreed to sell to them, the respective number of shares of
Common Stock set forth opposite the names of such Underwriters below. In the
Underwriting Agreement, the several Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all such shares of Common
Stock (other than those covered by the over-allotment option described below),
if any are purchased. In the event of default by an Underwriter with respect to
its obligation to purchase the shares of Common Stock, the Underwriting
Agreement provides that, in certain circumstances, purchase commitments of the
nondefaulting Underwriter may be increased or the Underwriting Agreement may be
terminated.

<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
M.A. Schapiro & Co., Inc.................................
First Albany Corporation.................................
----
Total................................................
====
</TABLE>

The Underwriters have advised the Company that they propose initially to
offer the shares of Common Stock to the public at the public offering price set
forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per share
of Common Stock on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed by
the Underwriters.

The offering price per share of Common Stock will be determined by agreement
between the Underwriters and the Company. Such determination will be based on
price/earnings and book value multiples of comparable financial institutions,
the financial condition and prospects of the Company and market conditions at
the time of the offering.

The Company has granted the Underwriters an option exercisable for 30 days
after the date hereof to purchase up to 112,500 additional shares of Common
Stock to cover over-allotments, if any, at the initial public offering price of
the Common Stock, less the underwriting discount. If the Underwriters exercise
this option, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage thereof which
the number of shares of Common Stock to be purchased by it shown in the
foregoing table bears to the shares of Common Stock initially offered hereby.

The Company, its executive officers and its directors, and each holder of 5%
or more of the Common Stock have agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any securities convertible
into or exercisable or exchangeable for Common Stock, for a period of 180 days
after the date of this Prospectus without the prior written consent of the
Underwriters, other than the shares of Common Stock offered hereby.

56
<PAGE>

RESERVED SHARES

The Company has reserved up to 40,000 shares of Common Stock for sale to
certain directors, officers and employees of the Company. There will be no
underwriting discount on the Reserved Shares which will be sold directly by the
Company to the directors, officers and employees of the Company who agree to
purchase such shares. If the Reserved Shares are not purchased by directors,
officers, and employees of the Bank, they will be available for sale to the
public by the Underwriters.

SALE OF PREFERRED STOCK

Subject to the terms and conditions of the Underwriting Agreement, M.A.
Schapiro has agreed to purchase, and the Company has agreed to sell to M.A.
Schapiro, 100,000 shares of Preferred Stock. In the Underwriting Agreement,
M.A. Schapiro has agreed, subject to the terms and conditions set forth
therein, to purchase all of such shares of Preferred Stock, if any are
purchased. The obligation of M.A. Schapiro to purchase shares of Preferred
Stock is not contingent on the obligation of M.A. Schapiro to purchase any
shares of Common Stock.

M.A. Schapiro has advised the Company that it proposes to offer the shares of
Preferred Stock at the public offering price set forth on the cover page of
this Prospectus. M.A. Schapiro intends to sell the shares of Preferred Stock
directly to investors and not through dealers. The Preferred Stock will be
offered to the public with a minimum purchase requirement of 10,000 shares. If
the Preferred Stock is approved for quotation on the Nasdaq National Market,
M.A. Schapiro intends to make a market in the Preferred Stock.

GENERAL

The Company has agreed to indemnify the several Underwriters against certain
liabilities which may be incurred in connection with the Common Stock Offering
or the Preferred Stock Offering, including liability arising under the
Securities Act.

M.A. Schapiro has from time to time provided certain financial advisory
services to the Company for which M.A. Schapiro has received customary
compensation. These services include advising the Company with respect to
potential mergers and acquisitions from time to time. M.A. Schapiro acted as
financial advisor to the Company in connection with the Acquisition. M.A.
Schapiro and First Albany Corporation each make a market in the Common Stock
and trade the securities of the Company for their own account and for the
accounts of their customers and may at any time hold long or short positions in
such securities.

LEGAL MATTERS

The validity of the shares of Common Stock and Preferred Stock offered hereby
will be passed upon for the Company by Bond, Schoeneck & King, LLP, Syracuse,
New York. Certain legal matters will be passed upon for the Underwriters by
Cadwalader, Wickersham & Taft, New York, New York.

EXPERTS

The consolidated statements of condition as of December 31, 1994 and 1993 and
the consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1994
included in this Prospectus have been so included in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
said firm as experts in auditing and accounting.

57
<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER INFORMATION

COMMUNITY BANK SYSTEM, INC.
<TABLE>
<S> <C>
Report of Independent Accounts............................................ F- 2
Consolidated Statements of Condition as of December 31, 1994 and 1993..... F- 3
Consolidated Statements of Income for the Years Ended December 31, 1994,
1993 and 1992............................................................ F- 4
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1994, 1993 and 1992................................... F- 5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1993 and 1992...................................................... F- 6
Notes to Consolidated Financial Statements................................ F- 7
OTHER INFORMATION
Schedule of Liabilities to be Assumed and Assets to be Acquired by
Community Bank, N.A. (unaudited)......................................... F-21
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Board of Directors and Shareholders
Community Bank System, Inc.

We have audited the accompanying consolidated statements of condition of
Community Bank System, Inc. and Subsidiaries as of December 31, 1994 and 1993
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for each of the three years in the period ended December
31, 1994. 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 in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial condition of Community Bank
System, Inc. and Subsidiaries as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.

As further discussed in the notes to the consolidated financial statements,
the Company changed its method of accounting for post-retirement benefits other
than pensions, income taxes, and investments in 1993.

Coopers & Lybrand L.L.P.

Syracuse, New York
January 27, 1995, except for Note O as to which the date is February 21, 1995

F-2
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
ASSETS
Cash and due from banks............................. $ 30,522,189 $ 27,422,278
Interest bearing deposits with other banks.......... 0 90,000
------------ ------------
Total cash and cash equivalents................. 30,522,189 27,512,278
Investment securities (approximate market value of
$374,117,000 and $260,580,000)..................... 378,519,604 253,453,616
Loans............................................... 510,738,775 443,601,069
Less: Unearned discount............................. 27,659,684 25,729,899
Reserve for possible loan losses.................. 6,281,109 5,706,609
------------ ------------
Net loans....................................... 476,797,982 412,164,561
Premises and equipment, net......................... 10,591,510 10,045,782
Accrued interest receivable......................... 6,657,326 4,538,769
Intangible assets, net.............................. 6,106,608 452,264
Other assets........................................ 6,305,990 4,885,245
------------ ------------
Total assets.................................... $915,501,209 $713,052,515
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Deposits
Noninterest bearing............................... $103,006,969 $ 88,644,788
Interest bearing.................................. 576,630,655 499,670,455
------------ ------------
Total deposits.................................. 679,637,624 588,315,243
Federal funds purchased........................... 57,300,000 57,000,000
Term borrowings................................... 105,550,000 550,000
Obligation under capital lease.................... 0 42,036
Accrued interest and other liabilities............ 6,724,070 5,158,809
------------ ------------
Total liabilities............................... 849,211,694 651,066,088
------------ ------------
Shareholders' equity:
Preferred stock
500,000 shares authorized
Common stock $1.25 par value; 5,000,000 shares
authorized, 2,788,150 and 2,748,318 shares issued
and outstanding.................................. 3,485,187 3,435,398
Surplus........................................... 14,885,096 14,374,149
Undivided profits................................. 49,853,313 42,902,266
Unrealized net gains (losses) on available for
sale securities.................................. (1,930,414) 1,280,466
Less: Shares issued under employee stock plan-
unearned......................................... 3,667 5,852
------------ ------------
Total shareholders' equity...................... 66,289,515 61,986,427
------------ ------------
Total liabilities and shareholders' equity...... $915,501,209 $713,052,515
============ ============
</TABLE>

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

F-3
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans............. $40,699,073 $36,235,800 $36,932,349
Interest and dividends on investments:
U.S. Treasury........................ 1,800,534 2,041,156 1,659,934
U.S. government agencies and
corporations........................ 8,078,065 6,981,414 6,359,240
States and political subdivisions.... 1,427,476 1,783,253 2,054,964
Mortgage-backed securities........... 8,922,926 6,831,166 8,273,881
Other securities..................... 645,828 696,693 754,936
Interest on federal funds sold........... 0 52,760 285,645
Interest on deposits with other banks.... 1,133 20,325 24,490
----------- ----------- -----------
Total interest income................ 61,575,035 54,642,567 56,345,439
----------- ----------- -----------
Interest expense:
Interest on deposits................... 18,213,046 16,961,993 21,352,303
Interest on federal funds purchased,
and term borrowings from banks........ 3,916,073 766,883 242,278
Interest on capital lease.............. 629 4,463 13,586
----------- ----------- -----------
Total interest expense............... 22,129,748 17,733,339 21,608,167
----------- ----------- -----------
Net interest income.................. 39,445,287 36,909,228 34,737,272
Less: Provision for possible loan losses. 1,702,466 1,506,131 2,726,788
----------- ----------- -----------
Net interest income after provision for
loan losses........................... 37,742,821 35,403,097 32,010,484
----------- ----------- -----------
Other income:
Fiduciary and investment services...... 1,379,566 1,113,217 898,060
Service charges on deposit accounts.... 2,593,282 2,379,405 2,266,064
Other service charges, commissions and
fees.................................. 1,519,043 1,185,642 1,454,938
Other operating income................. 130,822 101,008 278,582
Investment security gains (losses)..... (502,343) (15,000) 184,271
----------- ----------- -----------
Total other income................... 5,120,370 4,764,272 5,081,915
----------- ----------- -----------
Operating income..................... 42,863,191 40,167,369 37,092,399
----------- ----------- -----------
Other expenses:
Salaries and employee benefits......... 13,098,207 11,951,973 11,941,972
Occupancy expense, net................. 2,042,571 1,813,773 1,849,196
Equipment and furniture expense........ 1,697,230 1,641,750 2,326,589
Other.................................. 9,659,660 9,419,692 10,329,862
----------- ----------- -----------
Total other expenses................. 26,497,668 24,827,188 26,447,619
----------- ----------- -----------
Income before income taxes............. 16,365,523 15,340,181 10,644,780
Income taxes........................... 6,256,305 5,765,407 3,139,239
----------- ----------- -----------
Net Income........................... $10,109,218 $ 9,574,774 $ 7,505,541
=========== =========== ===========
Earnings per share................... $ 3.59 $ 3.43 $ 2.76
=========== =========== ===========
</TABLE>

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

F-4
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994

<TABLE>
<CAPTION>
UNREALIZED
NET GAINS
COMMON SHARES (LOSSES) ON
ISSUED UNDER AVAILABLE
COMMON UNDIVIDED EMPLOYEE STOCK FOR SALE
STOCK SURPLUS PROFITS PLAN--UNEARNED SECURITIES TOTAL
---------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1992................... $3,362,825 $13,806,005 $31,083,701 $(8,988) $48,243,543
Net income--1992....... 7,505,541 7,505,541
Cash dividends:
Common, $.90 per share. (2,421,284) (2,421,284)
Common stock issued
under employee stock
plan.................. 8,125 74,108 6,875 89,108
---------- ----------- ----------- ------- ----------- -----------
Balance at December 31,
1992................... $3,370,950 $13,880,113 $36,167,958 $(2,113) $ 0 $53,416,908
Net income--1993....... 9,574,774 9,574,774
Cash dividends:
Common, $1.04 per
share................. (2,840,466) (2,840,466)
Common stock issued
under employee stock
plan.................. 64,448 494,036 (3,739) 554,745
Market value adjustment
on available for sale
investments........... 1,280,466 1,280,466
---------- ----------- ----------- ------- ----------- -----------
Balance at December 31,
1993................... $3,435,398 $14,374,149 $42,902,266 $(5,852) $ 1,280,466 $61,986,427
Net income--1994....... 10,109,218 10,109,218
Cash dividends:
Common, $1.14 per
share................. (3,158,171) (3,158,171)
Common stock issued
under employee stock
plan.................. 49,789 510,947 2,185 562,921
Market value adjustment
on available for sale
investments........... (3,210,880) (3,210,880)
---------- ----------- ----------- ------- ----------- -----------
Balance at December 31,
1994................... $3,485,187 $14,885,096 $49,853,313 $(3,667) $(1,930,414) $66,289,515
========== =========== =========== ======= =========== ===========
</TABLE>

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

F-5
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND NON CASH ACTIVITIES

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------------
1994 1993 1992
------------- ------------- -------------
<S> <C> <C> <C>
Operating Activities:
Net income....................... $ 10,109,218 $ 9,574,774 $ 7,505,541
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation................... 1,434,356 1,467,370 1,759,862
Net amortization of intangible
assets........................ 350,569 161,569 343,641
Net accretion of security
premiums and discounts........ (511,974) (515,161) (467,441)
Provision for loan losses...... 1,702,466 1,506,131 2,726,788
Provision for deferred taxes... (454,968) (409,081) 146,995
(Gain) loss on sale of
investment securities......... 502,343 15,000 (184,271)
Change in interest receivable.. (2,118,557) 918,594 (590,722)
Change in other assets and
other liabilities............. 2,183,987 (309,512) (549,637)
Change in unearned loan fees
and costs..................... 76,510 169,022 224,950
------------- ------------- -------------
Net Cash Provided By Operating
Activities................... 13,273,950 12,578,706 10,915,706
------------- ------------- -------------
Investing Activities:
Proceeds from sales of
investment securities.......... 29,240,847 3,000,000 20,298,180
Proceeds from maturities of
investment securities.......... 64,275,075 111,504,503 54,138,365
Purchases of investment
securities..................... (223,998,813) (103,379,889) (108,013,700)
Net change in loans outstanding. (65,860,765) (56,466,193) (16,068,199)
Capital expenditures............ (1,992,834) (984,675) (1,225,043)
Proceeds from sales of capital
assets......................... 0 17,122 132,424
Premium paid for branch
acquisitions................... (6,004,913) 0 0
------------- ------------- -------------
Net Cash Used By Investing
Activities................... (204,341,403) (46,309,132) (50,737,973)
------------- ------------- -------------
Financing Activities:
Net change in demand deposits,
NOW accounts, and savings
accounts....................... 11,755,827 18,213,745 33,206,445
Net change in certificates of
deposit........................ 79,566,554 12,186,820 (51,167,434)
Net change in term borrowings... 105,300,000 4,714,100 48,835,900
Payments on lease obligation.... (42,036) (96,747) (723,023)
Issuance of common stock........ 560,456 553,809 80,328
Cash dividends.................. (3,063,437) (2,840,466) (2,421,284)
------------- ------------- -------------
Net Cash Provided By Financing
Activities................... 194,077,364 32,731,261 27,810,932
------------- ------------- -------------
Change In Cash And Cash Equiva-
lents............................ 3,009,911 (999,165) (12,011,335)
Cash and cash equivalents at
beginning of year.............. 27,512,278 28,511,443 40,522,778
------------- ------------- -------------
CASH AND CASH EQUIVALENTS AT END
OF YEAR.......................... $ 30,522,189 $ 27,512,278 $ 28,511,443
============= ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash Paid For Interest.......... $ 21,369,189 $ 18,063,232 $ 23,068,870
============= ============= =============
Cash Paid For Income Taxes...... $ 5,945,320 $ 7,143,311 $ 3,711,341
============= ============= =============
SUPPLEMENTAL DISCLOSURE OF NON
CASH AND OTHER INVESTING
ACTIVITIES:
Gross change in unrealized net
gains and (losses) on available
for sale securities............ $ (5,426,535) $ 2,164,046
</TABLE>

Proceeds from maturities of investment securities for 1994 included
$27,695,203 from available for sale and $36,579,872 from held to maturity
securities.

Purchases of investment securities for 1994 included $22,055,530 of available
for sale and $201,943,283 of held to maturity securities.

All proceeds from sale of investment securities in 1994 related to available
for sale securities.

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

F-6
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries, which include Community Bank, N.A. and a
currently inactive nonbanking subsidiary. Northeastern Computer Services, Inc.,
established in 1981, provided computer servicing activities for the Company,
its subsidiaries, thrift institutions, and credit unions, until it was
dissolved in June 1992. All intercompany accounts and transactions have been
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 federal funds sold. Generally, federal
funds are sold for one-day periods.

The carrying amounts reported in the balance sheet for cash and cash
equivalents approximate those assets' fair values.

Investment Securities

Effective December 31, 1993 the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." As required by this pronouncement, 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, adjusted for amortization of premiums and accretion of discounts. Debt
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.

The average cost method is used in determining the realized gains and losses
on sales of investment securities, which are reported under other income-
investment security gains (losses).

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

For variable rate loans that reprice frequently and with no significant
credit risk, fair values are based on carrying values. Fair values for fixed
rate loans are estimated using discounted cash flow analyses, using 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 and Reserve for Possible Loan Losses

Interest on commercial loans and mortgages 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 actuarial method. Nonrefundable loan fees and related direct
costs are deferred and amortized over the life of the loan as an adjustment to
loan yield using the effective interest method.

F-7
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's banking subsidiary places a loan on nonaccrual status and
recognizes income on a cash basis when it is more than 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.

The reserve for possible loan losses is maintained at a level considered
adequate to provide for potential loan losses. The reserve is increased by
provisions charged to expense and reduced by net charge-offs. The level of the
reserve is based on management's evaluation of potential losses in the loan
portfolio, as well as prevailing economic conditions.

Premises and Equipment

Premises and equipment are stated at cost less accumulated depreciation. The
annual provision for depreciation is computed using the straight-line method in
amounts sufficient to recognize the cost of depreciable assets over their
estimated useful lives. Maintenance and repairs are charged to expense as
incurred.

Other Real Estate

Properties acquired through foreclosure, or by deed in lieu of foreclosure,
are recorded at the lower of the unpaid loan balance plus settlement costs, or
fair value. The carrying value of individual properties is subsequently
adjusted to the extent that it exceeds estimated fair value.

Intangible Assets

Intangible assets represent core deposit intangibles and goodwill arising
from various acquisitions. Core deposit intangibles are being amortized on a
straight-line basis over five to eight years. Goodwill is being amortized on a
straight-line basis over ten to fifteen years.

Deposits

The fair values disclosed for demand and savings deposits are equal to the
carrying amounts at the reporting date. The carrying amounts for variable rate
money market accounts and certificates of deposit approximate their fair values
at the reporting date. Fair values for fixed rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits. The carrying value of accrued interest
approximates fair value.

Term Borrowings

The carrying amounts of federal funds purchased, short-term and long-term
borrowings approximate their fair values.

Earnings Per Share

Earnings per share are computed on the basis of weighted average common and
common-equivalent shares outstanding throughout each year (2,814,710 in 1994;
2,788,330 in 1993; and 2,722,093 in 1992).

F-8
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair Values of Financial Instruments

FASB Statement No. 107, "Disclosures about Fair Value of Financial
Instruments," requires disclosure of fair value information on financial
instruments, whether or not recognized in the balance sheet, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be realized
in immediate settlement of the instrument. Statement 107 excludes certain
financial instruments and all nonfinancial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.

Reclassification

Certain amounts from 1993 and 1992 have been reclassified to conform to the
current year's presentation.

NOTE B: INVESTMENT SECURITIES

The amortized cost and estimated market values of investments in securities
as of December 31 are as follows:

<TABLE>
<CAPTION>
1994
------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
HELD TO MATURITY PORTFOLIO
U.S Treasury securities and
obligations of U.S.
government corporations and
agencies.................... $154,672,077 $2,150,801 $2,455,356 $154,367,522
Obligations of states and
political subdivisions....... 17,304,829 498,618 31,730 17,771,717
Corporate securities.......... 1,500 392 322 1,570
Mortgage-backed securities.... 120,177,983 290,077 4,854,711 115,613,349
------------ ---------- ---------- ------------
Totals...................... $292,156,389 $2,939,888 $7,342,119 $287,754,158
============ ========== ========== ============
AVAILABLE FOR SALE PORTFOLIO
U.S Treasury securities and
obligations of U.S.
government corporations and
agencies.................... $ 33,691,404 $ 53,101 $1,329,958 $ 32,414,547
Obligations of states and
political subdivisions....... 3,432,127 40,398 0 3,472,525
Corporate securities.......... 566,756 1,093 0 567,849
Mortgage-backed securities.... 37,235,167 18,070 2,055,070 35,198,167
------------ ---------- ---------- ------------
Totals...................... $ 74,925,454 $ 112,662 $3,385,028 $ 71,653,088
============ ========== ========== ============
Equity securities............. 14,148,700 9,877 0 14,158,577
Federal Reserve
Bank common stock........... 551,550 0 0 551,550
------------ ---------- ---------- ------------
Totals...................... $ 89,625,704 $ 122,539 $3,385,028 $ 86,363,215
============ ========== ========== ============
Net unrealized gains/(losses)
on Available for Sale
portfolio.................... (3,262,489)
------------
Grand Total Carrying Value.. $378,519,604
============
</TABLE>

F-9
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

<TABLE>
<CAPTION>
1993
-----------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
HELD TO MATURITY PORTFOLIO
U.S Treasury securities and
obligations of U.S.
government corporations and
agencies..................... $ 53,995,027 $3,990,065 $ 65 $ 57,985,027
Obligations of states and
political subdivisions........ 17,164,639 1,360,881 2,881 18,522,639
Corporate securities........... 1,500 0 0 1,500
Mortgage-backed securities..... 54,686,107 1,818,858 40,858 56,464,107
------------ ---------- -------- ------------
Totals....................... $125,847,273 $7,169,804 $ 43,804 $132,973,273
============ ========== ======== ============
AVAILABLE FOR SALE PORTFOLIO
U.S Treasury securities and
obligations of U.S.
government corporations and
agencies..................... $ 58,722,296 $1,730,788 $ 35,460 $ 60,417,624
Obligations of states and
political subdivisions........ 7,194,351 225,535 0 7,419,886
Corporate securities........... 1,109,257 43,444 0 1,152,701
Mortgage-backed securities..... 53,176,543 453,957 267,929 53,362,571
------------ ---------- -------- ------------
Totals....................... $120,202,447 $2,453,724 $303,389 $122,352,782
============ ========== ======== ============
Equity securities.............. 4,739,500 13,711 0 4,753,211
Federal Reserve
Bank common stock............ 500,350 0 0 500,350
------------ ---------- -------- ------------
Totals....................... $125,442,297 $2,467,435 $303,389 $127,606,343
============ ========== ======== ============
Net unrealized gains/(losses)
on Available for Sale
portfolio..................... 2,164,046
------------
Grand Total Carrying Value... $253,453,616
============
</TABLE>

The amortized cost and estimated market value of debt securities at December
31, 1994 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 EST. MARKET CARRYING EST. MARKET
VALUE VALUE VALUE VALUE
------------ ------------ ----------- -----------
(FIGURES IN DOLLARS)
<S> <C> <C> <C> <C>
Due in one year or less...... $ 4,508,714 $ 4,505,586 $ 4,563,756 $ 4,595,482
Due after one through five
years....................... 18,520,170 18,938,541 2,359,610 2,315,041
Due after five years through
ten years................... 148,949,522 148,696,274 30,766,921 29,544,399
Due after ten years.......... 0 0 0 0
Total...................... 171,978,406 172,140,401 37,690,287 36,454,922
Mortgage-backed securities... 120,177,983 115,613,757 37,235,167 35,198,166
------------ ------------ ----------- -----------
Total...................... $292,156,389 $287,754,158 $74,925,454 $71,653,088
============ ============ =========== ===========
</TABLE>

Proceeds from sales of investments in debt securities during 1994, 1993 and
1992 were approximately $29,241,000, $3,000,000 and $20,298,000, respectively.
Gross gains of approximately $258,000 and $215,000 for 1994 and 1992 and gross
losses of $761,000, $15,000 and $31,000 were realized on those sales in 1994,
1993 ,and 1992, respectively.

F-10
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

Investment securities with a carrying value of $199,032,705 and $132,506,000
at December 31, 1994 and 1993, respectively, were pledged to collateralize
deposits and for other purposes required by law.

NOTE C: LOANS

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

<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Real estate mortgages:
Residential................................... $196,547,718 $177,058,875
Commercial.................................... 35,603,929 32,914,622
Farm.......................................... 7,624,577 7,420,575
Agricultural loans.............................. 13,295,398 11,564,058
Commercial loans................................ 67,975,882 58,251,529
Installment loans to individuals................ 188,209,205 154,813,023
Other loans..................................... 1,482,066 1,578,387
------------ ------------
510,738,775 443,601,069
Less: Unearned discount......................... (27,659,684) (25,729,899)
Reserve for possible loan losses.............. (6,281,109) (5,706,609)
------------ ------------
Net loans....................................... $476,797,982 $412,164,561
============ ============
</TABLE>

The estimated fair values of loans receivable net of unearned discount at
December 31, 1994 and 1993 were $473,655,000 and $420,878,000, respectively.

Changes in the reserve for possible loan losses for the years ended December
31 are summarized below:

<TABLE>
<CAPTION>
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Balance at the beginning of year...... $ 5,706,609 $ 4,982,451 $ 4,312,422
Provision charged to expense.......... 1,702,466 1,506,131 2,726,788
Loans charged off..................... (1,615,712) (1,410,390) (2,601,486)
Recoveries............................ 487,746 628,417 544,727
----------- ----------- -----------
Balance at end of year................ $ 6,281,109 $ 5,706,609 $ 4,982,451
=========== =========== ===========
</TABLE>

The Company grants real estate, consumer, and commercial loans to customers
throughout New York State.

NOTE D: PREMISES AND EQUIPMENT

Premises and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Land and land improvements........................ $ 2,253,625 $ 2,089,927
Bank premises owned............................... 11,998,034 11,140,847
Equipment......................................... 7,923,757 10,071,301
----------- -----------
Premises and equipment, gross................... 22,175,416 23,302,075
Less: Allowance for depreciation.................. 11,583,906 13,256,293
----------- -----------
Premises and equipment, net..................... $10,591,510 $10,045,782
=========== ===========
</TABLE>

F-11
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE E: INTANGIBLE ASSETS

Intangible assets consist of the following at December 31:

<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Core deposit intangible............................. $ 573,400 $ 573,400
Goodwill and other intangibles...................... 6,593,203 1,112,340
---------- ----------
Intangible assets, gross.......................... 7,166,603 1,685,740
Less: Accumulated amortization...................... 1,059,995 1,233,476
---------- ----------
Intangible assets, net............................ $6,106,608 $ 452,264
========== ==========
</TABLE>

NOTE F: DEPOSITS

Deposits by type at December 31 are as follows:

<TABLE>
<CAPTION>
1994 1993
------------ ------------
<S> <C> <C>
Demand........................................... $103,006,969 $ 88,644,788
Savings.......................................... 306,023,336 308,629,692
Time............................................. 270,607,319 191,040,763
------------ ------------
Total deposits................................. $679,637,624 $588,315,243
============ ============
</TABLE>

The estimated fair values of deposits at December 31, 1994 and 1993 were
approximately $677,087,000 and $589,795,000, respectively.

At December 31, 1994 and 1993, time certificates of deposit in denominations
of $100,000 and greater totaled $47,783,000 and $22,245,000, respectively.

NOTE G: TERM BORROWINGS

At December 31, 1994 and 1993, outstanding borrowings were as follows:

<TABLE>
<CAPTION>
1994 1993
------------ -----------
<S> <C> <C>
Federal funds purchased.......................... $ 57,300,000 $57,000,000
Short-term borrowings............................ 105,000,000
Long-term borrowings............................. 550,000 550,000
------------ -----------
$162,850,000 $57,550,000
============ ===========
</TABLE>

All short and long-term borrowings above represent Federal Home Loan Bank
advances. These advances are secured by a blanket lien on the Company's
residential real estate loan portfolio.

Borrowings are classified as short-term if their maturity is one year or
less. As of year-end 1994 all short-term borrowings were scheduled to mature
within 53 days. Long-term borrowings mature in 1996. The interest rate on this
borrowing is 4.5%.

NOTE H: INCOME TAXES

Effective January 1, 1993 the Company adopted the provisions of SFAS No. 109
"Accounting for Income Taxes," which requires an asset-liability approach to
recognizing the tax effects of temporary differences between tax and financial
reporting. In prior years, the Company accounted for the tax effects of

F-12
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
timing differences between tax and financial reporting using Accounting
Principle Board Opinion Number 11. This change had no significant effect on the
1993 consolidated financial statements.

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

<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $4,993,505 $4,542,509 $2,024,798
State................................... 1,717,768 1,631,979 967,446
Deferred:
Federal................................. (341,226) (305,383) 60,600
State................................... (113,742) (103,698) 86,395
---------- ---------- ----------
Total income taxes.................... $6,256,305 $5,765,407 $3,139,239
========== ========== ==========
</TABLE>

The components of the net deferred tax asset, included in other assets, as of
December 31 are as follows:

<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Allowance for loan losses............................. $2,555,480 $1,945,137
Deferred loan fees.................................... 294,470 326,758
Medical insurance and other reserves.................. 176,197 267,184
Pension and postretirement benefits................... 354,562 157,091
Investment securities................................. 388,683
---------- ----------
Total deferred tax asset.............................. $3,769,392 $2,696,170
---------- ----------
Investment securities................................. $1,576,164
Depreciation.......................................... 66,238 87,474
---------- ----------
Total deferred tax liability.......................... $ 66,238 $1,663,638
---------- ----------
Net deferred tax asset................................ $3,703,154 $1,032,532
========== ==========
</TABLE>

The deferred income taxes in 1992 result from timing differences in the
recognition of income and expense for tax and financial statement purposes. The
principal timing differences in 1992 were the loan loss provision, accretion on
investments and corporate restructuring, which resulted in a deferred tax
expense of $146,995 in 1992.

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:

<TABLE>
<CAPTION>
1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Federal statutory income
tax rate................. 35.0 % 35.0 % 34.0 %
Increase (reduction) in
taxes resulting from:
Tax-exempt interest..... (2.8) (3.8) (5.7)
State income taxes, net
of federal benefit..... 6.4 6.5 6.5
Alternative minimum tax. (5.6)
Other................... (0.4) (0.1) 0.3
---- ---- ----
Effective income tax rate. 38.2 % 37.6 % 29.5 %
==== ==== ====
</TABLE>

F-13
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE I: PENSION PLAN

The Company has a noncontributory defined benefit pension plan for all
eligible employees. The plan is administered by the Trust Department of
Community Bank, N.A. under the direction of an appointed retirement board. The
policy of the Company is to fund the plan to the extent of its maximum tax
deductibility.

The net periodic pension cost and assumptions used in the accounting for the
years ended December 31 were as follows:

<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during the
year..................................... $ 227,005 $ 199,848 $ 169,430
Interest cost on projected benefit
obligation............................... 513,981 477,913 437,131
Actual return on plan assets.............. 164,442 (684,572) (450,584)
Administrative expenses................... 101,695 85,971 72,635
Net amortization and deferral............. (884,693) (204) (224,125)
--------- --------- ---------
Net periodic pension cost............... $ 122,430 $ 78,956 $ 4,487
========= ========= =========
Discount rate............................. 8.0% 7.0% 9.0%
Expected long term rate of return on
assets................................... 9.0% 9.0% 9.0%
Rate of increase in compensation levels... 4.0% 4.0% 5.5%
</TABLE>

The entire amount of unrecognized gains and losses is amortized over the
average remaining service lives of the participants on a straight-line basis.

The following table presents a reconciliation of the plan's funded status at
December 31:

<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested.......................................... $ 5,924,223 $ 6,185,662
Nonvested....................................... 28,389 37,241
----------- -----------
Accumulated benefit obligation.................... $ 5,952,612 $ 6,222,903
=========== ===========
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Projected benefit obligation...................... $(6,888,795) $(7,317,594)
Plan assets at fair value......................... 6,996,892 7,623,102
----------- -----------
Plan assets in excess of projected benefit
obligation....................................... 108,097 305,508
Unrecognized net loss (gain) from past experience
different from that assumed and effects of
changes in assumptions........................... 1,049,638 952,249
Unrecognized prior service cost, being recognized
over 17 years.................................... (324,317) (339,507)
Unrecognized net asset at date of adoption, being
recognized over 17 years......................... (203,517) (225,760)
----------- -----------
Prepaid pension cost included in other assets..... $ 629,901 $ 692,490
=========== ===========
</TABLE>

The increase in the discount rate from 7% to 8% decreased the projected
benefit obligation at December 31, 1994 by $1,007,272.

F-14
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Plan assets consist primarily of listed stocks, governmental securities and
cash equivalents. The plan is authorized to invest up to 10% of the fair value
of its total assets in common stock of Community Bank System, Inc. At December
31, 1994 and 1993, the plan holds 1,160 and 10,660 shares, respectively, of the
sponsor company common stock.

The Company also has an Employee Savings and Retirement Plan, which is
administered by the Trust Department of Community Bank, N.A. The Employee
Savings and Retirement Plan includes Section 401(k) and Thrift provisions as
defined under the Internal Revenue Code. The provisions permit employees to
contribute up to 15% of their total compensation on a pre-tax or post-tax
basis. The Company's match amounts to 50% on the first 6% contributed. Company
contributions to the trust amounted to $460,459, $361,827 and $370,170 in 1994,
1993 and 1992, respectively.

NOTE J: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS

The Company provides health and life insurance benefits for eligible retired
employees and their dependents. An employee becomes eligible for these benefits
by satisfying plan provisions which include certain age and/or service
requirements. Medical benefits are based on years of service at retirement,
with forty years of service being required in order to be fully eligible for
benefits. The medical plans pay a stated percentage of medical expenses reduced
by deductibles and other coverages. The Medicare supplement policy provides for
a $100,000 maximum lifetime benefit. Generally, life insurance benefits are
equal to $5,000.

Effective January 1, 1993 the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions". This statement requires that the cost of
postretirement benefits be accrued for during the service lives of employees.
The Company elected the prospective transition approach and is amortizing the
transition obligation over a 20 year period.

A plan amendment effective January 1, 1994 limits the Company's expense to a
maximum of $2,500 per person per year for medical coverage. This has decreased
the APBO at January 1, 1994 by approximately $779,000, reducing the remaining
unrecognized transition obligation and decreasing the annual expense by
approximately $41,000.

Net periodic postretirement benefit cost at December 31 includes the
following components:

<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Service Cost.............................................. $ 73,200 $ 89,900
Amortization of transition obligation over 20.1 years..... 61,200 102,000
Amortization of unrecognized net loss over 19.5 years..... 21,800
Interest on APBO less interest on expected benefit
payments................................................. 156,300 180,500
-------- --------
Net periodic postretirement benefit cost.................. $312,500 $372,400
======== ========
</TABLE>

A 10.5 percent annual rate of increase in the per capita costs of covered
health care benefits was assumed for 1994, gradually decreasing to 5.5 percent
by the year 2051. Increasing the assumed health care cost trend rates by one
percentage point would increase the accumulated postretirement benefit
obligation as of December 31, 1994 by $255,000 and increase the aggregate of
the service cost and interest cost components of net periodic postretirement
benefit cost for 1994 by $26,000. A discount rate of 8% was used to determine
the accumulated postretirement benefit obligation.

F-15
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following sets forth the funded status of the plan as of December 31:

<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Accumulated Postretirement Benefit Obligation
(APBO):
Retirees........................................ $ 1,047,500 $ 1,117,600
Fully eligible active plan participants......... 97,400 59,700
Other active plan participants.................. 885,800 1,509,500
----------- -----------
Total APBO.................................... 2,030,700 2,686,800
Plan assets at fair value......................... 0 0
----------- -----------
Accumulated postretirement benefits obligation in
excess of plan assets............................ (2,030,700) (2,686,800)
Unrecognized portion of net obligation at
transition....................................... 1,108,100 1,948,700
Unrecognized net loss............................. 458,500 483,300
----------- -----------
Accrued postretirement benefit cost............... $ (464,100) $ (254,800)
=========== ===========
</TABLE>

NOTE K: INCENTIVE COMPENSATION

The Company has long-term incentive compensation programs for officers and
key employees including incentive stock options (ISO's), restricted stock
awards, nonqualified stock options (NQSO's) and warrants, and retroactive stock
appreciation rights.

Incentive stock options and warrants are granted at a price which is not less
than market value at the time of the grant and are exercisable within ten
years, but no earlier than one year from the date of the grant at dates
specified by the Board of Directors of the Company. Retroactive stock
appreciation rights may be granted with respect to both ISO's and NQSO's.

Information with respect to stock options and warrants under the above plans
is as follows:

<TABLE>
<CAPTION>
NUMBER
NUMBER OPTION PRICE OF SHARES
OF SHARES PER SHARE EXERCISABLE
--------- ------------ -----------
<S> <C> <C> <C>
Outstanding at December 31, 1991.......... 167,790 11.74-21.50 159,143
Granted................................. 59,000 13.00-25.00
Exercised............................... (6,300) 11.74-16.00
Cancelled............................... (1,000) 17.50
Outstanding at December 31, 1992.......... 219,490 11.74-25.00 159,990
Granted................................. 1,000 29.00-30.25
Exercised............................... (66,800) 11.74-18.25
Outstanding at December 31, 1993.......... 153,690 11.74-30.25 105,540
Granted................................. 14,150 28.50
Exercised............................... (42,800) 15.50-16.63
Outstanding at December 31, 1994.......... 125,040 15.50-30.25 74,840
</TABLE>

The program also provides for issuance of stock under a restricted stock
award plan subject to forfeiture terms as designated by the Board of Directors
of the Company. Stock issued under this plan is subject to restrictions as to
continuous employment and/or achievement of pre-established financial
objectives during the forfeiture period.

Restricted stock awarded in 1993 amounted to 200 shares. Total expense is
determined based on the market value of the stock at the date of grant and is
being accrued over the period the restrictions lapse. Expense in 1994, 1993,
and 1992 was $2,185, $2,186 and $9,574, respectively.

F-16
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

There were 130,000 and 46,909 shares available for future grants or awards
under the various programs described above at December 31, 1994 and 1993,
respectively.

NOTE L: 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,
which involve, to varying degrees, elements of credit risk in excess of the
amount recognized in the statement of condition. The contract amount of those
commitments to extend credit reflects the extent of involvement the Company has
in this particular class of financial instrument. The Company's exposure to
credit loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit is represented by the contractual
amount of the instrument. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.

<TABLE>
<CAPTION>
1994 1993
----------- -----------
<S> <C> <C>
Financial instruments whose contract amounts
represent credit risk at December 31:
Letters of credit............................... $ 507,000 $ 847,000
Commitments to make or purchase loans or to
extend credit on lines of credit............... 61,525,000 61,296,000
----------- -----------
Total......................................... $62,032,000 $62,143,000
=========== ===========
</TABLE>

The fair value of these instruments is insignificant.

Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the customer. Collateral held varies but may
include residential real estate, income-producing commercial properties, and
personal property.

The Company had unused lines of credit totaling $62,031,000 and $64,452,000
at December 31, 1994 and 1993, respectively.

The approval of bank regulatory authorities is required before dividends paid
by the bank subsidiary during the year can exceed certain prescribed limits.
Approximately $17,955,000 is free of limitations at December 31, 1994.

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 ended December 31, 1994 was $11,498,000 of which
$3,397,000 was required to be on deposit with the Federal Reserve Bank of New
York. The remainder, $8,101,000, was represented by cash on hand.

The Company is currently being examined by the Internal Revenue Service in
connection with tax years 1990 to 1993, and has received certain notices of
proposed adjustments. The Company intends to vigorously defend its position
with respect to these proposed adjustments and believes the ultimate resolution
will not have a material effect on the financial statements.

F-17
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)

NOTE M: LEASES

Rental expense included in operating expenses amounted to $502,312, $474,863,
and $735,940 in 1994, 1993 and 1992, respectively.

The future minimum rental commitments as of December 31, 1994 for all
noncancelable operating leases are as follows:

<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31: BUILDING EQUIPMENT TOTAL
------------------------- -------- --------- --------
<S> <C> <C> <C>
1995......................................... $331,971 $24,828 $356,799
1996......................................... 281,451 20,124 301,575
1997......................................... 177,051 20,124 197,175
1998......................................... 172,252 18,447 190,699
1999......................................... 119,318 119,318
Thereafter................................... 869,232 869,232
</TABLE>

NOTE N: BRANCH ACQUISITIONS

On December 6, 1994 the Company and the Bank signed a Purchase and Assumption
Agreement with The Chase Manhattan Bank, N.A. ("Chase"), a wholly owned
subsidiary of The Chase Manhattan Corporation, for the acquisition of certain
assets and the assumption of certain liabilities by the Bank relating to 15
Chase branch offices located in the Northern, Central, and Finger Lakes regions
of New York State. These locations include Norwich, Watertown (2), Boonville,
New Hartford, Utica, Skaneateles, Geneva, Pulaski, Seneca Falls, Hammondsport,
Canton, Newark (2), and Penn Yan, New York.

Pursuant to the Agreement, the Bank would assume certain deposit liabilities
estimated to be approximately $458 million, purchase certain loans estimated to
be approximately $25 million, and purchase at various prices certain real
property, furniture and equipment related to the branches having a book value
of approximately $3.2 million. The Bank will receive approximately $392 million
in cash as consideration for the net deposit liabilities, reflecting a deposit
premium of 8.25%, or approximately $38 million. The sale is subject to
regulatory approvals and financing arrangements, and is expected to close
during the third quarter of 1995. Subject to certain events and conditions, the
Agreement requires the Bank to pay Chase between $1,000,000 and $1,850,000 in
the event the transaction is not consummated. In conjunction with this
acquisition, the Company is expected to effect a public offering in the second
or third quarter of 1995 of additional common and preferred stock, principally
to offset the resulting dilution of regulatory capital ratios. Results of
operations on a pro forma basis are not presented since historical financial
information for the branches acquired is not available.

On June 6, 1994, the Company completed the purchase of three branches from
the Resolution Trust Corporation, and on October 28, 1994 the Company acquired
a branch from The Chase Manhattan Bank, N.A. These acquisitions have been
accounted for as purchases and their results of operations are included in the
consolidated financial statements from their respective dates of acquisition.
In total the Company received $68 million in cash, consisting of approximately
$75 million for the assumption of deposit liabilities less approximately $1
million in assets received and a deposit premium of approximately $6 million.
The premium is being amortized on a straight-line basis over 15 years.

NOTE O: SUBSEQUENT EVENT

On February 21, 1995 the Company adopted a Stockholders Protection Rights
Plan and declared a dividend of one right for each outstanding share of common
stock. The rights can only be exercised when an individual or group has
acquired or attempts to acquire 15% or more of the Company's common stock, if
such action the Board of Directors believes is not in the best interest of
stockholders. Each right then entitles the holder to acquire common stock
having a market value equivalent to two times the stated exercise price.

F-18
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The rights expire in February 2005 and may be redeemed by the Company in whole
at a price of $.01 per right.

NOTE P: PARENT COMPANY STATEMENTS

Community Bank System, Inc. (the Parent Company) contributed to its wholly-
owned subsidiary, Community Bank, N.A., substantially all of its assets and
liabilities as of January 1, 1992. During 1992, all operating expenses related
to these assets and liabilities were recorded by the subsidiary bank.

The following are the condensed balance sheets, statements of income and
statements of cash flows for the Parent Company:

CONDENSED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1994 1993
----------- -----------
<S> <C> <C>
Assets:
Cash and cash equivalents....................... $ 723,024 $ 161,482
Investment securities (approximate market value
of $348,000 and $337,000)...................... 348,001 344,644
Investment in and advances to subsidiaries...... 66,058,804 62,225,446
Other assets.................................... 375 2,375
----------- -----------
Total assets.................................. $67,130,204 $62,733,947
=========== ===========
Liabilities:
Accrued liabilities............................. $ 840,689 $ 747,520
Shareholders' equity.............................. 66,289,515 61,986,427
----------- -----------
Total liabilities and shareholders' equity.... $67,130,204 $62,733,947
=========== ===========
</TABLE>

CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------------------
1994 1993 1992
----------- ---------- ----------
<S> <C> <C> <C>
Dividends from subsidiaries............ $ 3,160,414 $3,310,544 $2,870,000
Interest on investments and deposits... 6,465 6,220 10,052
----------- ---------- ----------
Total revenues..................... 3,166,879 3,316,764 2,880,052
----------- ---------- ----------
Expenses:
Interest on short-term borrowing..... 2,243 7,862
Other expenses....................... 2,374 1,279
----------- ---------- ----------
Total expenses..................... 4,617 1,279 7,862
----------- ---------- ----------
Income before tax benefit and equity in
undistributed net income of
subsidiaries.......................... 3,162,262 3,315,485 2,872,190
Income tax benefit (expense)........... (706) (1,857) (7,730)
----------- ---------- ----------
Income before equity in undistributed
net income of subsidiaries............ 3,161,556 3,313,628 2,864,460
Equity in undistributed net income:
Subsidiary banks..................... 6,949,905 6,731,475 4,749,000
Bank-related subsidiaries............ (2,243) (470,329) (107,919)
----------- ---------- ----------
Net income........................... $10,109,218 $9,574,774 $7,505,541
=========== ========== ==========
</TABLE>

F-19
<PAGE>

COMMUNITY BANK SYSTEM, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENTS OF CASH FLOWS

INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND NONCASH ACTIVITIES

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------------
1994 1993 1992
----------- ----------- -----------
<S> <C> <C> <C>
Operating Activities:
Net income......................... $10,109,218 $ 9,574,774 $ 7,505,541
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization..................... 2,185 2,186 9,575
Equity in undistributed net
income of subsidiaries.......... (6,946,956) (6,259,289) (4,641,081)
Net change in accrued expenses... 2,000 100,679 194,360
----------- ----------- -----------
Net Cash Provided By Operating
Activities.......................... 3,166,447 3,418,350 3,068,395
----------- ----------- -----------
Investing Activities:
Purchases of investment securities. (7,191) (5,120) (8,941)
Net change in loans outstanding.... 250,000
Capital contributions to
subsidiaries...................... (1,152,730) (113,300)
----------- ----------- -----------
Net Cash Provided (Used) By Investing
Activities.......................... (7,191) (1,157,850) 127,759
----------- ----------- -----------
Financing Activities:
Net change in loans to
subsidiaries...................... (66,548) (908,904)
Net change in borrowings from
subsidiaries...................... 4,685
Issuance (retirement) of common
stock............................. 560,457 553,809 80,328
Cash dividends..................... (3,158,171) (2,840,466) (2,421,284)
----------- ----------- -----------
Net Cash (Used) By Financing
Activities.......................... (2,597,714) (2,353,205) (3,245,175)
----------- ----------- -----------
Change In Cash And Cash Equivalents.. 561,542 (92,705) (49,021)
Cash and cash equivalents at
beginning of year................. 161,482 254,187 303,208
----------- ----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR................................ $ 723,024 $ 161,482 $ 254,187
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash Paid For Interest............. $ 2,243 $ 7,311
=========== =========== ===========
Cash Paid For Income Taxes......... $ 22,692
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING ACTIVITIES:
Gross change in unrealized net
gains and (losses) on available
for sale securities............... $(5,426,534) $ 2,164,046
=========== =========== ===========
</TABLE>

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

F-20
<PAGE>

SCHEDULE OF LIABILITIES TO BE ASSUMED AND ASSETS TO BE ACQUIRED BY COMMUNITY
BANK, N.A.

DECEMBER 31, 1994

(UNAUDITED)

The following unaudited schedule of liabilities to be assumed and assets to
be acquired by Community Bank, N.A. in connection with the Acquisition has been
derived from the accounting records of The Chase Manhattan Bank, N.A. as of
December 31, 1994, and should be read in conjunction with "The Acquisition --
Unaudited Pro forma Financial Information".

<TABLE>
<S> <C>
Liabilities to be assumed by Community Bank, N.A.:
Deposits
Non-interest-bearing........................................... $ 45,920,001
Interest-bearing............................................... 413,179,559
------------
Total deposits............................................... 459,099,560
Accrued interest payable......................................... 438,991
------------
Total liabilities to be assumed by Community Bank, N.A....... $459,538,551
============
Assets to be acquired by Community Bank, N.A.:
Cash............................................................. $ 6,023,649
Loans
Commercial business............................................ 12,532,151
Commercial real estate......................................... 9,881,477
Other.......................................................... 2,838,721
------------
Total Loans.................................................. 25,252,349
Premises and equipment, net...................................... 3,091,136
Accrued interest receivable...................................... 150,245
------------
Total assets to be acquired by Community Bank, N.A........... $ 34,517,379
============
</TABLE>

F-21
<PAGE>

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

---------------

TABLE OF CONTENTS

<TABLE>
<S> <C>
Available Information...................................................... 3
Incorporation of Certain Information by Reference.......................... 3
Prospectus Summary......................................................... 4
Special Considerations..................................................... 7
The Company................................................................ 12
The Acquisition............................................................ 12
Use of Proceeds............................................................ 20
Capitalization............................................................. 21
Market for Common Stock and Dividends...................................... 22
Selected Consolidated Financial Information................................ 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 24
Business................................................................... 32
Management................................................................. 43
Security Ownership of Certain Beneficial Owners and Management............. 46
Certain Regulatory Considerations.......................................... 47
Description of Capital Stock............................................... 51
Underwriting............................................................... 56
Legal Matters.............................................................. 57
Experts.................................................................... 57
Index to Consolidated Financial Statements................................. F-1
</TABLE>

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCOR-
PORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITA-
TION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO
WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE REGISTERED SECURITIES OFFERED HEREBY IN
ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION.

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------

750,000 SHARES COMMON STOCK

100,000 SHARES CUMULATIVE PERPETUAL PREFERRED STOCK, SERIES A

LOGO

COMMUNITY BANK SYSTEM, INC.

---------------

PROSPECTUS

---------------

M.A. SCHAPIRO & CO., INC.

FIRST ALBANY CORPORATION

, 1995

- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>

PART II: INFORMATION NOT REQUIRED IN THE PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The estimated expenses in connection with the issuance and distribution of
the securities being registered hereby, other than underwriting discounts and
commissions, are as follows:

<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee............ $11,329.75
National Association of Securities Dealers Filing Fee.......... $ 3,785.63
Blue Sky Registration Fees..................................... $
Legal Fees..................................................... $
Accounting Fees................................................ $
Transfer Agent and Registrar................................... $
Printing, Postage and Handling Expenses........................ $
Miscellaneous Expenses......................................... $
----------
Total........................................................ $
==========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Community Bank System, Inc. (the "Company") is a Delaware corporation.
Section 145 of the General Corporation Law of the State of Delaware ("DGCL")
provides that a Delaware corporation has the power to indemnify its officers
and directors in certain circumstances.

Subsection (a) of Section 145 of the DGCL empowers a corporation to indemnify
any director or officer, or former director or officer, who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation),
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding provided that such director or officer acted in good faith
and in a manner reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, provided that such director or officer had no cause to believe his
or her conduct was unlawful.

Subsection (b) of Section 145 of the DGCL empowers a corporation to indemnify
any director of officer, or former director or officer, who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor by reason of the fact that such person acted in any of the capacities
set forth above, against expenses (including attorneys' fees) actually and
reasonably incurred in connection with the defense or settlement of such action
or suit provided that such director or officer acted in good faith and in a
manner reasonably believed to be in or not opposed to the best interests of the
corporation, except that no indemnification may be made in respect of any
claim, issue or matter as to which such director or officer shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action was brought shall determine
that despite the adjudication of liability but in view of all the
circumstances, such director or officer is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.

Section 145 of the DGCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he or she shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him or her in
connection therewith; that indemnification provided for by Section 145 shall
not be deemed exclusive of any other rights to which the indemnified party may
be entitled; and that the corporation shall have power to purchase and maintain
insurance on behalf of a director or officer of the corporation against any
liability asserted against him or her or incurred by him or her in any such
capacity or arising out of his or her status as such whether or not the
corporation would have the power to indemnify him or her against such
liabilities under Section 145.

II-1
<PAGE>

Article 8 of the Bylaws of the Company provides that the Company shall
indemnify any person made, or threatened to be made, a party to an action, suit
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he is or was a director or officer of the Corporation.

ITEM 17. EXHIBITS

The following exhibits are filed as part of this Registration Statement:

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT
-------------- ----------------------
<C> <S>
1 Form of Underwriting Agreement among the Company, M.A. Schapiro
& Co., Inc., and First Albany Corporation.*
3.1 Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.1 Certificate of the Powers, Designations, Preferences and Rights
of the Cumulative Perpetual Preferred Stock, Series A.*
5 Opinion of Bond, Schoeneck & King, LLP as to the validity of
the shares of the Registrant's common stock being registered.*
7 Opinion of Bond, Schoeneck & King, LLP as to Liquidation Pref-
erences on Series A Preferred Stock (to be included in Exhibit
5).*
10.01 Purchase and Assumption Agreement dated December 6, 1994 among
the Bank, the Company and The Chase Manhattan Bank, N.A.
10.02 First Amendment Dated April 4, 1995 to Purchase and Assumption
Agreement among the Bank, the Company and The Chase Manhattan
Bank, N.A.
10.03 Employment Agreement dated January 1, 1995 between the Company
and Mr. Belden.*
10.04 Form of Employment Agreements between the Company and Messrs.
Wears, Patton and Wallace.*
10.05 1994 Long-term Incentive Compensation Program, previously filed
with the Commission on March 18, 1994 as Exhibit A to the
Company's Definitive Proxy Statement for 1994 Annual Meeting
of Shareholders, and incorporated herein by reference.
10.06 Stockholder Protection Rights Agreement dated February 21, 1995
between the Company and the Bank, previously filed with the
Commission on February 27, 1995 as Exhibit 1 to the Company's
Registration Statement on Form 8-A (No. 1-11431), and incorpo-
rated herein by reference.
12 Statement regarding computation of ratios.
23.01 Consent of Bond, Schoeneck & King, LLP (to be included in Ex-
hibit 5).*
23.02 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney (included at page II-4 of this Registration
Statement).
</TABLE>

- --------
* To be filed by amendment.

ITEM 18. UNDERTAKINGS

(a) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section13(a) or Section15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

II-2
<PAGE>

(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.

(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.

II-3
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Syracuse, New York on this 10th day of April, 1995.

COMMUNITY BANK SYSTEM, INC.

/s/ Sanford A. Belden
By: _________________________________
Sanford A. Belden, President and
CEO

Each person whose signature appears below hereby authorizes Sanford A.
Belden, as attorney-in-fact, to execute in the name of such person and to file
any amendments, including post-effective amendments to this Registration
Statement.

Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Sanford A. Belden Director, President and CEO April 10, 1995
-----------------------
SANFORD A. BELDEN

/s/ David G. Wallace Treasurer April 10, 1995
-----------------------
DAVID G. WALLACE

/s/ Earl W. MacArthur Chairman of the Board April 10, 1995
-----------------------
EARL W. MACARTHUR

/s/ William D. Stalder Director April 10, 1995
-----------------------
WILLIAM D. STALDER

/s/ Nicholas A. DiCerbo Director April 10, 1995
-----------------------
NICHOLAS A. DICERBO

/s/ Lee T. Hirschey Director April 10, 1995
-----------------------
LEE T. HIRSCHEY

/s/ David C. Patterson Director April 10, 1995
-----------------------
DAVID C. PATTERSON

/s/ Richard C. Cummings Director April 10, 1995
-----------------------
RICHARD C. CUMMINGS

/s/ William M. Dempsey Director April 10, 1995
-----------------------
WILLIAM M. DEMPSEY

/s/ William N. Sloan Director April 10, 1995
-----------------------
WILLIAM N. SLOAN

/s/ John M. Burgess Director April 10, 1995
-----------------------
JOHN M. BURGESS

/s/ James A. Gabriel Director April 10, 1995
-----------------------
JAMES A. GABRIEL

Director
-----------------------
HUGH G. ZIMMER

/s/ Benjamin Franklin Director April 10, 1995
-----------------------
BENJAMIN FRANKLIN
</TABLE>

II-4
<PAGE>

GRAPHICS APPENDIX LIST

PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS REFERENCE
- --------------------------------------------------------------------------------
TX 2 Map of New York State depicting location of the Bank's current
branch facilities, and branch facilities to be acquired from The
Chase Manhattan Bank, N.A.
- --------------------------------------------------------------------------------
TX 29 GAP MATURITY MATRIX (PAGE 29):

The Gap Maturity Matrix contains a diagonal band of bold
face numbers in boxes. These numbers include each amount and
yield figure for which the repricing intervals for "Sources of
Funds" and Uses of Funds" are identical, specifically:

275,982
5.09%

10,896
3.75%

7,362
3.00%

35,301
5.60%

36,340
6.54%

13,397
4.87%

23,618
3.42%

96,013
4.24%
<PAGE>

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE NO.
-------------- ---------------------- --------
<C> <S> <C>
1 Form of Underwriting Agreement among the Company,
M.A. Schapiro & Co., Inc., and First Albany Corpo-
ration.*
3.1 Certificate of Incorporation of the Company.*
3.2 Bylaws of the Company.*
4.1 Certificate of the Powers, Designations, Preferences
and Rights of the Cumulative Perpetual Preferred
Stock, Series A.*
5 Opinion of Bond, Schoeneck & King, LLP as to the va-
lidity of the shares of the Registrant's common
stock being registered.*
7 Opinion of Bond, Schoeneck & King, LLP as to Liqui-
dation Preferences on Series A Preferred Stock (to
be included in Exhibit 5).*
10.01 Purchase and Assumption Agreement dated December 6,
1994 among the Bank, the Company and The Chase Man-
hattan Bank, N.A.
10.02 First Amendment Dated April 4, 1995 to Purchase and
Assumption Agreement among the Bank, the Company
and The Chase Manhattan Bank, N.A.
10.03 Employment Agreement dated January 1, 1995 between
the Company and Mr. Belden.*
10.04 Form of Employment Agreements between the Company
and Messrs. Wears, Patton and Wallace.*
10.05 1994 Long-term Incentive Compensation Program, pre-
viously filed with the Commission on March 18, 1994
as Exhibit A to the Company's Definitive Proxy
Statement for 1994 Annual Meeting of Shareholders,
and incorporated herein by reference.
10.06 Stockholder Protection Rights Agreement dated Febru-
ary 21, 1995 between the Company and the Bank, pre-
viously filed with the Commission on February 27,
1995 as Exhibit 1 to the Company's Registration
Statement on Form 8-A (No. 1-11431), and incorpo-
rated herein by reference.
12 Statement regarding computation of ratios.
23.01 Consent of Bond, Schoeneck & King, LLP (to be in-
cluded in Exhibit 5).*
23.02 Consent of Coopers & Lybrand L.L.P.
24 Power of Attorney (included at page II-4 of this
Registration Statement).
</TABLE>

- --------
* To be filed by amendment.

<PAGE>

EXHIBIT 10.01

PURCHASE AND ASSUMPTION AGREEMENT

DATED DECEMBER 6, 1994

AMONG

THE CHASE MANHATTAN BANK (NATIONAL ASSOCIATION),

COMMUNITY BANK, NATIONAL ASSOCIATION,

AND

COMMUNITY BANK SYSTEM, INC.
<PAGE>

TABLE OF CONTENTS

Page
----
I. DEFINITIONS

1.1 Certain Defined Terms................................... 1
1.2 Accounting Terms........................................ 5
1.3 Materiality............................................. 5

II. TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES

2.1 Transfer of Assets...................................... 5
2.2 Assumption of Liabilities............................... 6
2.3 Transfer of Records..................................... 6
2.4 Tax Matters............................................. 7
2.5 Matters Relating to the Sale of the Real Property....... 7
2.6 Proration of Certain Expenses........................... 8
2.7 Back Office Conversion.................................. 8
2.8 Processing of Certain Items After Closing............... 9
2.9 Information Returns..................................... 9
2.10 Environmental Inspections............................... 9
2.11 Optional Exclusion of Certain Commercial Real
Estate Loans........................................... 10

III. BID AMOUNT AND PAYMENTS

3.1 Amount of Premium....................................... 10
3.2 Payment by Seller....................................... 11
3.3 Settlement.............................................. 12

IV. SELLER'S REPRESENTATIONS AND WARRANTIES

4.1 Power and Authority..................................... 13
4.2 Litigation and Regulatory Proceedings................... 13
4.3 Consents and Approvals.................................. 13
4.4 Real Property and Fixed Assets.......................... 13
4.5 Ownership of Loans...................................... 14
4.6 Validity of and Compliance with Real Property Leases
and Tenant Leases...................................... 14
4.7 Financial Information................................... 14
4.8 Taxes................................................... 14

-i-
<PAGE>

TABLE OF CONTENTS (Cont'd)

Page
----

4.9 Labor Relations......................................... 15
4.10 Insurance............................................... 15
4.11 Environmental Matters................................... 15

V. BUYER'S AND CBSI'S REPRESENTATIONS
AND WARRANTIES

5.1 Power and Authority..................................... 15
5.2 Litigation and Regulatory Proceedings................... 16
5.3 Consents and Approvals.................................. 16
5.4 Retirement Plan Accounts................................ 16
5.5 Intent to Operate Branches.............................. 16

VI. ADDITIONAL AGREEMENTS OF SELLER

6.1 Access to Seller's Premises, Records, and Personnel..... 17
6.2 Communications with Seller's Customers.................. 17
6.3 Regulatory Approvals.................................... 17
6.4 Conduct of Business..................................... 17
6.5 Indemnification......................................... 18
6.6 Exclusive Arrangement................................... 18
6.7 IRAs and Qualified Retirement Plan Accounts............. 18
6.8 Non-Solicitation of Certain Customers After Closing..... 18
6.9 Establishment of Banking Offices........................ 19
6.10 Landlord and Lessor Consents............................ 19
6.11 Buyer's Registration Statement.......................... 20

VII. ADDITIONAL AGREEMENTS OF BUYER

7.1 Solicitation of Seller's Customers...................... 20
7.2 Regulatory Approvals.................................... 20
7.3 Indemnification......................................... 21
7.4 Confidentiality......................................... 21
7.5 Change of Name, Etc..................................... 21
7.6 Continued Operation of the Branches..................... 21
7.7 Accounts in Bankruptcy.................................. 22
7.8 Deposit in Escrow....................................... 22

-ii-
<PAGE>

TABLE OF CONTENTS (Cont'd)

Page
----

VIII. EMPLOYEES OF THE BRANCHES

8.1 Retention of Employees.................................. 22
8.2 Training................................................ 23
8.3 Non-Solicitation........................................ 23
8.4 FAS 106 Adjustment...................................... 23

IX. CLOSING AND CONDITIONS TO CLOSING

9.1 Time and Place of Closing............................... 24
9.2 Exchange of Closing Documents........................... 24
9.3 Buyer's Conditions to Closing........................... 24
9.4 Seller's Conditions to Closing.......................... 26
9.5 Survival of Representations and Warranties.............. 26

X. TERMINATION

10.1 Termination by Either Party............................. 27
10.2 Break-up Fee............................................ 27
10.3 Regulatory Condition.................................... 28

XI. CERTAIN REPRESENTATIONS AND COVENANTS OF CBSI

11.1 CBSI's Additional Representations and Warranties........ 28
11.2 Issuance of Capital Stock............................... 29
11.3 Bridge Financing........................................ 29

XII. MISCELLANEOUS

12.1 Continuing Cooperation.................................. 30
12.2 Merger and Amendment.................................... 30
12.3 Disputes................................................ 30
12.4 Counterparts............................................ 31
12.5 Exhibits and Schedules.................................. 31
12.6 Assignment.............................................. 31
12.7 Headings................................................ 31
12.8 Notices................................................. 32
12.9 Expenses................................................ 32
12.10 Public Announcements.................................... 33

-iii-
<PAGE>

EXHIBITS

Exhibit 2.8 Clearing Procedures
Exhibit 3.3A Form of Preliminary Closing Statement
Exhibit 3.3B Form of Final Closing Statement
Exhibit 9.3 Form of Seller's Opinion of Counsel
Exhibit 9.4 Form of Buyer's Opinion of Counsel
Exhibit 11.1 Letter from M.A. Schapiro & Co., Inc.

SCHEDULES

Schedule 1.1A Branches Subject to the Agreement
Schedule 1.1B Customers Party to Custody and Security Agreements
Schedule 1.1C Small Business Loans and Lines of Credit to be Assumed
and Small Business Loans to be Acquired by Buyer
Schedule 4.4A Schedule of Real Property Relating to the Branches
Schedule 4.4B Schedule of Fixed Assets Held at the Branches
Schedule 4.6A Real Property Leases
Schedule 4.6B Tenant Leases
Schedule 6.4 Commitments to Invest in Fixed Assets
Schedule 8.1 Certain Employees of Seller

-iv-
<PAGE>

PURCHASE AND ASSUMPTION AGREEMENT
---------------------------------

This Agreement, dated December 6, 1994, is among The Chase Manhattan Bank
(National Association), a national banking association having its principal
place of business in New York, New York ("Seller"), Community Bank, National
Association, a national banking association having its administrative offices in
DeWitt, New York ("Buyer") and Community Bank System, Inc., a Delaware
corporation having its principal place of business in DeWitt, New York ("CBSI").

RECITALS
--------

A. Seller desires to dispose of assets and liabilities of certain of its
branches as defined in this Agreement.

B. Buyer has proposed to purchase these assets and liabilities, upon the terms
and conditions provided in this Agreement.

AGREEMENT
---------

In consideration of the mutual promises set forth in this Agreement, Buyer,
Seller and CBSI agree as follows:

I. DEFINITIONS

1.1 Certain Defined Terms.
---------------------

Some of the capitalized terms appearing in this Agreement are defined
below. The definition of a term expressed in the singular also applies to that
term as used in the plural in this Agreement and vice versa.

"Amount of Premium" has the meaning set forth in Section 3.1 of this
Agreement.

"Assets" has the meaning set forth in Section 2.1 of this Agreement.

"Branches" means those banking offices of Seller listed on Schedule 1.1A to
this Agreement.

"Business Day" means any Monday, Tuesday, Wednesday, Thursday or Friday on
which both Seller and Buyer are open for business.
<PAGE>

"Cash Reserve Lines of Credit" mean those consumer lines of credit made
available to customers of the Branches as a protection against overdrafts on
Deposit Accounts.

"Cash Reserve Loans" means those loans made under Cash Reserve Lines of
Credit.

"Closing" means the transfer of the Assets and the assumption of the
Liabilities on the Closing Date.

"Closing Date" has the meaning set forth in Section 9.1 of this Agreement.

"Confidentiality Agreement" means the letter agreement dated October 13,
1994 between Buyer and Seller.

"Custody and Security Agreements" include those agreements and, in those
cases where no written agreement exists, the implied contractual obligations,
relating to securing Deposits of the municipalities and other governmental
entities listed in Schedule 1.1B.

"Deposit Accounts" means those existing deposit accounts at Seller, the
balances of which are included in the Deposits or would be so included if the
account had a positive balance.

"Deposits" means all deposits as defined in 12 U.S.C. Section 1813(l) which
are booked at the Branches (unless originated through Seller's money desk
operations in Rochester or New York City) or held by the municipalities and
other entities listed on Schedule 1.1B, including accrued but unpaid interest
and both collected and uncollected funds, together with Seller's rights and
responsibilities under any customer agreement evidencing or relating thereto
(including, without limitation, any night deposit or check encashment
agreements), but excluding (i) deposits held in accounts for which Seller acts
as fiduciary (other than deposits held by Retirement Plans), (ii) deposits
subject to legal process, (iii) deposits which have been reported as abandoned
property under the abandoned property laws of any jurisdiction, (iv) deposits
held in any IRA where the depositor has notified Seller or Buyer of his or her
objection to Buyer acting as custodian or trustee of the IRA or any Qualified
Retirement Plan where the customer does not adopt Buyer's master or prototype
plan before Closing; (v) deposits relating to loans or other extensions of
credit not included in the Assets, (vi) deposits held by Large Companies, (vii)
deposits by Seller's affiliates, and (viii) deposits constituting official
checks, travelers checks, money orders, or certified checks.

"Environmental Law" means any federal, state, or local environmental, land
use, zoning, health, chemical use, safety, or sanitation law, statute,
ordinance, or code relating to the protection of the environment and/or
governing the use, storage, treatment, generation, transportation, processing,
handling, production, or disposal of any hazardous substance as defined in the
same, petroleum, or petroleum products, as well as any rule, regulation, policy,
guideline, interpretation, decision, order, or directive of any federal, state,
or local governmental agency or authority with respect to any Environmental Law.

-2-
<PAGE>

"Equipment Leases" means those operating and financial leases and
conditional sales contracts under which Seller holds equipment included in the
Fixed Assets to the extent that the leases are assignable and the terms of the
leases are reasonably acceptable to Buyer.

"Escrow Agreement" means the escrow agreement dated this date between Buyer
and Seller.

"Fair Market Value of the Real Property" means the amounts determined under
Section 2.5(a).

"FAS 106 Adjustment" means the amount calculated under Section 8.4(a).

"Fixed Assets" means all fixtures (including existing signage poles but not
signage boxes), leasehold improvements, furnishings (excluding artwork owned by
Seller or its affiliates), vaults, equipment (including, for example, all ATM
machines and telephone equipment which is not related to automation equipment,
but excluding security equipment, computer equipment, and related
telecommunications equipment), supplies (other than forms and other supplies
which bear Seller's logo), and other personal property ordinarily maintained at
the Branches which are owned or (to the extent of the lessee's interest) leased
by Seller. Nevertheless, Fixed Assets shall include leased equipment only to
the extent that the applicable Equipment Leases can be assigned to Buyer and the
lease terms are reasonably acceptable to Buyer.

"Investment Securities" means any Type I security or Type II security as
defined in 12 C.F.R.(S)1.3.

"IRAs" mean those non-discretionary individual retirement accounts relating
to the Branches.

"Large Company" means any business which Seller reasonably determines to
have annual revenues of $10,000,000.00 or more.

"Leased Branches" means all premises of the Branches which Seller leases
and occupies under the Real Property Leases.

"Liabilities" has the meaning set forth in Section 2.2 of this Agreement.

"Loan Documentation" means all notes, loan or credit agreements, security
or other collateral agreements, guarantees, mortgages, copies of UCC filings and
disclosure forms, and all similar agreements, or instruments relating to any
loan included in the Assets and all materials actually maintained by Seller in
the credit files for those loans.

"Loans" includes the Cash Reserve Loans, the Passbook Loans, and the Small
Business Loans.

-3-
<PAGE>

"Mediator" means the firm of KPMG Peat Marwick or, if that firm declines to
perform the functions of the Mediator specified in this Agreement, then another
firm of certified public accountants mutually acceptable to Seller and Buyer.

"Overdrafts" means those overdrafts of the book balance of any Deposit
Accounts which have been outstanding for no more than one week at Closing.

"Passbook Loans" means all consumer loans, the principal balance and
accrued but unpaid interest of which is fully secured by Deposits as of Closing.

"Qualified Retirement Plans" means those retirement plans relating to the
Branches for which Seller acts as trustee or custodian under its prototype
qualified plan, but which are not administered by Seller's trust department.

"Real Property" means the real property associated with the operation of
the Branches which is owned by Seller or one of its affiliates, except for any
such real property which Buyer may elect to exclude from the Real Property in
accordance with Section 2.10 of this Agreement.

"Real Property Leases" means the leases identified in Schedule 4.6A, except
for any leases which Buyer may elect to exclude from the Real Property Leases in
accordance with Section 2.10 of this Agreement.

"Small Business Lines of Credit" means those committed or uncommitted lines
of credit extended as of Closing to any customer listed on Schedule 1.1C that is
marked by an asterisk, except for any such line of credit which Buyer
determines, within ten (10) Business Days after Closing, would have been risk-
rated "special mention," "substandard," or "doubtful" if Buyer had performed a
credit audit of the Loan on the Closing Date.

"Small Business Loans" means those loans and commercial mortgages made
under Small Business Lines of Credit or otherwise to any customer listed on
Schedule 1.1C, except for any such loan or commercial mortgage which (a) Buyer
determines, within ten (10) Business Days after Closing, would have been risk-
rated "special mention," "substandard," or "doubtful" if Buyer had performed a
credit audit of the Loan on the Closing Date or (b) in the case of a loan
classified by Seller as a business installment loan, is more than sixty (60)
days past due at Closing with respect to any payment of principal or interest.
Nevertheless, "Small Business Loan" does not include any lease of personal
property.

"Transferred Employee" means each employee who is hired by Buyer under
Section 8.1 of this Agreement.

-4-
<PAGE>

1.2 Accounting Terms.
----------------

To the extent that any accounting terms used in this Agreement are not
defined in Section 1.1, they shall be defined under definitions found in
generally accepted accounting principles.

1.3 Materiality.
-----------

The terms "material" and "material adverse effect" are used in this
Agreement to qualify certain representations of Seller and Buyer and certain
conditions to their respective obligation to proceed to closing. The event or
circumstance described in these representations and conditions will be deemed to
be "material" only if it has (or would be reasonably expected to have) a
material effect on the financial condition, business, or operations of the
Branches, taken as a whole unless expressly stated otherwise in the Agreement.

II. TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES

2.1 Transfer of Assets.
------------------

(a) Seller will transfer possession of and all right, title, and interest
in and to the following assets to Buyer (the "Assets") at the close of business
on the Closing Date:

(i) The Real Property;

(ii) The Fixed Assets;

(iii) Cash on hand in the Branches;

(iv) Except as provided in subsection (b) of this Section 2.1, the
Passbook Loans and the Cash Reserve Loans;

(v) Except as provided in Section 2.11, the Small Business Loans;

(vi) Except as provided in subsection (c) of this Section 2.1, the
Overdrafts;

(vii) Seller's rights under the Cash Reserve Lines of Credit, the
Small Business Lines of Credit (except as otherwise provided in
Section 2.11), the Real Property Leases, the Equipment Leases,
and any safe deposit box rental agreements relating to safe
deposit boxes located at the Branches; and

(viii) The Tenant Leases and related security deposits if any.

-5-
<PAGE>

All Assets are transferred without any express or implied warranties (including
the implied warranties of merchantability or fitness for any particular use)
except to the extent otherwise provided in this Agreement.

(b) Subject to the procedures set forth in this subsection, the Assets
shall not include any Cash Reserve Loan which is more than sixty (60) days past
due on the Closing Date with respect to any payment of principal or interest.

(c) Buyer shall not purchase any Overdraft relating to any account if the
aggregate of all overdrafts outstanding at Closing with respect to that account
or any accounts related to that account exceeds $1,000.

2.2 Assumption of Liabilities.
-------------------------

Buyer agrees, on the Closing Date, to assume, pay, perform and discharge
the following liabilities of Seller (the "Liabilities") at their respective book
value, as shown on Seller's books as at the close of business on the Closing
Date:

(a) The Deposits and the Deposit Accounts;

(b) Seller's obligations with respect to the Real Property Leases, the
Tenant Leases, and those Equipment Leases included in the Fixed Assets;

(c) Seller's duties and responsibilities with respect to all Cash Reserve
Lines of Credit and, except as otherwise provided in Section 2.11, all Small
Business Lines of Credit;

(d) Seller's duties and responsibilities with respect to customer safe
deposit boxes held at the Branches;

(e) Seller's duties and responsibilities with respect to the IRAs; and

(f) Seller's duties and responsibilities under the Custody and Security
Agreements.

Nothing in this Agreement shall preclude Buyer from amending any term of any
Deposit Account following the Closing to the extent permissible under the
deposit agreement (or any related agreement with the customer) and applicable
law.

2.3 Transfer of Records.
-------------------

(a) Seller also shall transfer to Buyer possession and all right, title,
and interest of and in (i) all books and records maintained at the Branches,
(ii) all signature cards for the Deposit Accounts which are not held at the
Branches, (iii) all Individual Retirement Account Agreements and

-6-
<PAGE>

disclosure statements which are not held at the Branches, (iv) the Real Property
Leases, (v) the Equipment Leases, (vi) the Tenant Leases, and (vii) the Loan
Documentation.

(b) Any books and records relating to the Assets, the Liabilities, or the
Branches (including historical information on Deposit Accounts) held by either
Seller or Buyer after Closing shall be maintained in accordance with (and for
the period provided in) that party's standard recordkeeping policies and
procedures. Throughout that period, the party holding any such books and
records shall comply with the reasonable request of the other party to provide
copies of specified documents, at the expense of the requesting party. The
requesting party shall give reasonable notice of any such request. Without
limiting the foregoing and except for the destruction by Seller in the ordinary
course of records which are commingled with records relating to assets and
liabilities which are not related to the Branches, neither party will destroy
any books or records relating to the Assets, the Liabilities, or the Branches
before the fifth anniversary of the Closing without providing forty-five (45)
days written notice to the other party. Subject to any obligation of Seller to
keep the records confidential, the party receiving the notice shall be permitted
to inspect any such records and to take possession of them, provided that it
shall reimburse the party providing the notice for any out-of-pocket expense
incurred in that regard.

2.4 Tax Matters.
-----------

(a) Buyer shall pay any sales and use taxes and any interest and penalties
thereon which are payable or arise as a result of this Agreement or the
consummation of the transactions contemplated by this Agreement. The purchase
price for the Fixed Assets is their respective net value as noted on Seller's
books at the close of the month preceding the month in which the Closing Date
occurs in accordance with its customary practices and procedures used in
preparing financial statements.

(b) Seller shall pay all real property transfer taxes and real property
transfer gains taxes arising out of the assignment of the Real Property and the
Real Property Leases. The parties shall cooperate in preparing and filing any
real property transfer gains tax forms which may be necessary or advisable
before the Closing Date. The purchase price of the Real Property is the
aggregate of the Fair Market Values of all properties included in the Real
Property. None of the consideration paid under this Agreement is attributable
to the Real Property Leases.

2.5 Matters Relating to the Sale of the Real Property.
-------------------------------------------------

(a) The purchase price of each parcel of the Real Property shall be the
Fair Market Value of the Real Property, which shall be determined as follows.
Promptly after the execution of this Agreement, Seller and Buyer shall each
conduct its own internal valuation of the Real Property and negotiate in good
faith to attempt to agree on the Fair Market Value of the Real Property for the
various parcels. If Seller and Buyer are unable to agree on the Fair Market
Value of the Real Property for a parcel within forty-five (45) days of the date
of this Agreement, then the parties will set the Fair Market Value of the Real
Property for that parcel by the following appraisal mechanism.

-7-
<PAGE>

Within sixty (60) days of the date of this Agreement, Seller and Buyer shall
each designate in writing an independent real estate appraiser for the purposes
of determining the current Fair Market Value of that parcel. The two appraisers
shall prepare written appraisals of the current fair market value of the parcel
on the basis of the use of the parcel as it currently is used within thirty (30)
days of their appointment. If the difference between the two appraised values is
no more than twenty percent of the higher appraised value, the Fair Market Value
of the Real Property for that parcel shall be the average of the two appraised
values. If the difference between the two appraised values is more than twenty
percent of the higher appraised value, the two appraisers shall select an
independent appraiser within ten (10) days of their determination, who shall
make its determination of the current Fair Market Value of the parcel (without
knowledge of the substance of either of the two final valuations) within thirty
(30) days of so being appointed. The Fair Market Value of the Real Property in
question shall be the appraised value of one of the original two appraisers
which is closest in value to the third appraiser. All appraisers designated
under this Section shall be current members in good standing of the American
Institute of Real Estate Appraisers or an equivalent organization. Seller and
Buyer shall each pay one half of the aggregate reasonable fees and expenses of
the appraisers.

(b) Promptly after the date of this agreement, Seller shall (i) make
available to Buyer all existing abstracts of title and surveys relating to the
Real Property and (ii) order redates of all such abstracts of title. Promptly
after receiving redates of the abstracts of title, Seller shall order surveys of
the Real Property. Seller shall make available to Buyer all redated abstracts
and surveys promptly after it receives them. Buyer shall pay for recording the
deed(s) for the Real Property.

2.6 Proration of Certain Expenses.
-----------------------------

All rental, (other than safe deposit box rentals), real estate taxes, fuel
oil costs, utility, water and sewer charges and assessments, as well as
semiannual assessments paid to the Bank Insurance Fund with respect to the
Deposits, shall be adjusted on a pro rata basis (including but not limited to a
--------
proration of rental payments on Tenant Leases) as of the close of business on
the Closing Date. Additionally, Buyer will reimburse Seller for that portion, if
any, of Seller's Bank Insurance Fund assessment for the next semi-annual period
commencing after the Closing Date which reflects the Deposits.

2.7 Back Office Conversion.
----------------------

(a) Seller and Buyer shall cooperate with each other and shall use their
reasonable best efforts (as consistent with their internal day-to-day
operations) in order to cause the timely transfer of information concerning the
Assets and Liabilities which is maintained on Seller's data processing systems
so that Buyer can incorporate the Deposits and the Loans onto its deposit and
loan accounting system no later than the opening of business on the Business Day
following the Closing Date. Upon Buyer's reasonable request, Seller also shall
provide Buyer from time to time before Closing with proposed detailed record
layouts and file descriptions and with computer tapes in Seller's IBM format as
may be reasonably necessary to conduct test conversions. Within fifteen (15)
days after the date of this Agreement, Seller and Buyer shall each designate an
appropriate officer

-8-
<PAGE>

to be responsible for the necessary cooperation of the parties and another
officer to act as an initial contact for questions and requests for information.

(b) Buyer will utilize a full-time internal coordinator for planning and
executing the acquisition and conversion of the Branches and will receive
assistance throughout the period between the date of this Agreement and the
conversion of the Deposits and the Loans onto Buyer's computer systems from a
consultant who is familiar with Buyer's operations and systems and has extensive
experience with conversions.

2.8 Processing of Certain Items After Closing.
-----------------------------------------

(a) Buyer and Seller shall promptly agree upon written practices and
procedures (the "Clearing Procedures") under which Seller shall handle in a
prompt and timely manner all items (including, for example, automatic clearing
house and electronic funds transfer items) relating to the Assets or the
Deposits which are presented or returned to Seller on or before the sixtieth
(60th) day following Closing. In this regard, Buyer and Seller shall each
designate an appropriate officer within ten (10) days after the execution of
this Agreement to negotiate the Clearing Procedures. When agreed upon by the
parties, the Clearing Procedures shall be attached to this Agreement as Exhibit
2.8. Both parties will comply with the Clearing Procedures, as well as all
applicable regulations, clearing house rules, and agreements, and take all other
reasonable steps to insure that all such items are delivered to Buyer promptly
and in good order, together with a list or computer tape of the same.

(b) The Clearing Procedures shall provide that Buyer will have the benefit
and bear the risk associated with any item which is presented or returned to
Seller after Closing. They also shall provide that Buyer will pay Seller on a
same day basis in immediately available funds an amount equal to the aggregate
amount of all payments made by Seller upon presentment of these items. All
items to be provided to Buyer under this Section shall be made available for
pick-up in accordance with the Clearing Procedures at Seller's offices located
at One Chase Square, Seneca Building, 6th Floor, Rochester, New York.

2.9 Information Returns.
-------------------

Seller will file all required information returns with the Internal Revenue
Service with respect to interest paid on the Deposits before Closing. Buyer
shall file all required information returns with the Internal Revenue Service
with respect to interest paid on the Deposits after Closing.

2.10 Environmental Inspections.
-------------------------

(a) Buyer, at its sole cost and expense, shall have the right to perform a
Phase 1 Environmental Site Assessment (the "Assessment") of each of the
premises included in the Real Property or, to the extent Seller is authorized to
permit an Assessment, the Real Property Leases within sixty (60) days after the
date of this Agreement. No Assessment shall disrupt the business of the
Branches.

-9-
<PAGE>

(b) Within five (5) days after receipt of the Assessment, Buyer shall
advise Seller in writing ("Buyer's Notice") if the Assessment reveals any
condition(s) which cause or would cause the premises to be in violation of any
Environmental Law or any similar law, and shall furnish Seller with a copy of
the Assessment.

(c) Within thirty (30) days after receipt of Buyer's Notice, Seller may
elect to advise Buyer in writing ("Seller's Response") that it shall remediate
(or ask the landlord of the premises to remediate) the condition(s) specified in
Buyer's Notice so that the premises and all equipment and systems appurtenant
thereto are in full compliance with all such laws and regulations and shall
repair any damage to the Real Property caused by such remediation work. If
Seller advises Buyer that it will remediate the condition(s) specified in
Buyer's Notice it shall perform such work with due diligence.

(d) If Seller advises Buyer that it will not remediate some or all of the
conditions specified in Buyer's Notice, and that any landlord of Lease premises
is not obligated to remediate them, then Buyer, within five (5) days after
receipt of Seller's Response, may elect to exclude from the Real Property or the
Real Property Leases, as the case may be, any or all of the premises which
Seller so declines to remediate. If Buyer does not elect to so exclude any of
the premises which Seller declines to remediate, Seller shall have no liability
to Buyer with respect to any environmental problem identified in the Assessment
with respect to those premises.

2.11 Optional Exclusion of Certain Commercial Real Estate Loans.
----------------------------------------------------------

Subject to the second sentence of this Section 2.11. Buyer shall not be
obligated to purchase any Small Business Loan secured by real property if Buyer
has affirmative evidence (whether or not contained in the Loan Documentation)
leading it to conclude that the value of the Small Business Loan may be
adversely affected by the possible non-compliance of the real property with any
Environmental Law. Buyer shall not be obligated to assume any Small Business
Line of Credit under which any such Small Business Loan which Buyer elects not
to purchase under the previous sentence was made. Buyer must notify Seller of
every such Small Business Loan which it elects not to purchase and every Small
Business Line of Credit which Buyer elects not to assume no later than ninety
(90) days after the date of this Agreement (in cases when the Small Business
Loan is outstanding on the date of this Agreement) or fifteen (15) days after
the Closing Date (in all other cases).

III. BID AMOUNT AND PAYMENTS

3.1 Amount of Premium.
-----------------

In further consideration of Seller entering into this Agreement, Buyer will
pay to Seller, as described in Sections 3.2 and 3.3 of this Agreement, an amount
equal to eight and one quarter percent (8.25%) of the average amount of all the
Deposits (including accrued but unpaid interest)

-10-
<PAGE>

outstanding at the close of business over (a) in the case of Deposits of
municipalities and school districts, a period of twelve (12) months ending on
the last day of the month preceding the month in which the Closing Date occurs
and (b) in the case of all other Deposits, a period of five (5) Business Days
ending on the fifth (5th) Business Day preceding the Closing Date (the "Amount
of Premium"). The average amount of certain Deposits of municipalities and
school districts may be based on month-end balances. Nevertheless, if the
Closing does not occur on or before May 31, 1995, the period of five (5)
Business Days shall end on May 31, 1995 and not on the fifth (5th) Business Day
preceding the Closing Date.

3.2 Payment by Seller.
-----------------

In consideration of Buyer's purchase of the Assets and its assumption of
the Liabilities, Seller shall pay to Buyer an amount equal to the Deposits, as
at the close of business on the Closing Date, less the sum of the following,
calculated as at the close of business on the Closing Date:

(a) The sum of the Fair Market Values of the Real Property;

(b) The net value of the Fixed Assets as noted on Seller's books (prepared
in accordance with its customary practices and procedures used in preparing
financial statements) as of the close of the month preceding the month in which
the Closing Date occurs;

(c) The aggregate principal amounts plus any accrued interest on the
Passbook Loans, the Cash Reserve Loans, and the Small Business Loans;

(d) The amount of cash on hand at the Branches;

(e) The principal amount of the Overdrafts;

(f) The net amount (which may be a negative amount) of taxes payable by
Buyer and Seller under Section 2.4;

(g) The net amount (which may be a negative amount) of any adjustment under
Section 2.6;

(h) The amount of the FAS 106 Adjustment; and

(i) The Amount of Premium.

For purposes of determining the amount of cash on hand at the Branches, foreign
currency shall be valued at the exchange rate published in the Wall Street
Journal on the Monday following the Closing Date.

-11-
<PAGE>

3.3 Settlement.
----------

(a) Not later than the Wednesday immediately preceding the Closing Date,
Seller shall deliver to Buyer a proposed Preliminary Closing Statement, together
with supporting documentation reasonably satisfactory to Buyer, certified by an
appropriate officer, in the form of Exhibit 3.3A to this Agreement, completed as
at the close of business on the third (3rd) Friday before the Closing Date
(except that the book value of the Fixed Assets as of the close of business on
the Closing Date shall be used). For purposes of the Preliminary Closing
Statement only, the Amount of Premium will be based on the amount of the
Deposits on the Friday before the Closing Date. The parties shall agree upon
the Preliminary Closing Statement before the Closing Date, and it shall be the
basis of a preliminary payment to be made to Buyer's account on the Closing Date
(the "Preliminary Payment"). A party's agreement to the Preliminary Closing
Statement shall not be binding with respect to the Final Closing Statement.

(b) Seller shall provide Buyer with a proposed Final Closing Statement,
together with supporting documentation reasonably satisfactory to Buyer,
certified by an appropriate officer, within sixty (60) days after the Closing
Date (or on a different date agreed upon by the parties), and the parties shall
use their best efforts to agree upon the Final Closing Statement promptly. The
Final Closing Statement shall be in the form of Exhibit 3.3B, and it shall be
completed as of the close of business on the Closing Date. On the first (1st)
Business Day after Buyer agrees to the Final Closing Statement or Seller is
notified of any determination of the Final Closing Statement under Subsection
(d), Seller shall pay to Buyer (or Buyer shall pay to Seller, as the case may
be) an amount equal to the amount due stated on the Final Closing Statement (the
"Adjustment Payment"), plus interest from the day after the Closing Date until
and including the day before the Adjustment Payment is made at a rate per annum
(calculated daily based on a 360-day year) equal to the "near closing bid"
federal funds rate published in the Wall Street Journal on the Monday following
the Closing Date.

(c) Both the Preliminary Payment and the Adjustment Payment shall be made
by wire transfer of immediately available Fed funds to the account of the party
receiving the payment.

(d) If the parties are unable to agree on a Final Closing Statement within
eighty (80) days after Closing, then, subject to Section 12.3(b), either party
may submit the matter to the Mediator, which shall determine all disputed
portions of the Final Closing Statement in accordance with the terms and
conditions of this Agreement within thirty (30) days after the submission. The
parties shall each pay half of the fees and expenses of the Mediator, except
that the Mediator may assess the full amount of its fees and expenses against
either party if it determines that that party negotiated the Final Closing
Statement in bad faith. The Final Closing Statement, as agreed upon by the
parties and/or determined under this subsection, shall be final and binding upon
the parties.

-12-
<PAGE>

IV. SELLER'S REPRESENTATIONS AND WARRANTIES

Seller makes the following representations and warranties as of the date of this
Agreement:

4.1 Power and Authority.
-------------------

(a) Seller has the corporate power and authority to enter into and perform
this Agreement. The execution and delivery of this Agreement has been duly
authorized by all necessary corporate action by Seller. Upon execution and
delivery by all parties, this Agreement will constitute a valid and binding
obligation of Seller, enforceable in accordance with its terms, subject to
conservatorship, receivership, and a court's right under general principles of
equity to refuse to direct specific performance.

(b) The performance of this Agreement by Seller will not violate any
applicable law, rule, regulation, or order or any material contract or
instrument by which Seller is bound except for such violations which, in the
aggregate, would not reasonably be expected to have any material adverse affect
on the operation of the Branches or the consummation of the transactions
contemplated by this Agreement.

4.2 Litigation and Regulatory Proceedings.
-------------------------------------

There are no actions pending or (to Seller's knowledge) threatened against
Seller which alone, or taken in the aggregate, reasonably would be expected to
have any material adverse effect upon the consummation of the transactions
contemplated by this Agreement. No governmental agency has notified Seller that
it would oppose or not approve or consent to the transactions contemplated by
this Agreement.

4.3 Consents and Approvals.
----------------------

Except for the regulatory approvals mentioned in Section 9.4(a) of this
Agreement and any necessary landlord consents to the assignment of the Real
Property Leases, no consents or approvals, or filings or registrations with any
third party or any public body, agency, or authority, are necessary in
connection with Seller's consummation of the transactions contemplated by this
Agreement.

4.4 Real Property and Fixed Assets.
------------------------------

(a) Schedule 4.4A contains a list of all the Real Property. Schedule 4.4B
contains a non-exclusive list of aggregate net value of the Fixed Assets for
each of the Branches as of September 30, 1994, as noted on Seller's books in
accordance with its customary practices and procedures used in preparing
financial statements.

(b) Seller has good and marketable title to the Real Property and Fixed
Assets (except for leased equipment), free and clear of all encumbrances, except
for the rights of any tenants identified

-13-
<PAGE>

in Schedule 4.6B and for liens and encumbrances, if any, which do not detract
from the value of or interfere with the use of the Assets, and current taxes and
assessments not delinquent. The Equipment Leases are, and, subject to any
necessary lessor's consent, upon assignment will be, valid leases enforceable in
accordance with their terms (subject to bankruptcy, other laws relating to
creditors' rights, and a court's right under general principles of equity to
refuse to direct specific performance) under which Seller is entitled to use the
equipment leased under the same. No material default has occurred and is
continuing under any of the Equipment Leases.

4.5 Ownership of Loans.
------------------

Seller has good title to the Loans (but not necessarily the collateral for
the Loans) free and clear of all liens and encumbrances. Seller is authorized
to assign the Loans to Buyer and, upon the assignment, Buyer will have the
rights of a lender with respect to the Loans.

4.6 Validity of and Compliance with Real Property Leases and Tenant Leases.
----------------------------------------------------------------------

(a) The leases identified in Schedule 4.6A (the "Real Property Leases") are
valid and existing leases under which Seller, as lessee, is entitled to
possession of the demised premises. No event has occurred, and is continuing,
which constitutes a default under any of the Real Property Leases nor is there
any claim by a landlord against the Seller in connection with the Real Property
Leases. Subject to Seller obtaining any necessary landlord consents, the
assignment of such leases will transfer to Buyer all of Seller's rights under
the Real Property Leases.

(b) The leases and/or subleases identified in Schedule 4.6B (the "Tenant
Leases") are valid and existing leases and/or subleases under which Seller, as
lessor or sublessor, has demised certain space to the tenant or subtenant. No
event has occurred, and is continuing, which constitutes a default under any of
the Tenant Leases, nor is there any claim by the tenant or subtenant against
Seller in connection with the Tenant Leases.

4.7 Financial Information.
---------------------

The Preliminary Closing Statement and Final Closing Statement will be
prepared in accordance with Seller's customary practices and procedures used in
preparing financial statements.

4.8 Taxes.
-----

Seller either has paid all payroll, withholding, property, sales, use, and
transfer taxes imposed by any taxing authority which are due and payable by
Seller with respect to the Branches or their employees, has properly accrued for
the same by reserves shown on Seller's books and records of account, or will
have done one or the other of the foregoing on or before the Closing Date.
Notwithstanding any other provision in this Agreement, Seller shall retain all
rights to any refund with respect to any such tax paid.

-14-
<PAGE>

4.9 Labor Relations.
---------------

No employee located at any Branch is represented for purposes of collective
bargaining by a labor organization of any type and to the best of Seller's
knowledge, no labor union is attempting to organize employees of the Branches.
No claim related to any employee of the Branches is pending or, to Seller's
knowledge, threatened with respect to any civil rights, occupational safety, or
other labor-related statute, regulation, or ordinance which might reasonably be
expected to have a material adverse effect on the business, financial condition,
or operations of the Branches.

4.10 Insurance.
---------

Seller maintains, or causes to be maintained, insurance on the Branches and
the Assets in amounts and of the kind as may be required or as is customary in
the business of banking.

4.11 Environmental Matters.
---------------------

To the best knowledge of Seller's facilities personnel in upstate New York,
neither the Real Property nor any of the premises subject to the Real Property
Leases is, or has been in violation of, or subject to any liability under, any
Environmental Law, except for such violations or liabilities that are not
material based on the Branches in question. To the best knowledge of Seller's
facilities personnel in upstate New York, there are no actions, suits or
proceedings, or demands, claims, notices of investigation (including without
limitation notices, demand letters, or requests for information from an
environmental agency) instituted, pending, or threatened relating to the
Branches, except for liabilities or violations that would not have a material
adverse effect on the Branches in question.

V. BUYER'S AND CBSI'S REPRESENTATIONS AND WARRANTIES

Buyer and CBSI make the following representations and warranties as of the date
of this Agreement:

5.1 Power and Authority.
-------------------

(a) Buyer and CBSI have the corporate power and authority to enter into and
perform this Agreement. The execution and delivery of this Agreement has been
duly authorized by all necessary corporate action by Buyer and CBSI. Upon
execution and delivery by all parties, this Agreement will constitute a valid
and binding obligation of Buyer and CBSI, enforceable in accordance with its
terms, subject to conservatorship, receivership, other laws relating to
creditors' rights, and a court's right under general principles of equity to
refuse to direct specific performance.

-15-
<PAGE>

(b) The performance of this Agreement by Buyer and CBSI will not violate
any applicable law, rule, regulation, or order or any material contract or
instrument by which Buyer or CBSI is bound except for such violations which, in
the aggregate, would not reasonably be expected to have any material adverse
effect on the consummation of the transactions contemplated by this Agreement.

5.2 Litigation and Regulatory Proceedings.
-------------------------------------

There are no actions pending or (to Buyer's or CBSI's knowledge) threatened
against Buyer or CBSI which alone, or taken in the aggregate, reasonably would
be expected to have any material adverse effect upon the consummation of the
transactions contemplated by this Agreement. No governmental agency has
notified Buyer or CBSI that it would oppose or not approve or consent to the
transactions contemplated by this Agreement.

5.3 Consents and Approvals.
----------------------

Except for the regulatory approvals mentioned in Section 9.3(a) of this
Agreement, no consents or approvals, or filings or registrations with any third
party or any public body, agency, or authority are necessary in connection with
Buyer's or CBSI's consummation of the transactions contemplated by this
Agreement.

5.4 Retirement Plan Accounts.
------------------------

Buyer makes available to its deposit customers an individual retirement
account agreement and disclosure statement and a master or prototype qualified
plan which comply in all material respects with all applicable statutes and all
other applicable requirements of the Internal Revenue Service and the United
States Department of Labor. Buyer's master or prototype qualified plan is
compatible with Seller's master or prototype plan so that customers currently
using Seller's master or prototype plan may amend their plans to take the form
of Buyer's master or prototype plan without adverse consequences.

5.5 Intent to Operate Branches.
--------------------------

Buyer intends to maintain branches in each of the communities where the
Branches are located and to serve the banking needs of the communities in which
the Branches are located through those branches on an ongoing basis.

-16-
<PAGE>

VI. ADDITIONAL AGREEMENTS OF SELLER

6.1 Access to Seller's Premises, Records, and Personnel.
---------------------------------------------------

Upon execution of this Agreement, Seller shall give Buyer and its
representatives and counsel reasonable access to the Branches, Seller's
corporate records, financial statements, internal and external audit reports,
findings and written communications, and all other documents and other
information concerning the Branches' business, operations, assets, liabilities,
personnel and condition, financial or otherwise, and appropriate personnel of
Seller, provided that Buyer does not interfere with the Branches' business
operations or those of any other area of Seller. Seller shall not be required
to provide access to or to disclose information where such access or disclosure
might violate or prejudice the rights of any customer or employee or would be
contrary to law or any legal or regulatory order or process. In no event shall
Seller be obligated to furnish any personnel files, income tax returns, or
income tax worksheets.

6.2 Communications with Seller's Customers.
--------------------------------------

Seller shall mail notices to its customers of Buyer's impending acquisition
of the Branches at least twenty-one (21) days before Closing. After Seller
provides this notice, Buyer shall be permitted to provide to Seller material to
be sent, at Buyer's expense, to those customers of the Branches whose deposits
or loans are being transferred under this Agreement concerning the proposed
transaction and Buyer's products. Each party's communication shall be subject
to the approval of the other party, which approval shall not be refused
unreasonably.

6.3 Regulatory Approvals.
--------------------

Seller shall use its best efforts to obtain promptly any regulatory
approval on which its consummation of the transactions contemplated by this
Agreement is conditioned. Seller also shall cooperate fully and promptly with
Buyer in obtaining any regulatory approval which Buyer must obtain before
Closing. Seller shall notify Buyer promptly of any significant development with
respect to any application it files under this Section. Seller also shall
provide Buyer with a copy of any regulatory approval it receives under this
Section, promptly after Seller's receipt of the same.

6.4 Conduct of Business.
-------------------

Except as provided in this Agreement and as may be agreed upon otherwise
with Buyer, Seller will continue to carry on the business of banking at the
Branches until Closing only in the ordinary course of business, consistent with
prudent business practices, and shall use reasonable efforts to maintain good
relations with customers of the Branches. Seller shall not, without Buyer's
prior approval, make any capital expenditures in excess of an aggregate amount
of $25,000 for any one Branch or $250,000 for all Branches, other than as
provided for under binding commitments identified in Schedule 6.4, or terminate
the operation of any Branch, unless those operations cease due to events beyond
Seller's control. Seller shall price all Deposits consistent with market

-17-
<PAGE>

conditions and consistent with Chase's policies for Chase branches located in
its Rochester, Syracuse, or Watertown divisions, as the case may be.

6.5 Indemnification.
---------------

Seller will indemnify Buyer against, and hold it harmless from, all
liability, damages, losses, costs, penalties, and expense (including reasonable
attorneys' fees) relating to (a) any claim against Buyer with respect to the
Assets or the Liabilities to the extent that it arises out of Seller's breach of
any provision of this Agreement, (b) any claim against Buyer which arises out of
Seller's negligence or willful misconduct or Seller's failure before Closing to
perform the Liabilities in all material respects in accordance with their terms,
or (c) the enforcement of Buyer's rights under this Section. If a claim is made
against Buyer for which Seller may be liable under this Section, Buyer shall
give prompt notice to Seller of the claim and Seller may elect to take over the
defense of the claim. Once Seller takes over the defense of any such claim, it
shall have no obligation under this Section with respect to any attorneys' fees
or other legal expense incurred thereafter by Buyer with respect to that claim.
Buyer shall make its personnel available to Seller and otherwise cooperate
reasonably with Seller in its investigation or defense of any such claim, and
Buyer's failure to do so shall render void Seller's obligations under this
Section with respect to that claim. Buyer shall not settle any claim subject to
indemnification under this Section without Seller's consent.

6.6 Exclusive Arrangement.
---------------------

Unless Seller determines that Buyer has breached any term or condition of
this Agreement in a material respect, Seller will not enter into any agreement
or discussions with any other party with regard to the sale or other disposition
of the Branches; further, Seller will not sell or otherwise dispose of any of
the Assets or Liabilities of the Branches other than in the ordinary course of
business of the Branches.

6.7 IRAs and Qualified Retirement Plan Accounts.
-------------------------------------------

Seller shall notify each of its customers holding Deposits under an IRA in
a timely fashion of the assignment of the trusteeship or custodianship of their
IRA, as contemplated by the plan documents. Seller also shall use reasonable
efforts to cause customers with Qualified Retirement Plan accounts at the
Branches to adopt Buyer's master or prototype plan, provided that such an
adoption would have no adverse consequences to the customers or their Qualified
Retirement Plans.

6.8 Non-Solicitation of Certain Customers After Closing.
---------------------------------------------------

(a) For a period of three (3) years after Closing, Seller shall not
solicit (i) deposit business of a type then offered by Buyer from any customer
whose deposits are included in the Deposits or (ii) commercial lending business
from any customer to whom a Small Business Line of Credit has been extended or a
Small Business Loan made. The foregoing shall not prohibit

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<PAGE>

solicitation through customary advertisement and marketing practices not
targeted to those customers, except that Seller shall not advertise in
newspapers published in the cities or towns in which the Branches are located.
Additionally, the solicitation of investment, securities, and investment
management business from any of these customers, including, without limitation,
solicitations with respect to Seller's InvestaCash investment management
product, shall not be deemed to be the solicitation of deposit business for
purposes of this Section; however, the solicitation of any such business is
subject to the provisions of Paragraph 6.8(b) of this Agreement.

(b) For a period of three (3) years after Closing, Seller will not
prepare or use for marketing purposes any list of the customers whose Deposits
or Loans are transferred to Buyer in connection with the transactions
contemplated by this Agreement. However, Seller will not be prohibited from
adding the name of any customer to (or maintaining the name of any customer on)
any mailing list in those cases where the customer's name is derived
independently of its deposit or commercial loan relationship with the Branches
or the customer at Closing has a relationship with Chase other than the Deposits
or the Loans.

6.9 Establishment of Banking Offices.
--------------------------------

From and after the Closing Date and continuing until the second
anniversary of this Agreement, neither Seller nor any of its Affiliates (i.e.
any person, firm, or corporation directly or indirectly controlling, controlled
by, or under common control with Seller) shall acquire or establish any office
which is engaged in the business of banking or financial or investment services
and is located within a five (5) mile radius of any of the Branches (other than
the Newark Branch and the Newark Plaza Branch) or within a three (3) mile radius
of the Newark Branch or the Newark Plaza Branch (the "Territory").
Nevertheless, the foregoing shall not prevent Seller or any of its Affiliates
from acquiring, being acquired by, or merging into or consolidating with any
financial institution, or assuming deposit liabilities of any financial
institution, provided that the acquisition of one or more offices within the
Territory is only an incidental part of the transaction as a whole.
Additionally, the foregoing shall not apply to the establishment of (a) ATMs and
other facilities provided that the ATM's or other facilities are located on the
premises of a Large Company which is a customer of Seller and such facilities
are intended primarily for the purpose of providing services to the Large
Company and its employees and are not intended for general public access (except
in an incidental manner) and further provided that no such ATM or other facility
shall be established at a supermarket or shopping mall or (b) other offices
which (i) do not accept deposits and (ii) provide services solely to Large
Companies.

6.10 Landlord and Lessor Consents.
----------------------------

Seller shall use its reasonable best efforts to obtain, in form and
substance reasonably satisfactory to Buyer's counsel, all necessary consents and
estoppel certificates of the applicable landlords and lessors to the assumption
by Buyer of the Real Property Leases and the Equipment Leases.

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<PAGE>

6.11 Buyer's Registration Statement.
------------------------------

Seller shall cooperate fully with CBSI by providing in a timely manner all
information required by CBSI in the preparation of any registration statements
in connection with the issuance of the capital stock described in Section 11.2
of this Agreement (except to the extent that the provision of that information
is unreasonable or impracticable) and providing CBSI's investment bankers and
auditors with access to appropriate books and records of Seller as may be
reasonably necessary to perform any necessary due diligence or prepare pro forma
financial information in connection with any such registration statement,
provided that no such request or due diligence shall interfere unreasonably with
- -------- ----
Seller's business operations or the ongoing duties and responsibilities of its
personnel. Subject to the provisos set forth in the preceding sentence, Seller
shall make appropriate personnel available to cooperate fully and assist Buyer
to the extent reasonably possible in (i) the preparation, interpretation, and
assessment of such information, as well as (ii) the interpretation and
assessment of such books and records.

VII. ADDITIONAL AGREEMENTS OF BUYER

7.1 Solicitation of Seller's Customers.
----------------------------------

Buyer shall not solicit business from any customer of the Branches before
Closing, except through customary advertising and marketing practices not
directed specifically at those customers. Nevertheless, Buyer shall provide
Seller with brochures, fulfillment kits, product descriptions, and other
materials relating to Buyer's products so Seller's personnel can provide that
information to customers upon request. Reasonable procedures will be developed
for appropriate representatives of Buyer to be on-site at the Branches to assist
with customer questions on terms and conditions mutually acceptable to Buyer and
Seller.

7.2 Regulatory Approvals.
--------------------

Buyer will complete and file within thirty (30) days after the date of this
Agreement every application necessary to obtain any regulatory approval on which
Buyer's consummation of the transactions contemplated by this Agreement is
conditioned and take all reasonable steps (including if necessary the amendment
of proformas to increase the amount of equity capital to be raised) to obtain
all such approvals promptly. In this regard, within ten (10) days after the
date of this Agreement, Buyer shall identify to Seller all information which it
requires from Seller in order to complete these regulatory applications. Buyer
also shall cooperate fully and promptly with Seller in obtaining any regulatory
approval which Seller must obtain before Closing. Buyer shall notify Seller
promptly of any significant development with respect to any application it files
under this Section. Buyer also shall provide Seller with a copy of any
regulatory approval it receives under this Section, promptly after Buyer's
receipt of the same.

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<PAGE>

7.3 Indemnification.
---------------

Buyer will indemnify Seller against, and hold it harmless from, all
liability, damages, costs, losses, penalties, and expense (including reasonable
attorneys' fees) relating to (a) any claims against Seller which arise out of
Buyer's failure after Closing to comply with the Liabilities in any material
respect or out of Buyer's breach of any provision of this Agreement or (b) the
enforcement of Seller's rights under this Section. If a claim is made against
Seller for which Buyer may be liable under this provision, Seller shall give
prompt and sufficient notice to Buyer of that fact, and Buyer may elect to take
over defense of the claim. Once Buyer takes over the defense of any such claim,
it shall have no obligation under this Section with respect to any attorneys
fees or other legal expense incurred thereafter by Seller in defense of that
claim. Seller shall make its personnel available to Buyer and otherwise
cooperate reasonably with Buyer in its investigation or defense of any such
claim, and Seller's failure to do so shall render void Buyer's obligations under
this Section with respect to that claim. Seller shall not settle any claim
subject to indemnification under this Section without Buyer's consent.

7.4 Confidentiality.
---------------

Buyer shall continue to comply with the Confidentiality Agreement. Buyer's
obligations under this Section shall survive the termination of this Agreement.

7.5 Change of Name, Etc.
--------------------

As soon as practicable after Closing, Buyer will (a) change the name on all
documents and facilities relating to the Assets, the Liabilities, and the
Branches to Buyer's name, (b) notify all persons whose loans, lines of credit,
or deposits are transferred under this Agreement of the consummation of the
transactions contemplated by this Agreement, and (c) provide all appropriate
notices to the FDIC and any other appropriate regulatory authorities required as
a result of the consummation of these transactions. All forms and other
documents bearing Seller's name or logo which are used by Buyer after Closing
will be stamped or otherwise marked in such a way that identifies Buyer as the
party using the form or other document. As soon as practicable and, in any
event, within seven (7) calendar days after the Closing Date, Buyer will issue
new checks reflecting its transit and routing number to customers of the
Branches with checking privileges. Buyer shall use its best efforts to
encourage these customers to begin using these checks and cease using checks
bearing Seller's name.

7.6 Continued Operation of the Branches.
-----------------------------------

Subject to any divestitures which may be required in connection with any
regulatory approval, Buyer shall establish a branch at the present location of
each of the Branches effective at Closing and shall continue to operate each of
the Branches for at least ninety (90) days after Closing, unless the Branch is
consolidated into one of Buyer's branches in such a way that the consolidation
will not be treated as a branch closing for purposes of Section 39 of the
Federal Deposit Insurance

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<PAGE>

Act. In no event shall Seller be required to participate in the closing of any
Branch or in any notice to customers relating to such a closing.

7.7 Accounts in Bankruptcy.
----------------------

At all times from and following the Closing, Buyer shall comply with the
requirements of 11 U.S.C. (S) 345 with respect to any Deposit Account which is
subject to that statute.

7.8 Deposit in Escrow.
-----------------

Promptly after the execution of this Agreement, Buyer shall deposit one
million dollars ($1,000,000.00) in cash or Investment Securities in escrow with
Seller under the Escrow Agreement.

VIII. EMPLOYEES OF THE BRANCHES

8.1 Retention of Employees.
----------------------

(a) Buyer will offer employment to each of Seller's employees who is
employed on an active full-time or part-time basis (but not temporary employees)
on the date of this Agreement at any of the Branches or in one of the positions
identified on Schedule 8.1 of this Agreement in a position comparable to that
currently held by that person and at his or her then-current salary. Each and
every employee who accepts an offer of employment from Buyer in connection with
the transactions contemplated by this Agreement is a "Transferred Employee."

(b) Buyer will recognize each Transferred Employee's years of service
accrued under Seller's qualified defined benefit and defined contribution
retirement plans as of the Closing Date for purposes of vesting and eligibility
under Buyer's qualified retirement plans, and will make any amendments to
Buyer's plans which may be necessary or advisable in this regard. Buyer also
will credit each Transferred Employee for his or her years of service as
recognized by Seller as of the Closing Date under Seller's welfare benefit plans
for the purpose of Buyer's welfare benefit plans and for calculating any
severance benefits which such employee might be entitled to receive under
Buyer's policy (if any) if his or her employment is terminated by Buyer. If a
Transferred Employee has made any payment during the Seller's welfare benefit
plan year that includes the Closing Date towards satisfaction of any deductible
required for any given Seller welfare benefit plan, Buyer will credit that
payment against the Transferred Employee's required deductible under Buyer's
comparable welfare benefit plan, if any, for the plan year (of Buyer's plan)
that includes the Closing Date. Buyer will give each Transferred Employee
credit for all vacation days which he or she has accrued in the year of Closing
but not taken before the Closing. Buyer will waive any pre-existing condition
exclusion or waiting period for the Transferred Employees for its medical, life
insurance, and disability benefit plans (if any). Except as provided in this
Section 8.1, a Transferred

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<PAGE>

Employee's right to benefits under any of Buyer's benefit plans shall be
determined by the terms of the plans. Buyer assumes no responsibility with
respect to any of Seller's benefit plans.

(c) Each Transferred Employee will be provided base salary for a period of
at least one (1) year following the Closing Date or Buyer's severance policy
(whichever is more favorable to the employee), except in the case of discharge
for cause, voluntary separation, death, or disability.

8.2 Training.
--------

Seller shall permit Buyer to train whatever employees of the Branches as
Buyer may reasonably specify with regard to Buyer's operations, policies, and
procedures provided that no such training shall interfere unduly with the
operation of the Branches or the responsibilities of Seller's personnel. This
training shall take place at the Branches. Buyer shall reimburse Seller for any
overtime expense incurred as a result of training activities. Specific
procedures to provide access to the Branches for training and installation of
equipment will be mutually agreed upon by Seller and Buyer provided that no such
procedures shall interfere unduly with the operation of the Branches or the
responsibilities of Seller's personnel.

8.3 Non-Solicitation.
----------------

(a) For a period of one year after the Closing Date:

(i) Without the prior written consent of Buyer, neither Seller nor any
of its affiliates shall, directly or indirectly, solicit the employment of any
Transferred Employee who is employed by the Buyer or any of Buyer's affiliates
at the time of the solicitation; and

(ii) Without the prior written consent of Seller, neither Buyer nor any
of its affiliates shall, directly or indirectly, solicit the employment of any
individual other than a Transferred Employee, who is described in Section 8.1(a)
and remains employed by Seller or one of its affiliates at the time of the
solicitation.

(b) This Section 8.3 shall not preclude non-targeted general solicitations
made through ordinary employment marketing practices.

8.4 FAS 106 Adjustment.
------------------

(a) Seller shall pay Buyer at Closing an amount (the "FAS 106
Adjustment") in relation to the accounting benefit which Seller may receive
under FAS 106 as a result of Buyer's hiring the Transferred Employees. Seller
will compute the FAS 106 Adjustment using the actual age, sex and service of the
Transferred Employees and employing either (i) the same discount rate, turnover
rate, and health care cost trend assumptions which Seller would employ in
computing its FAS 106 reserve if it computed that reserve at the time of Closing
or (ii) if the amount of the FAS 106 Adjustment would be reduced thereby, the
same discount rate, turnover rate, and health care cost

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<PAGE>

trend assumptions which Buyer would employ in computing its FAS 106 reserve if
it computed that reserve at the time of Closing. Seller shall provide Buyer at
least ten (10) Business Days before the Closing Date with the necessary
information to calculate independently the FAS 106 Adjustment.

(b) Buyer shall provide Seller with a certificate, executed by its
Chief Financial Officer, within five (5) Business Days after the end of each
such year (or, in the case of the calendar year in which the fourth (4th)
anniversary of the Closing Date occurs, within twenty (20) Business Days after
that anniversary of the Closing Date) listing those Transferred Employees, if
any, who terminated their employment with Buyer during the preceding calendar
year (or, in the case of the last certificate, during that calendar year)
without Buyer being subject to any continued liability for post-retirement
medical benefits for those Transferred Employees.

(c) Within twenty (20) Business Days after receiving each certificate
under Section 8.4(b), Seller shall calculate that portion of the FAS 106
Adjustment attributable to the Transferred Employee listed on the certificate
(the "FAS 106 Rebate Amount"), using the same age, sex, and service of the
Transferred Employee which was used in computing the FAS 106 Adjustment and the
same discount rate, overall turnover rate, and health care cost trend
assumptions used in calculating the FAS 106 Adjustment. Buyer shall pay Seller
an amount, in good and immediately available funds, equal to the FAS 106 Rebate
Amount within fifteen (15) Business Days after Seller provides the FAS 106
Rebate Amount to Buyer and all necessary information to calculate independently
the FAS 106 Rebate Amount.

IX. CLOSING AND CONDITIONS TO CLOSING

9.1 Time and Place of Closing.
-------------------------

(a) Closing ("Closing") shall occur on a Friday to be agreed upon by the
parties (the "Closing Date"), but in no event shall the Closing Date occur after
May 31, 1995, provided that, if the registration statement described in Section
11.2 has not become effective on or before May 1, 1995, the Closing Date may be
postponed until no later than June 30, 1995. Closing shall be effective as of
the close of business on the Closing Date. Closing shall take place at Seller's
offices located on the fifth floor of the Clinton Square Building, Rochester,
New York at 10:00 A.M. on the Closing Date.

(b) The parties shall use reasonable effects to conduct the Closing on or
before April 28, 1994, provided that the Issuance (as defined in Section 11.1)
can be accomplished a sufficient amount of time before that date.

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<PAGE>

9.2 Exchange of Closing Documents.
-----------------------------

Counsel for the parties shall exchange drafts of all documents to be
delivered at Closing (other than the Preliminary Closing Statement) at least
three (3) Business Days prior to the Closing Date.

9.3 Buyer's Conditions to Closing.
-----------------------------

Buyer's obligations to purchase the Assets and assume the Liabilities is
contingent upon and subject to the fulfillment of the following conditions in
all material respects:

(a) The parties obtaining all regulatory approvals which are necessary for
them to proceed with the transactions contemplated by this Agreement and the
expiration of any required waiting period without the commencement of adverse
proceedings by any governmental authority with jurisdiction over the
transactions contemplated by this Agreement;

(b) Each express representation, covenant and warranty of Seller in this
Agreement being true and correct in all material respects as of the Closing Date
and all material covenants and conditions of Seller to be performed or met by
Seller on or before the Closing Date having been performed or met in all
material respects;

(c) Seller's delivery to Buyer of the following documents in form and
substance satisfactory to counsel for Seller and Buyer:

(i) The executed Preliminary Closing Statement;

(ii) Warranty deed(s) with a lien law trust fund covenant conveying
the Real Property;

(iii) Bills of sale, assignments, and other instruments of transfer
sufficient to convey to Buyer all of Seller's right, title, and
interest in and to the remaining Assets;

(iv) A certificate executed by an appropriate officer of Seller
attesting, to the officer's best knowledge, to Seller's
compliance with the conditions set forth in Section 9.3;

(v) An opinion of counsel executed by Seller's in-house counsel in
the form of Exhibit 9.3; and

(vi) Consents and estoppel certificates executed by the landlords of
the Newark, Newark Plaza, Geneva West, and Skaneateles Branches
and one other leased Branch; and

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<PAGE>

(d) Buyer's receipt of the Preliminary Payment as provided in Section 3.3.

9.4 Seller's Conditions to Closing.
------------------------------

Seller's obligation to sell the Assets and transfer the Liabilities to
Buyer is contingent upon and subject to the fulfillment of the following
conditions in all material respects:

(a) The parties' obtaining all regulatory approvals which are necessary for
them to proceed with the transactions contemplated by this Agreement and the
expiration of any required waiting period without the commencement or threat of
adverse proceedings by any governmental authority with jurisdiction over the
transactions contemplated by this Agreement;

(b) Each express representation, covenant and warranty of Buyer in this
Agreement (other than the representation set forth in Section 4.11) being true
and correct in all material respects as of the Closing Date and all material
covenants and conditions of Buyer to be performed or met by Buyer on or before
the Closing Date having been performed or met in all material respects;

(c) Buyer's delivery to Seller of the following documents in form and
substance reasonably satisfactory to counsel for Seller and Buyer:

(i) One or more executed assumptions of the Real Property Leases;

(ii) One or more executed instruments assuming the remaining
Liabilities;

(iii) A certificate executed by an appropriate officer of Buyer
attesting, to the officer's best knowledge, to Buyer's
compliance with the conditions set forth in Section 9.4(b); and

(iv) An opinion of counsel executed by Buyer's counsel in the form of
Exhibit 9.4; and

(d) Buyer's pledge of securities to secure the Deposits of the customers
identified in Schedule 1.1B, as required by law or the applicable Custody and
Security Agreement.

9.5 Survival of Representations and Warranties.
------------------------------------------

Each and every one of Buyer's and Seller's representations and warranties
under this Agreement or contained in any certificate or instrument delivered by
either party at Closing shall survive for a period of one (1) year following the
Closing Date.

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<PAGE>

X. TERMINATION

10.1 Termination by Either Party.
---------------------------

Either party may terminate this Agreement before Closing upon written
notice to the other if:

(a) As a result of any material breach of any representation, warranty, or
covenant, the party terminating the agreement would be justified in not
proceeding to Closing, but only if (i) the party in breach does not promptly
take reasonable steps to cure the breach after receiving written notice from the
non-breaching party or (ii) the breach, by its nature, cannot be cured
substantially by the Closing; or

(b) Closing does not occur on or before May 31, 1995 (or, if the
registration statement described in Section 11.2 is not effective on or before
May 1, 1995, June 30, 1995), notwithstanding the reasonable best efforts of the
party terminating this Agreement; or

The termination of this Agreement under subsection (a) shall not absolve the
party violating the agreement from any liability to the other party arising out
of its breach of this Agreement.

10.2 Break-up Fee.
------------

(a) If any regulatory approval necessary for Buyer to proceed to Closing is
denied (or if Buyer withdraws any such application because it believes it may be
denied or that an approval would be subject to unacceptable conditions), Buyer
shall pay Seller a break-up fee as Seller's sole remedy and as total liquidated
damages for any damages or claims which Seller might have in the amount of (i)
one million dollars ($1,000,000.00), if the determining factor for denial (or
the imposition of unacceptable conditions) is for reasons relating to the
Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing
Act, or the possible anti-competitive effects of the transactions contemplated
by this Agreement, or (ii) one million eight hundred fifty thousand dollars
($1,850,000.00) in all other cases where the application is denied or withdrawn.
The payment of this fee shall not preclude Seller from pursuing other remedies
against Buyer with respect to any breach of Section 7.2 of this Agreement.

(b) If CBSI does not provide Buyer with sufficient capital to proceed to
closing as a result of its inability to raise sufficient funds through a common
stock underwriting, bridge financing, or a combination of the two, or the
failure of its shareholders to give any necessary approval with respect to the
same, Buyer shall pay Seller a break-up fee as Seller's sole remedy and as total
liquidated damages for any damages or claims which Seller may have in the amount
of one million eight hundred fifty thousand dollars ($1,850,000.00).

-27-
<PAGE>

(c) Nothing in this Section shall be construed as limiting any claim Seller
may have against Buyer in any case where neither of the break-up fees described
in this Section 10.2 is payable. The break-up fee described in Paragraphs
10.2(a) and (b) shall not be payable if (i) a primary factor in Buyer's failure
to obtain the regulatory approval or complete the issuance was caused by
Seller's material breach of its obligations under Section 6.11 or Section 6.3,
as the case may be or (ii) Buyer is entitled at that time to terminate this
Agreement under Section 10.1(a).

10.3 Regulatory Conditions.
---------------------

Buyer shall notify Seller promptly if any regulatory approval described in
Section 9.3 is conditioned on the completion of the Issuance (as defined in
Section 11.1 of this Agreement) before the Closing, or if CBSI is informed by
the Federal Reserve Bank of New York (or the Board of Governors of the Federal
Reserve System or its staff) that the Issuance must occur before Closing, or if
Buyer or CBSI determines that it is highly unlikely that the bridge financing
described in Section 11.3 of this Agreement will be obtained. At any time after
the occurrence of any of these events, Seller may terminate this Agreement, and,
upon such termination, Buyer shall pay Seller a break-up fee of one million
eight hundred fifty thousand dollars ($1,850,000.00), provided that Seller
-------------
reasonably believes at the time of termination, on the basis of demonstrated
facts, that the Issuance is highly unlikely to succeed in raising sufficient
capital for Buyer to proceed to Closing. Without limiting the generality of the
foregoing, Seller shall be deemed to have a reasonable basis for believing that
the Issuance is highly unlikely to succeed in raising sufficient capital for
Buyer to proceed to Closing if (a) the average of the high and low prices for
CBSI common stock as published in The Wall Street Journal in the ten issues
-----------------------
immediately preceding the date of the termination is less than $22.00 per share
and Seller reasonably believes that the dip in CBSI's stock price below $22.00
per share is not solely due to temporary market conditions or (b) the Securities
Exchange Commission brings a stop order proceeding or some other enforcement
proceedings with respect to the Issuance or indicates to CBSI that it will bring
a proceeding for a stop order or other enforcement action if CBSI proceeds with
the Issuance. Buyer shall notify Seller promptly if the Securities Exchange
Commission takes any such action

XI. CERTAIN REPRESENTATIONS AND COVENANTS OF CBSI

11.1 CBSI's Additional Representations and Warranties.
------------------------------------------------

CBSI represents and warrants as of the date of this Agreement that:

(a) CBSI has received the letter from M.A. Schapiro & Co., Inc. which is
attached to this Agreement as Exhibit 11.1 (the "Highly Confident Letter").

(b) To the best of CBSI's knowledge, the Highly Confident Letter presents,
in all material respects, the views of M.A. Schapiro & Co., Inc. with respect to
the matters discussed in the Highly Confident Letter, and

-28-
<PAGE>

(c) CBSI has no reason to believe that any of the assumptions underlying
the conclusions set forth in the Highly Confident Letter are unfounded or
(except to the extent that they relate to general market conditions) that they
are reasonably likely to be unfounded at the anticipated time of the issuance of
the capital stock which is discussed in the Highly Confident Letter (the
"Issuance").

11.2 Issuance of Capital Stock.
-------------------------

(a) CBSI shall use its best efforts to enter into a letter of intent with
M.A. Schapiro & Co., Inc. (or another reputable investment banking firm) for the
underwriting of the Issuance, on a firm commitment basis, subject to terms and
conditions similar to those set out in the Highly Confident Letter.

(b) CBSI shall promptly prepare and file with the Securities Exchange
Commission a registration statement on an appropriate form with respect to an
amount of common stock of CBSI sufficient to complete the Issuance. CBSI shall
use its reasonable best efforts to have the registration statement declared
effective under the Securities Act of 1933 as promptly as practicable after such
filing, to commence sales upon the effectiveness of the registration statement,
and to maintain the effectiveness of the registration statement until such time
that the Issuance has been completed or abandoned. CBSI also shall take any
action required to be taken under any applicable state securities or similar
laws in connection with the Issuance. CBSI shall provide a copy of the
registration statement to Seller promptly after it is filed with the Securities
Exchange Commission.

(c) CBSI shall use its reasonable best efforts (subject to its discretion
as to the acceptability of the price attainable) to complete the Issuance
promptly after the registration statements described in this Section 11.2(b)
become effective. The proceeds of the Issuance shall be contributed promptly
to Buyer as additional equity capital to the extent necessary to permit Buyer to
proceed to Closing.

11.3 Bridge Financing.
----------------

Notwithstanding Section 11.2 of this Agreement, promptly after the
execution of this Agreement (but, in any event no later than thirty (30) days
before the Closing Date), CBSI shall use its best efforts to obtain a commitment
for sufficient bridge or other financing for Buyer to proceed to Closing
provided that such action is not inconsistent with regulatory approvals or
reasonably likely to result in regulatory sanctions. CBSI shall draw upon this
commitment and promptly contribute the proceeds to Buyer as additional equity
capital as may be necessary to permit Buyer to proceed to Closing in a timely
manner provided that such action is not inconsistent with regulatory approvals
or reasonably likely to result in regulatory sanctions.

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<PAGE>

XII. MISCELLANEOUS

12.1 Continuing Cooperation.
----------------------

(a) On and after the Closing Date, Seller agrees to give such further
reasonable assurances and to execute, acknowledge and deliver such bills of
sale, deeds, acknowledgements and other instruments of conveyance and transfer
as in Buyer's judgment are reasonably necessary and appropriate to vest
effectively in Buyer the full legal and equitable title to all of the Assets and
Liabilities.

(b) On and after the Closing Date, Buyer shall execute, acknowledge, and
deliver any documents or instruments as may be necessary and appropriate to
relieve and discharge Seller from its obligations with respect to the
Liabilities.

(c) Seller and Buyer shall cooperate fully with each other in connection
with any examination conducted by any tax authority subsequent to the Closing
Date by promptly providing upon request information relating to the tax
liability of any business operated by Seller or Buyer with respect to the
Branches and promptly informing the other of the institution of any material
developments concerning, and the outcome of, the same.

12.2 Merger and Amendment.
--------------------

This Agreement, together with the Confidentiality Agreement and the Escrow
Agreement, sets out the complete agreement of the parties with respect to the
matters discussed in this Agreement, and supersedes all prior agreements between
the parties, whether written or oral, which apply to these matters. No
provision of this Agreement may be changed or waived except as expressly stated
in a document executed by both parties.

12.3 Disputes.
--------

(a) Neither Seller nor Buyer shall assert any claim arising out of or
relating to this Agreement (except with respect to Buyer's and Seller's
indemnification obligations under Sections 6.5 and 7.3 insofar as they relate to
certain claims asserted against the other party and claims which may be
submitted to the Mediator under Section 3.3(d)) unless all of the following
tests are met:

(i) The amount in dispute with respect to the claim arising out of a
single incident or group of closely related incidents exceeds
$10,000.00;

(ii) The aggregate amount of all claims by Buyer or Seller (as the
case may be) which satisfy the preceding clause (i) exceed
$50,000.00, in which case a claim may be asserted only to the
extent that this $50,000.00 threshold has been exceeded; and

-30-
<PAGE>

(iii) The notice required by Section 12.3(b) is submitted on or before
the second (2nd) anniversary of the Closing.

(b) The parties shall attempt in good faith to resolve any dispute arising
out of or relating to this Agreement promptly by negotiations, as follows.
Either party may give the other party written notice of any dispute not resolved
in the normal course of business. Executives of both parties at comparable
levels at least one step above the personnel who have previously been involved
in the dispute shall meet at a mutually acceptable time and place within ten
(10) days after delivery of such notice, and thereafter as often as they
reasonably deem necessary to exchange relevant information and to attempt to
resolve the dispute. If the matter has not been resolved by these persons
within thirty (30) days of the disputing party's notice, or if the parties fail
to meet within ten (10) days, the dispute shall be referred to more senior
executives of both parties who have authority to settle the dispute and who
shall likewise meet to attempt to resolve the dispute. All negotiations under
this Section are confidential and shall be treated as compromise and settlement
negotiations for purposes of the Federal Rules of Evidence, State rules of
evidence, and common law.

(c) Neither party shall have any liability for lost profits or punitive
damages with respect to any claim arising out of or relating to this Agreement.

12.4 Counterparts.
------------

This Agreement may be executed in any number of counterparts, each of which
will constitute an original, but all of which taken together shall constitute
one and the same instrument.

12.5 Exhibits and Schedules.
----------------------

All exhibits and schedules referred to in this Agreement shall constitute a
part of this Agreement.

12.6 Assignment.
----------

This Agreement is not assignable by either party without the written
consent of the other party.

12.7 Headings.
--------

The headings contained in this Agreement are inserted for convenience only
and shall not affect the meaning of this Agreement or any of its provisions.

-31-
<PAGE>

12.8 Notices.
-------

Any notice under this Agreement shall be made in writing and shall be
deemed received when either received or delivered in person, by facsimile
transmission, or by first class mail, postage prepaid, to the parties at the
address set forth below or at such other addresses as each party shall inform
the other in writing.

If to Seller to: Jerry DeRojas, Vice President
The Chase Manhattan Bank, N.A.
Two Chase Manhattan Plaza, 16th Floor
New York, New York 10081

with a copy to: Jeffrey R. Jones, Esq., Vice President
The Chase Manhattan Bank, N.A.
One Chase Square, Clinton Square 5
Rochester, New York 14643

and, in the case of notices under Section 12.1(c) to:

Manager, Tax Audits
The Chase Manhattan Bank, N.A.
33 Maiden Lane, 20th Floor
New York, New York 10081

If to Buyer: Sanford A. Belden, President & CEO
Community Bank, N.A.
5790 Widewaters Parkway
DeWitt, New York 13214

with a copy to: George J. Getman, Esq.
Bond, Schoeneck & King
One Lincoln Center, 18th Floor
Syracuse, New York 13202

12.9 Expenses.
--------

Unless specifically stated to the contrary in this Agreement, each party
will assume and pay for the expenses it incurs with respect to the purchase and
sale of the Assets and assumption of the Liabilities under this Agreement. Each
party shall be responsible for any fee payable to any agent, broker or finder
acting on its behalf in this transaction.

-32-
<PAGE>

12.10 Public Announcements.
--------------------

Buyer and Seller will coordinate any press release that may be required
regarding the transactions contemplated by this Agreement. Neither party will
issue any external releases or make any external disclosures or announcements
without consulting with or obtaining the approval of the other party, unless
such announcement is, in the opinion of counsel to the party making the
announcement, required by law.

THE CHASE MANHATTAN BANK COMMUNITY BANK,
(NATIONAL ASSOCIATION) NATIONAL ASSOCIATION

By: /s/ Jerry A. DeRojas By: /s/ Sanford A. Belden
-------------------------------- --------------------------------
Jerry A. DeRojas, Vice President Sanford A. Belden, President and
CEO

COMMUNITY BANK SYSTEM, INC.

By: /s/ Sanford A. Belden
--------------------------------
Sanford A. Belden, President and
CEO

-33-

<PAGE>

EXHIBIT 10.02

FIRST AMENDMENT TO PURCHASE AND ASSUMPTION AGREEMENT
----------------------------------------------------

This Amendment, dated April 4, 1995, amends a Purchase and Assumption
Agreement dated December 6, 1994 (the "Agreement") among The Chase Manhattan
Bank (National Association), a national banking association having its principal
place of business in New York, New York ("Seller"), Community Bank, National
Association, a national banking association having its administrative offices in
DeWitt, New York ("Buyer") and Community Bank System, Inc., a Delaware
corporation having its principal place of business in DeWitt, New York ("CBSI").

AMENDMENT

1. The parties hereby amend Section 9.1 of the Agreement to read as
follows:

(A) CLOSING ("CLOSING") SHALL OCCUR ON A FRIDAY TO BE AGREED UPON
BY THE PARTIES (THE "CLOSING DATE"), BUT IN NO EVENT SHALL THE CLOSING
DATE OCCUR AFTER JULY 31, 1995, PROVIDED THAT IF A REGULATORY APPROVAL
DESCRIBED IN SECTION 9.3(A) HAS NOT BEEN OBTAINED ON OR BEFORE JUNE 30,
1995 DUE TO THE PROTEST SUBMITTED BY INNER CITY PRESS/COMMUNITY ON THE
MOVE, THE CLOSING SHALL OCCUR NO LATER THAN THE EARLIER OF THE
THIRTIETH (30TH) DAY FOLLOWING BUYER'S RECEIPT OF SUCH REGULATORY
APPROVAL OR AUGUST 31, 1995. CLOSING SHALL BE EFFECTIVE AS OF THE CLOSE
OF BUSINESS ON THE CLOSING DATE. CLOSING SHALL TAKE PLACE AT SELLER'S
OFFICES LOCATED ON THE FIFTH FLOOR OF THE CLINTON SQUARE BUILDING,
ROCHESTER, NEW YORK AT 10:00 A.M. ON THE CLOSING DATE.

(B) THE PARTIES SHALL USE REASONABLE EFFORTS TO CONDUCT THE
CLOSING ON OR BEFORE JULY 14, 1995, PROVIDED THAT THE ISSUANCE (AS
DEFINED IN SECTION 11.1) CAN BE ACCOMPLISHED IN A SUFFICIENT AMOUNT OF
TIME BEFORE THAT DATE.

2. The parties hereby amend Section 10.1(b) of the Agreement to read as
follows:

(B) CLOSING DOES NOT OCCUR (I) ON OR BEFORE JULY 31, 1995 OR (II)
IF A REGULATORY APPROVAL DESCRIBED IN SECTION 9.3(A) HAS NOT BEEN
OBTAINED ON OR BEFORE JUNE 30, 1995 DUE TO THE PROTEST SUBMITTED BY
INNER CITY PRESS/COMMUNITY ON THE MOVE, NO LATER THAN THE EARLIER OF
THE THIRTIETH DAY FOLLOWING BUYER'S RECEIPT OF SUCH REGULATORY APPROVAL
OR AUGUST 31, 1995.

3. The parties hereby amend the last sentence of Section 3.1 of the
Agreement to read as follows:

NEVERTHELESS, IF THE CLOSING DOES NOT OCCUR ON OR BEFORE JUNE 30,
1995, THE PERIOD OF FIVE (5) BUSINESS DAYS SHALL END ON JUNE 30,
1995 AND NOT ON THE FIFTH (5TH) BUSINESS DAY PRECEDING THE CLOSING
DATE.
<PAGE>

4. The parties hereby add the following sentence at the end of Section
12.9 of the Agreement:

NOTWITHSTANDING THE FIRST SENTENCE OF THIS SECTION, BUYER SHALL
PROMPTLY REIMBURSE SELLER FOR THE AMOUNT PAYABLE TO PRICE, WATERHOUSE
FOR A COMFORT LETTER RELATING TO CERTAIN INFORMATION PROVIDED BY SELLER
FOR INCLUSION IN THE REGISTRATION STATEMENT DESCRIBED IN SECTION
11.2(B) OF THIS AGREEMENT.

5. The parties hereby agree to amend Schedule 1.1B to the Agreement prior
to the Closing to delete certain municipalities and school districts whose
Deposit Accounts the parties agree will not be transferred at Closing.

6. Certain capitalized terms used in this Amendment are defined in the
Agreement.

7. This Amendment shall not affect the rights and responsibilities of the
parties under any other section of the Agreement including, by way of example
and not by limitation, CBSI's obligation to prepare and file a registration
statement with the Securities and Exchange Commission "promptly" and to use
reasonable efforts to have the registration statement declared effective
"promptly" after filing the registration statement or Seller's rights under
Sections 10.2 and 10.3 of the Agreement.

THE CHASE MANHATTAN BANK
(NATIONAL ASSOCIATION)

By: /s/ Jerry A. DeRojas
---------------------------------------
Jerry A. DeRojas, Vice President

COMMUNITY BANK, NATIONAL ASSOCIATION

By: /s/ Sanford A. Belden
----------------------------------------
Sanford A. Belden, President and CEO

COMMUNITY BANK SYSTEM, INC.

By: /s/ Sanford A. Belden
----------------------------------------
Sanford A. Belden, President and CEO

-2-

<PAGE>

EXHIBIT 12

COMMUNITY BANK SYSTEM, INC.

COMPUTATION OF CONSOLIDATED RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Earnings:
Pretax Income................ $ 16,365 $ 15,340 $ 10,645 $ 4,969 $ 2,858
Add: Fixed Charges........... 22,296 17,890 21,851 30,046 33,521
-------- -------- -------- -------- --------
Earnings including interest
on deposits................. 38,661 33,230 32,496 35,015 36,379
Less: Interest on deposits... (18,213) (16,962) (21,352) (29,663) (32,965)
-------- -------- -------- -------- --------
Earnings excluding interest
on deposits................. $ 20,448 $ 16,268 $ 11,144 $ 5,352 $ 3,414
======== ======== ======== ======== ========
Fixed Charges:
Interest Expense............. $ 22,130 $ 17,733 $ 21,608 $ 29,838 $ 33,329
Estimated interest component
of net rental
expense..................... 166 157 243 208 192
-------- -------- -------- -------- --------
Total fixed charges including
interest on deposits........ 22,296 17,890 21,851 30,046 33,521
Less: Interest on deposits... (18,213) (16,962) (21,352) (29,663) (32,965)
-------- -------- -------- -------- --------
Total fixed charges excluding
interest on deposits........ $ 4,083 $ 928 $ 499 $ 383 $ 556
======== ======== ======== ========
Ratio of Earnings to Fixed ========
Charges:
Including interest on
deposits.................. 173.40% 185.75% 148.72% 116.54% 108.53%
Excluding interest on
deposits.................. 500.78% 1,753.02% 2,233.27% 1,397.39% 614.03%
</TABLE>

<PAGE>

EXHIBIT 23.02

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the inclusion in this registration statement on Form S-2 of our
report dated January 27, 1995, except for note O as to which the date is
February 21, 1995, on our audits of the consolidated financial statements of
Community Bank System, Inc. We also consent to the reference to our firm under
the caption "Experts".

COOPERS & LYBRAND L.L.P.

Syracuse, New York
April 11, 1995