Community Bank System (CBU) 8-K Results of Operations and Financial Condition

Exhibit 99

COMMUNITY BANK SYSTEM, INC.
5790 Widewaters Parkway, DeWitt, N.Y. 13214 News Release
 
For further information, please contact:
Scott A. Kingsley,
EVP & Chief Financial Officer
Office: (315) 445-3121
Fax: (315) 445-7347

COMMUNITY BANK SYSTEM GENERATES RECORD EARNINGS IN 2004

INCREASES NET INCOME 24% OVER 2003

          Syracuse, N.Y. - January 24, 2005 - Community Bank System, Inc. (NYSE: CBU) earned net income of $12.7 million during the fourth quarter of 2004, a 46.1% increase over the fourth quarter of 2003. Earnings of $50.2 million for the year ended December 31, 2004 were up 24.3% over 2003. The increase resulted from acquired and organic growth in earning asset levels, strong growth in non-interest income and improved asset quality, despite a lower net interest margin.

Fourth quarter diluted earnings per share of $.40 were up 8.1% from the fourth quarter of 2003 (excluding an after-tax debt restructuring charge of $1.6 million in 2003). Full year diluted earnings per share of $1.64 were 10.1% better than 2003’s results, and marked a new high. Cash earnings per share (which excludes the after-tax effect of the amortization of intangible assets) were $1.78 versus $1.61 for the year ended December 31, 2003.

Sanford A. Belden, President and Chief Executive Officer, stated, “We are pleased with our fourth quarter and full year operating performance, particularly our continued strong asset quality and the robust performance of our financial services businesses. In addition, during 2004 we successfully completed the acquisitions of both First Heritage Bank, which added three branches to First Liberty Bank & Trust (our Pennsylvania franchise), and a branch in Dansville, N.Y. We were also selected to join the S&P SmallCap 600 Index, expanded and strengthened our senior management team with new appointments from both within and outside of our organization, and rewarded shareholders with a 12.5% dividend increase.”

Net interest income was $38.6 million during the fourth quarter, up 11.2% over the prior fourth quarter, due principally to a $625.9 million increase in average earning assets driven by acquisitions and securities purchases. For the year, we generated $151.0 million in net interest income, up 14.6% over 2003’s $131.8 million. This growth was achieved despite a fourth quarter net interest margin of 4.32%, compared to 4.59% for the fourth quarter 2003 and 4.35% for 2004’s third quarter. Similarly, net interest margin for the full year of 4.45% declined from 4.69% for 2003. Full year earning asset yields were down 51 basis points versus 2003, while cost of funds fell 26 basis points over the same time frame, resulting in net interest margin contraction.

Loan loss provision for the fourth quarter was $2.1 million, compared to $2.3 million in the third quarter of 2004, and was $1.0 million below the fourth quarter of 2003, despite a $342.7 million increase in average loans. Net charge-off, delinquency, and non-performing loan ratios all showed improvement over 2003’s fourth quarter. Provision for the twelve months ended December 31, 2004 of $8.8 million was 21.8% below the $11.2 million recorded in 2003, reflecting these favorable asset quality trends as well.

We grew non-interest income in 2004 by $6.6 million, or 17.3%, over 2003 to $44.4 million (excluding a debt restructuring charge in 2003). Our banking and financial services businesses both experienced acquired and organic growth, including very strong performances from our retirement plan administration and broker-dealer businesses.

Operating expenses (excluding acquisition expenses) increased from $27.6 million in the fourth quarter of 2003 to $30.2 million in the current quarter, principally due to the additional day-to-day operating expenses from the two whole-bank acquisitions completed over the past 14 months. Similarly, year-to-date operating expenses (excluding acquisition expenses) were up 15.6% over 2003, supporting the full-year increases in net interest income and non-interest income of 14.6% and 17.3%, respectively.

The company’s effective income tax rate of 24.9% in 2004 was up from 24.0% in 2003, due principally to a lower proportion of tax-exempt income.

Financial Position
Ending earning assets of $3.89 billion for the fourth quarter were down $29.5 million from the third quarter 2004, with the decrease evenly split between loans and investments. Ending earnings assets were up $488.2 million from December 31, 2003, with loans increasing $230.0 million and investments increasing $258.2 million. Deposits increased $9.9 million for the quarter, but included $32.6 million of deposits from a branch acquisition. Borrowings were down $51.1 million from the end of the third quarter. For the year, deposits increased $203.5 million, or 7.5%, and borrowings were up $252.7 million, or 37.8%.

Asset Quality
As of December 31, 2004, the Company improved its non-performing loan ratio from 0.62% a year ago to 0.55%, and its delinquency ratio from 1.77% to 1.45%. The full-year net charge-off ratio was 0.37%, compared to 0.54% in 2003. The ratio of allowance for loan losses to total loans at year-end was 1.35%, compared to 1.37% at both September 30, 2004 and December 31, 2003. This improved asset quality profile is the result of the Company’s enhanced credit risk management programs and continued emphasis on disciplined underwriting standards, as well as stabilizing economic conditions.

Dansville Branch Acquisition
In December, the Company completed the purchase of a branch office in Dansville, N.Y. from HSBC Bank USA, N.A. Consistent with its original plans, CBU has closed its own Dansville branch and consolidated all customer service activities into the larger (former) HSBC office.

Other Matters
In December, the Board of Directors authorized a stock repurchase program to acquire up to 500,000 common shares, or approximately 1.6% of total outstanding shares, over the course of the ensuing twelve months for general corporate purposes. In January 2005, the Board of Directors voted to permit the Stockholder Protection Rights Agreement (originally adopted in 1995) to expire in February 2005.

Conference Call Scheduled
A conference call will be held with company management at 11:00 a.m. (ET) on Tuesday, January 25, 2005, to discuss the above results at 1-866-453-5550 (access code 4010874). An audio recording will be available one hour after the call until December 31, 2005, and may be accessed at 1-866-453-6660 (access code 155819). Investors may also listen to the call live via the Internet at:http://phx.corporate-ir.net/phoenix.zhtml?p=irol-eventdetails&c=95653&eventid=995812

This webcast will be archived on this site for one full year and may be accessed at any point during this time at no cost. This earnings release, including supporting financial tables, is available within the Investor Relations/News & Media section of the company’s website at:www.communitybankna.com.

Community Bank System, Inc. (NYSE: CBU) is a registered bank holding company based in DeWitt, N.Y. CBU’s wholly-owned banking subsidiary has $4.4 billion in assets and 130 customer facilities across Upstate New York, where it operates as Community Bank, N.A., and Northeastern Pennsylvania, where it operates as First Liberty Bank & Trust. For further information please visit our websites at:www.communitybankna.comorwww.firstlibertybank.com.

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The following factors, among others, could cause the actual results of CBU’s operations to differ materially from CBU’s expectations: the successful integration of operations of its acquisitions; competition; changes in economic conditions, interest rates and financial markets; and changes in legislation or regulatory requirements. CBU does not assume any duty to update forward-looking statements.

Summary of Financial Data
(Dollars in thousands, except per share data)

	Quarter Ended						Year to Date
Earnings	December 31, 2004			December 31, 2003			December 31, 2004		December 31, 2003
Interest income	$	55,515		$	49,163		$	212,795	$	191,129
Interest expense		16,940			14,460			61,752		59,301
Net interest income		38,575			34,703			151,043		131,828
Loan loss provision		2,100			3,093			8,750		11,195
Net interest income after provision for loan losses		36,475			31,610			142,293		120,633
Deposit service fees		6,488			6,096			25,201		23,121
Other banking services		372			599			2,431		1,906
Trust, investment and asset management fees		1,744			1,728			7,443		6,682
Benefit plan administration, consulting and actuarial fees		2,301			1,931			9,298		6,220
Investment securities (losses) gains, net		(73	)		(56	)		72		(53	)
Debt prepayment costs		0			(2,600	)		0		(2,645	)
Total non-interest income		10,832			7,698			44,445		35,231
Salaries, employee benefits and professional fees		16,557			15,854			65,724		56,347
Occupancy and equipment and furniture		4,668			4,355			18,813		17,125
Intangible amortization		2,013			1,292			7,414		5,093
Other		6,934			6,050			26,244		23,648
Acquisition expenses		270			328			1,704		498
Total operating expenses		30,442			27,879			119,899		102,711
Income before tax		16,865			11,429			66,839		53,153
Income tax		4,199			2,759			16,643		12,773
Net income	$	12,666		$	8,670		$	50,196	$	40,380
Basic earnings per share	$	0.41		$	0.32		$	1.68	$	1.54
Diluted earnings per share	$	0.40		$	0.31		$	1.64	$	1.49
Diluted earnings per share-cash (1)	$	0.44		$	0.34		$	1.78	$	1.61

Summary of Financial Data
(Dollars in thousands, except per share data)

	2004												2003
	4th			3rd Qtr			2nd Qtr			1st Qtr			4th Qtr
Earnings
Interest income	$	55,515		$	55,223		$	52,136		$	49,921		$	49,163
Interest expense		16,940			16,166			14,679			13,967			14,460
Net interest income		38,575			39,057			37,457			35,954			34,703
Provision for loan losses		2,100			2,300			2,300			2,050			3,093
Net interest income after provision for loan losses		36,475			36,757			35,157			33,904			31,610
Deposit service fees		6,488			6,756			6,181			5,776			6,096
Other banking services		372			1,135			266			658			599
Trust, investment and asset management fees		1,744			1,935			2,062			1,702			1,728
Benefit plan administration, consulting and actuarial fees		2,301			2,338			2,275			2,384			1,931
Investment securities (losses) gains, net		(73	)		0			135			10			(56	)
Debt prepayment costs		0			0			0			0			(2,600	)
Total non-interest income		10,832			12,164			10,919			10,530			7,698
Salaries, employee benefits and professional fees		16,557			16,642			16,362			16,164			15,854
Occupancy and equipment and furniture		4,668			4,713			4,650			4,782			4,355
Amortization of intangible assets		2,013			2,003			1,759			1,639			1,292
Other		6,934			6,515			6,593			6,201			6,050
Acquisition expenses		270			53			411			970			328
Total operating expenses		30,442			29,926			29,775			29,756			27,879
Income before income taxes		16,865			18,995			16,301			14,678			11,429
Income taxes		4,199			4,761			4,160			3,523			2,759
Net income	$	12,666		$	14,234		$	12,141		$	11,155		$	8,670
Basic earnings per share	$	0.41		$	0.47		$	0.41		$	0.39		$	0.32
Diluted earnings per share	$	0.40		$	0.45		$	0.40		$	0.38		$	0.31
Diluted earnings per share-cash (1)	$	0.44		$	0.49		$	0.43		$	0.41		$	0.34
Profitability
Return on assets		1.15	%		1.29	%		1.18	%		1.17	%		0.93	%
Return on equity		10.75	%		12.53	%		11.34	%		10.92	%		9.51	%
Non-interest income/operating income (FTE)		20.4	%		22.1	%		21.0	%		21.1	%		16.9	%
Efficiency ratio (2)		52.9	%		50.7	%		53.2	%		54.5	%		54.5	%
Components of Net Interest Margin (FTE)
Loan yield		6.09	%		5.95	%		6.04	%		6.21	%		6.35	%
Investment yield		6.00	%		6.06	%		6.19	%		6.53	%		6.34	%
Earning asset yield		6.05	%		6.00	%		6.10	%		6.33	%		6.35	%
Interest bearing deposit rate		1.49	%		1.45	%		1.48	%		1.56	%		1.63	%
Short-term borrowing rate		2.22	%		1.67	%		1.23	%		1.27	%		1.25	%
Long-term borrowing rate		4.92	%		4.88	%		5.23	%		6.26	%		6.18	%
Cost of all interest bearing funds		2.06	%		1.94	%		1.90	%		1.97	%		2.07	%
Cost of funds (includes DDA)		1.75	%		1.65	%		1.61	%		1.66	%		1.75	%
Net interest margin (FTE)		4.32	%		4.35	%		4.49	%		4.67	%		4.59	%
Fully tax-equivalent adjustment	$	3,754		$	3,793		$	3,626		$	3,335		$	3,141

Summary of Financial Data
(Dollars in thousands, except per share data)

	2004												2003
	4th			3rd Qtr			2nd Qtr			1st Qtr			4th Qtr
Average Balances
Loans	$	2,360,493		$	2,362,596		$	2,222,827		$	2,111,388		$	2,017,817
Taxable investment securities		991,687			1,006,893			949,099			817,503			834,221
Non-taxable investment securities		543,672			546,395			506,950			452,935			417,893
Total interest-earning assets		3,895,852			3,915,884			3,678,876			3,381,826			3,269,931
Total assets		4,397,549			4,398,260			4,145,955			3,841,103			3,695,233
Interest-bearing deposits		2,354,817			2,363,032			2,320,030			2,227,978			2,141,724
Short-term borrowings		482,930			512,074			416,767			356,163			336,250
Long-term borrowings		439,345			439,423			376,350			270,479			294,728
Total interest-bearing liabilities		3,277,092			3,314,529			3,113,147			2,854,620			2,772,702
Shareholders’ equity	$	468,799		$	451,799		$	430,660		$	410,816		$	361,525
Balance Sheet Data
Cash and cash equivalents	$	118,345		$	122,329		$	101,410		$	79,373		$	103,923
Investment securities		1,584,339			1,604,968			1,584,353			1,347,590			1,329,534
Loans:
Consumer mortgage		801,412			793,120			780,550			743,699			739,593
Business lending		831,244			847,844			853,034			673,812			689,436
Consumer direct and indirect		725,837			732,787			713,151			687,904			699,480
Total loans		2,358,493			2,373,751			2,346,735			2,105,415			2,128,509
Allowance for loan losses		31,778			32,609			32,040			28,821			29,095
Intangible assets		232,500			228,744			230,783			194,820			196,111
Other assets		131,932			127,371			126,513			124,259			126,415
Total assets		4,393,831			4,424,554			4,357,754			3,822,636			3,855,397
Deposits		2,928,978			2,919,088			2,934,933			2,740,933			2,725,488
Borrowings		840,065			891,154			852,850			512,072			587,396
Subordinated debt held by unconsolidated subsidiary trusts		80,446			80,432			80,418			80,404			80,390
Other liabilities		69,714			66,679			48,156			66,204			57,295
Total liabilities		3,919,203			3,957,353			3,916,357			3,399,613			3,450,569
Shareholders’ equity		474,628			467,201			441,397			423,023			404,828
Total liabilities and shareholders’ equity		4,393,831			4,424,554			4,357,754			3,822,636			3,855,397
Assets under management or administration	$	2,101,936		$	1,952,982		$	1,936,063		$	1,863,601		$	1,806,941
Capital
Tier 1 leverage ratio		6.94	%		6.72	%		7.01	%		7.19	%		7.25	%
Tangible equity / tangible assets		5.82	%		5.68	%		5.10	%		6.29	%		5.70	%
Accumulated other comprehensive income	$	34,200		$	38,000		$	16,287		$	47,584		$	35,958
Diluted weighted average common shares outstanding		31,500			31,545			30,670			29,557			28,013
Period end common shares outstanding		30,642			30,554			30,617			28,560			28,330
Cash dividends declared per common share	$	0.18		$	0.18		$	0.16		$	0.16		$	0.16
Book value		15.49			15.29			14.42			14.81			14.29
Tangible book value		7.90			7.80			6.88			7.99			7.37
Common stock price (end of period)		28.25			25.13			22.79			23.14			24.50
Total shareholders return - trailing 12 months		18.5	%		17.6	%		23.2	%		51.3	%		61.2	%

Summary of Financial Data
(Dollars in thousands, except per share data)

	2004												2003
	4th			3rd Qtr			2nd Qtr			1st Qtr			4th Qtr
Asset Quality
Non-accrual loans	$	11,798		$	13,511		$	11,142		$	12,499		$	11,940
Accruing loans 90+ days delinquent		1,158			1,808			1,234			1,462			1,307
Restructured loans		0			806			856			27			28
Total non-performing loans		12,956			16,125			13,232			13,988			13,275
Other real estate owned (OREO)		1,645			734			1,044			1,014			1,077
Total non-performing assets		14,601			16,859			14,276			15,002			14,352
Net charge-offs	$	2,931		$	1,731		$	1,438		$	2,324		$	2,744
Loan loss allowance/loans outstanding		1.35	%		1.37	%		1.37	%		1.37	%		1.37	%
Non-performing loans/loans outstanding		0.55	%		0.68	%		0.56	%		0.66	%		0.62	%
Loan loss allowance/non-performing loans		245	%		202	%		242	%		206	%		219	%
Net charge-offs/average loans		0.49	%		0.29	%		0.26	%		0.44	%		0.54	%
Loan loss provision/net charge-offs		72	%		133	%		160	%		88	%		113	%
Non-performing assets/loans outstanding plus OREO		0.62	%		0.71	%		0.61	%		0.71	%		0.67	%

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

(2) Excludes intangible amortization, acquisition expenses, results of securities transactions and debt restructuring activities