As filed with the Securities and Exchange Commission on February 5, 2001
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
COMMUNITY BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)
----------------
Delaware 6712 16-1213679
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification
incorporation or No.)
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 Chief Executive Officer
Community Bank System, Inc.
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)
With copy to:
George J. Getman, Esq. David W. Swartz, Esq.

Bond, Schoeneck & King, LLP Stevens & Lee, P.C.
One Lincoln Center and 111 North Sixth Street
Syracuse, New York 13202-1355 P.O. Box 679
(315) 422-0121 Reading, Pennsylvania 19603
(610) 478-2000
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of the registration statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [_]

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

CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

Proposed Maximum
Proposed Maximum Aggregate Amount of
Title of Each Class of Amount to be Offering Price Registration
Securities to be Registered Registered(2) (3) Fee
- -----------------------------------------------------------------------------------------------

Common Stock, no par value (including
associated share purchase rights)(1)....... 3,566,439 shares $96,723,720 $24,181

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Prior to the occurrence of certain events described in the Registrant's
Stockholder Protection Rights Agreement (none of which events have occurred
as of the filing of this registration statement), the associated share
purchase rights will not be exercisable nor evidenced separately from the
certificates representing the Registrant's common stock.
(2) Represents the estimated maximum number of shares of common stock, no par
value, of the Registrant to be issued upon the consummation of the proposed
merger to which this registration statement relates.
(3) Estimated solely for the purpose of calculating the registration fee. The
registration fee has been computed pursuant to Rule 457(f)(1) and Rule
457(c) under the Securities Act of 1933, as amended, based on the average
of the high and low prices of common stock, par value $0.3125 per share, of
First Liberty Bank Corp. on January 31, 2001, which common stock will be
cancelled in the proposed merger to which this registration statement
relates.
----------------
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 Securities and Exchange Commission, acting
pursuant to said Section 8(A), may determine.

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

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this joint proxy statement/prospectus is not complete and +
+may be changed without notice. Community Bank System may not sell these +
+securities until the registration statement filed with the Securities and +
+Exchange Commission is effective. This joint proxy statement/prospectus is +
+not an offer to sell these securities, and Community Bank System is not +
+soliciting offers to buy these securities, in any jurisdiction where the +
+offer or sale of these securities is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion Dated February 5, 2001

JOINT PROXY STATEMENT/PROSPECTUS
PROPOSED MERGER YOUR VOTE IS VERY IMPORTANT

[COMMUNITY BANK SYSTEM AND FIRST LIBERTY LOGOS]
[ ], 2001

Community Bank System, Inc. and First Liberty Bank Corp. have entered into a
merger agreement which provides that First Liberty will merge with and into
Community Bank System, subject to shareholder and regulatory approvals and
other conditions. If the merger is completed, First Liberty shareholders will
receive 0.56 of a share of Community Bank System common stock for each share of
First Liberty common stock and cash instead of any fractional shares, unless
they properly exercise their dissenters' rights. Generally, First Liberty
shareholders will not recognize any gain or loss for federal income tax
purposes on the Community Bank System common stock they receive in the merger.

We cannot complete the merger without the approval of First Liberty's
shareholders and Community Bank System's stockholders. Accordingly, we are
seeking your vote for this important transaction.

Community Bank System Stockholders:

Community Bank System has scheduled a special meeting of its stockholders to
vote on a proposal to adopt and approve the merger agreement. In order for the
merger agreement to be approved, at least a majority of the outstanding shares
of Community Bank System must be voted in favor of the merger agreement at the
special meeting. The date, time and place of Community Bank System's special
meeting is as follows:

[ ], 2001
[ ].m., Eastern Time
[ ]
[ ]
[ ]

Community Bank System's board of directors unanimously recommends that the
stockholders of Community Bank System vote "FOR" approval of the merger
agreement.

First Liberty Shareholders:

First Liberty has scheduled a special meeting of its shareholders to vote on
a proposal to adopt and approve the merger agreement. In order for the merger
agreement to be approved, at least a majority of the votes cast at the special
meeting must be in favor of the merger agreement. The date, time and place of
First Liberty's special meeting is as follows:

[ ], 2001
[ ].m., Eastern Time
[ ]
[ ]

First Liberty's board of directors unanimously recommends that the
shareholders of First Liberty vote "FOR" approval of the merger agreement.

Community Bank System's common stock is listed on the New York Stock Exchange
under the symbol "CBU." On [ ], 2001, the closing sale price for Community
Bank System common stock as reported on the New York Stock Exchange was $[ ]
per share. First Liberty's common stock is traded in the over-the-counter
market and is quoted on the OTC Bulletin Board under the symbol "FLIB." On
[ ], 2001, the last sale price for First Liberty common stock as reported
on the OTC Bulletin Board was $[ ] per share.

The enclosed joint proxy statement/prospectus contains more detailed
information concerning the proposed merger and the respective boards' decision
to approve it. We urge you to consider it carefully. Because of the
significance of this merger to our respective companies, it is very important
that your shares be represented at a special meeting, whether or not you plan
to attend in person. We urge you to take the time to consider this important
matter and vote now. In order to make sure that your vote is represented,
please indicate your vote on the enclosed proxy form, date and sign it, and
return it in the enclosed envelope. If you are a Community Bank System
stockholder, you may instead vote by touch-tone telephone as described on the
enclosed proxy form. If you attend a special meeting in person, you may revoke
your proxy at the meeting and vote in person.

Very truly yours, Very truly yours,

/s/ Sanford A. Belden /s/ William M. Davis

Sanford A. Belden William M. Davis
President and Chief Executive Officer
President
Community Bank System, Inc. First Liberty Bank Corp.

When you are evaluating the merger, you should consider the risk factors
appearing on page [ ] of this document.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of the Community Bank System common
stock to be issued or determined if this joint proxy statement/prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.

The shares of Community Bank System common stock to be issued in the merger
are not savings or deposit accounts or other obligations of any bank, and they
are not insured by the Federal Deposit Insurance corporation or any other
governmental agency.

----------

Joint Proxy Statement/Prospectus dated [ ], 2001
First mailed to shareholders on or about [ ], 2001.

COMMUNITY BANK SYSTEM, INC.

5790 Widewaters Parkway
DeWitt, New York 13214

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

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [ ], 2001

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

A Special Meeting of the Stockholders of Community Bank System, Inc. will be
held at [ ], on [ ], 2001 at [ : ] [ ]m., Eastern Time, for the
following purposes:

1. Merger. To consider and vote upon a proposal to adopt and approve an
Agreement and Plan of Merger, dated as of November 29, 2000, by and between
Community Bank System and First Liberty Bank Corp., which provides for the
merger of First Liberty with and into Community Bank System;

2. Adjournment. To adjourn the Special Meeting, if necessary, to permit
further solicitation of proxies in the event that there are not sufficient
affirmative votes at the time of the Special Meeting to adopt and approve the
merger agreement; and

3. Other Business. To transact such other business as may properly come
before the Special Meeting or any adjournments or postponements of the Special
Meeting.

Only holders of record of Community Bank System common stock at the close of
business on [ ], 2001 are entitled to the notice of and to vote at the
Special Meeting and any adjournments or postponements of the Special Meeting.

The affirmative vote of the holders of at least a majority of the
outstanding shares of Community Bank System common stock is required for
approval of the merger agreement. This means that a failure to vote in favor of
the approval of the merger agreement has the same effect as a vote against it.
Therefore, your vote is important regardless of the number of shares you own.
Even if you plan to attend the Special Meeting, we urge you to sign, date and
return the enclosed proxy without delay in the enclosed postage-paid envelope
or vote by touch-tone telephone as described on the enclosed proxy without
delay, but not by both methods. If you do vote by both methods, only the last
vote that is submitted will be counted and each previous vote will be
disregarded. You may revoke your proxy at any time prior to the Special
Meeting. If you are present at the Special Meeting, or at any adjournments or
postponements of the Special Meeting, you may revoke your proxy and vote
personally on each matter brought before the Special Meeting.

If you have any questions or require assistance, please call David G.
Wallace, Treasurer, at (315) 445-7310.

BY ORDER OF THE BOARD OF DIRECTORS

/s/ Donna J. Drengel

Donna J. Drengel
Corporate Secretary

DeWitt, New York
[ ], 2001

IMPORTANT

Your vote is important. In order to assure that your vote is represented at
the Special Meeting, please mark, sign, date and return the enclosed proxy in
the enclosed envelope as soon as possible. No postage is required for mailing
in the United States.

The board of directors of Community Bank System unanimously recommends that
the stockholders vote "FOR" approval of the merger agreement.

FIRST LIBERTY BANK CORP.

645 Washington Avenue
P.O. Box 39
Jermyn, Pennsylvania 18433-0039

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

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [ ], 2001

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

A Special Meeting of the Shareholders of First Liberty Bank Corp. will be
held at [ ], on [ ], 2001 at [ : ] [ ]m., Eastern Time, for the
following purposes:

1. Merger. To consider and vote upon a proposal to adopt and approve an
Agreement and Plan of Merger, dated as of November 29, 2000, by and between
Community Bank System, Inc. and First Liberty, which provides for the merger of
First Liberty with and into Community Bank System;

3. Other Business. To transact such other business as may properly come
before the Special Meeting or any adjournments or postponements of the Special
Meeting.

Only holders of record of First Liberty common stock at the close of
business on [ ], 2001 are entitled to the notice of and to vote at the
Special Meeting and any adjournments or postponements of the Special Meeting.

The affirmative vote of at least a majority of the votes cast by the holders
of First Liberty common stock is required for approval of the merger agreement.
Therefore, your vote is important regardless of the number of shares you own.
Even if you plan to attend the Special Meeting, we urge you to sign, date and
return the enclosed proxy without delay in the enclosed postage-paid envelope.
You may revoke your proxy at any time prior to the Special Meeting. If you are
present at the Special Meeting, or at any adjournments or postponements of the
Special Meeting, you may revoke your proxy and vote personally on each matter
brought before the Special Meeting.

If you have any questions or require assistance, please call Joseph R.
Solfanelli, Executive Vice President, at (570) 803-6515.

BY ORDER OF THE BOARD OF DIRECTORS

/s/ Norman E. Woodworth

Norman E. Woodworth
Corporate Secretary

Jermyn, Pennsylvania
[ ], 2001

IMPORTANT

The board of directors of First Liberty unanimously recommends that the
stockholders vote "FOR" approval of the merger agreement.

QUESTIONS AND ANSWERS ABOUT THE MERGER

Q:Could you tell me more about Community Bank System?

A: Community Bank System is the parent company of Community Bank, N.A. and is a
bank holding company registered under the Bank Holding Company Act of 1956,
as amended. Community Bank is a commercial banking franchise headquartered
in Upstate New York, with 72 customer facilities and 54 ATM's stretching
diagonally from Northern New York to the Southern Tier and west to Lake
Erie.

Community Bank is a community retail bank committed to the philosophy of
serving the financial needs of customers in local communities. Community
Bank emphasizes the local character of business, knowledge of the customer
and customer needs, comprehensive retail and small business products, and
responsive decision-making at the branch and regional level. Community Bank
and its subsidiaries offer a range of commercial and retail banking and
financial services in their market areas to business, individual,
agricultural and government customers. Community Bank and its employees
strive to support, and to actively engage in important initiatives in,
local communities within the market areas it serves.

Community Bank System's common stock is publicly traded on the New York
Stock Exchange under the symbol CBU. After giving pro forma effect to the
merger between Community Bank and The Citizens National Bank of Malone,
which closed on January 26, 2001, Community Bank System had approximately
$2.1 billion in assets on a consolidated basis as of September 30, 2000.
For additional information about Community Bank System, please see "Where
You Can Find More Information" on page [ ].

Q:Could you tell me more about First Liberty?

A: First Liberty is the parent company of First Liberty Bank & Trust and is a
bank holding company registered under the Bank Holding Company Act of 1956.
First Liberty Bank is a Pennsylvania chartered banking institution
headquartered in Jermyn, Pennsylvania. First Liberty Bank serves Lackawanna
and Luzerne Counties in Northeastern Pennsylvania through 13 community
banking offices.

First Liberty Bank provides various community oriented domestic lending and
depository services for both commercial and individual customers. First
Liberty Bank's lending services include commercial and individual real
estate mortgage and construction loans, secured and unsecured loans and
lines of credit. Deposit services include savings, clubs, money market,
NOW, checking and certificate of deposit accounts. First Liberty Bank also
offers trust services to its customers.

First Liberty's common stock is traded in the over-the-counter market and
is quoted under the symbol FLIB on the OTC Bulletin Board, an electronic
quotation service for over-the-counter securities which are not listed on
Nasdaq. On a consolidated basis, First Liberty had consolidated assets of
approximately $647 million as of September 30, 2000. For additional
information about First Liberty, please see "Where You Can Find More
Information" on page [ ] and "The Companies--First Liberty" on page [ ].

Q: Do the respective boards of directors of Community Bank System and First
Liberty have a recommendation on how I should vote on the merger agreement?

A: Yes. The board of directors of Community Bank System unanimously recommends
that the stockholders of Community Bank System vote in favor of the approval
of the merger agreement. Likewise, the board of directors of First Liberty
unanimously recommends that the shareholders of First Liberty vote in favor
of the approval of the merger agreement.

Q:What do I need to do now?

A: Just indicate on your proxy card how you want to vote, and sign and mail
your proxy card in the enclosed envelope as soon as possible so that your
shares will be represented at the special meeting of your company. If you
are a Community Bank System stockholder, you can vote your proxy by touch-
tone telephone instead, as described in the enclosed proxy card.

If you sign and send in your proxy and do not indicate how you want to
vote, your proxy will be voted in favor of the merger agreement. If you are
a stockholder of Community Bank System, your failure to sign and send in
your proxy or your abstention will have the effect of a vote against the
merger. On the other hand, if you are a shareholder of First Liberty, your
failure to sign and send in your proxy or your abstention will not have the
effect of a vote against the merger. However, your vote is important to
ensure that First Liberty obtains a quorum to approve the merger agreement
at its special meeting.

You may attend your company's special meeting and vote your shares in
person, rather than voting by proxy. In addition, you may withdraw your
proxy up to and including the day of the meeting by following the
directions on page [ ] or [ ] and either change your vote by giving a new
proxy or attend the meeting and vote in person.

Q: If I am a First Liberty shareholder, what will I receive in the merger?

A: If you are a First Liberty shareholder, for each share of First Liberty
common stock you own before the merger, you will receive 0.56 of a share of
Community Bank System common stock and cash instead of fractional shares, if
any, unless you properly exercise your dissenters' rights.

You should bear in mind that the exchange ratio of 0.56 described above is
fixed. The exchange ratio will not be adjusted even if the respective
market values of Community Bank System common stock or First Liberty common
stock change before the merger. The market value of Community Bank System
common stock is subject to fluctuation. Therefore, the value of a share of
Community Bank System common stock as of the effective time of the merger
and after the merger could differ from the current market value of
Community Bank System common stock. A change in the market value of
Community Bank System common stock will cause an increase or decrease in
the value of the consideration you will receive in the merger.

Q: Should I send in my stock certificates now?

A: No. If you are a First Liberty shareholder, after the merger is completed,
you will receive written instructions from the exchange agent on how to
exchange your stock certificates for shares of Community Bank System. Please
do not send in your stock certificates with your proxy.

Q: What is the purpose of this document?

A: This document serves as both companies' joint proxy statement and as
Community Bank System's prospectus. As a proxy statement, this document is
being provided to First Liberty shareholders because the board of directors
of First Liberty is soliciting their proxy to vote to approve the merger
agreement. Similarly, as a proxy statement, this document is being provided
to Community Bank System stockholders because the board of directors of
Community Bank System is soliciting their proxy to vote to approve the
merger agreement. As a prospectus, Community Bank System is providing this
document to First Liberty shareholders because Community Bank System is
offering shares of its common stock in exchange for their shares of First
Liberty common stock in the merger.

Q: Who is the exchange agent for the merger?

A: American Stock Transfer & Trust Company is the exchange agent. American
Stock Transfer is the transfer agent for Community Bank System's common
stock.

Q: How do I learn more about Community Bank System and First Liberty?

A: Please see pages [ ] through [ ] and pages [ ] through [ ] of this document
for information regarding market price, dividends and other features of
Community Bank System common stock and First Liberty common stock. You
should also see pages [ ] through [ ] to find out how to obtain more
information about Community Bank System and First Liberty.

Q: If I am a First Liberty shareholder, what are the tax consequences of the
merger to me?

A: Generally, you should not recognize any gain or loss for U.S. federal income
tax purposes, except with respect to cash in lieu of fractional shares, if
any. We describe the material U.S. federal income tax consequences of the
merger in more detail on pages [ ] to [ ]. The tax consequences of the
merger to you will depend upon the facts of your own situation. Please
consult your own tax advisor for a full understanding of the tax
consequences of the merger to you.

Q: What if I wish to dissent?

A: If you are a shareholder of First Liberty and vote against the merger or
give written notice at or prior to the meeting that you dissent from the
merger and follow the specific steps to perfect your dissenters' rights, you
will have the right to seek appraisal of your shares and receive a cash
amount as determined in accordance with provisions of the Pennsylvania
Business Corporation Law, which are attached as Annex E. You may lose your
dissenters' rights if you do not follow the procedures described in the
provisions. For more information on your dissenters' rights, please see page
[ ]. You should be aware that if you receive cash in the merger as a result
of exercising your dissenters' rights, you will recognize a gain or loss for
federal income tax purposes. Please see "Federal Income Tax Treatment of
Dissenters" on page [ ].

Stockholders of Community Bank System do not have any dissenters' rights in
the merger.

Q: If my shares are held in "street name" by my broker, will the broker vote my
shares for me?

A: No. Your broker will vote your shares only if you provide instructions on
how to vote. You should instruct your broker how to vote your shares,
following the directions your broker provides. If you do not give
instructions to your broker, your broker will not be able to vote your
shares. This will have the effect of voting against the merger agreement if
you are a Community Bank System stockholder, but not if you are a First
Liberty shareholder.

Q: How do the directors and executive officers of each company plan to vote?

A: All of the directors and executive officers of First Liberty have committed
that they will vote in favor of the merger agreement all the shares of First
Liberty common stock that they are entitled to vote. As of the record date
for the First Liberty special meeting, the directors and executive officers
of First Liberty together had the right to vote [ ] shares, or
approximately [ ]% of the outstanding First Liberty common stock.

Although we did not request directors and executive officers of Community
Bank System to commit to vote their shares of Community Bank System common
stock in favor of the merger agreement, Community Bank System expects that
those persons will vote their shares in favor of the merger agreement. As
of the record date for the Community Bank System special meeting, the
directors and executive officers of Community Bank System together had the
right to vote [ ] shares, or approximately [ ]% of the outstanding
Community Bank System common stock.

Q: What risks should I consider before I vote on the merger?

A: You should read "Risk Factors" on pages [ ] to [ ].

Q: When is the merger expected to be completed?

A: We are working to complete the merger during the second quarter of 2001. We
must first obtain the necessary regulatory approvals and the approval of the
First Liberty shareholders and Community Bank System stockholders at their
respective special meetings and satisfy other conditions. We cannot assure
you as to when or if all the conditions to the merger will be met, and it is
possible we will not complete the merger at all.

WHO CAN HELP ANSWER YOUR QUESTIONS

If you want additional copies of this document, or if you want to ask any
questions about the merger, you should contact:

If you are a Community Bank If you are a First Liberty
System stockholder: shareholder:

David Wallace, Treasurer Joseph R. Solfanelli,
Community Bank System, Inc. Executive Vice President
5790 Widewaters Parkway First Liberty Bank Corp.
DeWitt, New York 13214 645 Washington Avenue
(315) 445-7310 P.O. Box 39
Jermyn, Pennsylvania 18433-0039
(570) 803-6515

Please see "Where You Can Find More Information" on page [ ] to find out
where you can find more information about Community Bank System and First
Liberty.

TABLE OF CONTENTS

SUMMARY.................................................................... 1

SELECTED HISTORICAL FINANCIAL DATA......................................... 9

SELECTED UNAUDITED PRO FORMA FINANCIAL DATA................................ 12

COMPARATIVE UNAUDITED PER SHARE DATA....................................... 19

RISK FACTORS............................................................... 20
The Value of the Community Bank System Common Stock You Receive in the
Merger May Vary......................................................... 20
We May Fail to Implement the Merger Successfully, Achieve Savings and
Realize the Other Anticipated Benefits from the Merger Because of
Difficulties in Integrating Our Business Operations..................... 20
We May Pursue Acquisitions and Investments that Could Adversely Affect
Our Business............................................................ 20
Changes In Interest Rates Affect Our Profitability and Assets............ 20
Regional Economic Factors May Have an Adverse Impact on Our Business..... 21
We Face Strong Competition from Other Banks and Financial Institutions
which Can Hurt Our Business............................................. 21
We Depend on Dividends from Our Banking Subsidiaries for Cash Revenues,
but Those Dividends are Subject to Restrictions......................... 21
Anti-Takeover Provisions May Prevent or Discourage Takeover Attempts in
Which Our Stockholders May Receive a Premium............................ 21

A WARNING ABOUT FORWARD-LOOKING INFORMATION................................ 22

THE COMPANIES.............................................................. 23
Community Bank System.................................................... 23
First Liberty............................................................ 23
Business............................................................... 23
Properties............................................................. 24
Legal Proceedings...................................................... 24
Information Concerning First Liberty Directors and Officers............ 25
Certain Relationships and Related Transactions......................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 27

SPECIAL MEETING OF THE STOCKHOLDERS OF COMMUNITY BANK SYSTEM............... 45
General.................................................................. 45
Record Date; Voting Power................................................ 45
Vote Required............................................................ 45
Recommendation of the Community Bank System Board........................ 46
Solicitation and Revocation of Proxies................................... 46
Other Matters............................................................ 47

SPECIAL MEETING OF THE STOCKHOLDERS OF FIRST LIBERTY....................... 47
General.................................................................. 47
Record Date; Voting Power................................................ 47
Vote Required............................................................ 47
Recommendation of the First Liberty Board................................ 48
Solicitation and Revocation of Proxies................................... 48
Other Matters............................................................ 48

THE MERGER................................................................. 49
General.................................................................. 49
Background of the Merger................................................. 50
Community Bank System's Reasons for the Merger; Recommendation of
Community Bank System's Board of Directors.............................. 54
First Liberty's Reasons for the Merger; Recommendation of First Liberty's
Board of Directors...................................................... 56
Fairness Opinion of Community Bank System's Financial Advisors........... 58
Fairness Opinion of First Liberty's Financial Advisors................... 62
Stock Option Agreement................................................... 67
Voting Agreements with Directors and Executive Officers of First
Liberty................................................................. 67
Financial Interests of Certain First Liberty Directors and Executive
Officers in the Merger.................................................. 68
Material Federal Income Tax Consequences................................. 69
Accounting Treatment of the Merger....................................... 71
Resales of Community Bank System Common Stock............................ 72
New York Stock Exchange Listing.......................................... 73
Regulatory Approvals and Notices for the Merger.......................... 73

THE MERGER AGREEMENT....................................................... 74
Exchange of Certificates................................................. 74
Representations and Warranties........................................... 74
Conditions to the Merger................................................. 75
Termination.............................................................. 76
Conduct of Business prior to Completion of the Merger; Covenants......... 77
Use of First Liberty Bank Name........................................... 79
No Solicitation of Takeover Proposals.................................... 79
Fees and Expenses; Reimbursement of Expenses............................. 79
Directors, Employees and Employee Benefits............................... 80
Indemnification.......................................................... 81
Dividends................................................................ 81
Amendment and Waiver..................................................... 81

DISSENTING SHAREHOLDERS' RIGHTS............................................ 82
General.................................................................. 82
Notice of Intention to Dissent........................................... 82
Notice to Demand Payment................................................. 82
Failure to Comply with Notice to Demand Payment, etc..................... 82
Payment of Fair Value of Shares.......................................... 83
Estimate by Dissenting Shareholder of Fair Value of Shares............... 83
Valuation Proceedings.................................................... 83
Cost and Expenses........................................................ 84

MARKET PRICE AND DIVIDEND INFORMATION...................................... 85

DESCRIPTION OF CAPITAL STOCK OF COMMUNITY BANK SYSTEM...................... 87
General.................................................................. 87
Common Stock............................................................. 87
Certain Certificate of Incorporation and Bylaws Provisions............... 87
Rights Plan.............................................................. 88

DESCRIPTION OF CAPITAL STOCK OF FIRST LIBERTY.............................. 90
General.................................................................. 90
Common Stock............................................................. 91
Certain Charter and Pennsylvania Corporate Law Provisions................ 92

COMPARISON OF RIGHTS OF HOLDERS OF FIRST LIBERTY COMMON STOCK AND
COMMUNITY BANK SYSTEM COMMON STOCK..................................... 93

EXPERTS................................................................. 99

LEGAL MATTERS........................................................... 99

WHERE YOU CAN FIND MORE INFORMATION..................................... 99

FINANCIAL STATEMENT INDEX............................................... F-1

Annex
-----

Agreement and Plan of Merger, dated as of November 29, 2000, by and
between Community Bank System, Inc. and First Liberty Bank Corp........ A

Stock Option Agreement, dated as of November 29, 2000, by and between
Community Bank System, Inc. and First Liberty Bank Corp................ B

Opinion of Berwind Financial, L.P....................................... C

Opinion of Janney Montgomery Scott LLC.................................. D

Sections 1930 and 1571-1580 of the Pennsylvania Business Corporation Law
of 1988, as amended.................................................... E

iii

SUMMARY

This summary highlights selected information from this document and may not
contain all the information that is important to you. For a more complete
understanding of the merger and for a more complete description of the legal
terms of the merger, you should read this entire document carefully, as well as
the additional documents we refer you to. See "Where You Can Find More
Information" on page [ ].

We have attached the merger agreement to this document as Annex A. Please
read that document carefully. It is the legal document that governs the merger
and your rights in the merger.

Community Bank System to Continue as the Surviving Corporation (Page [ ])

We are proposing a merger of First Liberty into Community Bank System, which
will combine both companies. Community Bank System will continue as the
surviving corporation of the merger. Following the merger, we expect to merge
First Liberty Bank, a wholly-owned banking subsidiary of First Liberty, with
and into Community Bank, a wholly-owned banking subsidiary of Community Bank
System, with Community Bank surviving the merger.

Exchange Ratio is Fixed at 0.56 of a Share of Community Bank System Common
Stock for Each Share of First Liberty Common Stock (Page [ ])

If you are a First Liberty shareholder and the merger is completed, you will
receive 0.56 of a share of Community Bank System common stock for each share of
First Liberty common stock you own plus cash instead of any fractional shares,
unless you properly exercise your dissenters' rights. On [ ], 2001, the
closing price of Community Bank System was $[ ], making the value of 0.56 of
a share of Community Bank System common stock on that date equal to
approximately $[ ]. Because the exchange ratio is fixed and will not be
adjusted for any fluctuation in the market price of Community Bank System
common stock or First Liberty common stock, you will not know when you vote
what the shares will be worth when they are issued at the completion of the
merger. We urge you to obtain current market price of the shares.

First Liberty Shareholders Will Own Approximately 31% of the Combined Company
Following the Merger (Page [ ])

At the completion of the merger and assuming no exercise of dissenters'
rights, persons who are First Liberty shareholders immediately before the
merger are expected to own approximately 31% of the outstanding shares of
common stock of the combined company.

No Federal Income Tax on Community Bank System Common Stock Received in the
Merger (Page [ ])

We intend that First Liberty shareholders will not recognize any gain or
loss for U.S. Federal income tax purposes in the merger, except for those who
receive cash instead of fractional shares or who perfect their dissenters'
rights under Pennsylvania law. Tax matters are complicated, and tax consequence
of the merger may vary among First Liberty shareholders depending on their
specific situations. We urge each First Liberty shareholder to consult his or
her own tax advisor to fully understand how the merger will affect him or her.

Our Financial Advisors Say the Exchange Ratio is Fair from a Financial Point of
View (Page [ ])

Community Bank System. Community Bank System's financial advisors, Janney
Montgomery Scott LLC, rendered an opinion to the board of directors of
Community Bank System that, as of the date of the opinion, the exchange ratio
was fair from a financial point of view to the stockholders of Community Bank
System. This opinion is attached as Annex D to this document. You should read
it carefully.

First Liberty. First Liberty's financial advisors, Berwind Financial, L.P.,
rendered an opinion to the board of directors of First Liberty that, as of the
date of the opinion, the exchange ratio was fair from a financial point of view
to the shareholders of First Liberty. This opinion is attached as Annex C to
this document. You should read it carefully.

Share Information and Market Price (Page [ ])

Community Bank System common stock is traded on the New York Stock Exchange
under the symbol CBU. First Liberty common stock is traded in the over-the-
counter market and is quoted on the OTC Bulletin Board under the symbol FLIB.
The following table shows the closing or last sale prices of Community Bank
System common stock and First Liberty common stock on November 29, 2000 and
[ ], 2001, and the equivalent price per share of First Liberty common
stock which is determined by multiplying the closing price of Community Bank
System common stock by the exchange ratio of 0.56. The companies made the first
public announcement of the merger after the close of markets on November 29,
2000.

Community
Bank System Fist Liberty
----------- ----------------------------
Equivalent Market
Historical Historical Value Per Share
----------- ---------- -----------------

Closing or Last Sale Prices Per
Share on:
November 29, 2000................ $24.10 $13.25 $13.496
[ ], 2001.................... $[ ] $ [ ] $ [ ]

The market prices of both Community Bank System common stock and First
Liberty common stock will fluctuate before the merger. We encourage you to
obtain current market prices.

The Companies (Page [ ])

Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, New York 13214
(315) 445-2282

Community Bank System is a bank holding company operating Community Bank,
which currently has 72 customer facilities and 54 ATM's in 18 counties in
Upstate New York: St. Lawrence, Jefferson, Lewis, Oneida, Cayuga, Seneca,
Ontario, Oswego, Wayne, Yates, Allegany, Cattaraugus, Tioga, Steuben,
Chautauqua, Franklin, Herkimer, and Onondaga. Community Bank and its
subsidiaries offer a broad range of commercial banking, trust, pension
administration, investment and financial services to business, individual,
agricultural and government customers.

Community Bank is Community Bank System's principal asset. At September 30,
2000 and after giving pro forma effect to the merger between Community Bank and
Citizens National Bank, which was completed on January 26, 2001, Community Bank
System had on a consolidated basis approximately $2.1 billion in total assets,
$1.55 billion in total deposits, $1.13 billion in total loans and shareholders'
equity of $147 million.

First Liberty Bank Corp.
645 Washington Avenue
P.O. Box 39
Jermyn, Pennsylvania 18433-0039
(570) 876-6500

First Liberty is a bank holding company operating First Liberty Bank &
Trust. First Liberty Bank is a community bank operating 13 banking offices and
16 ATMs in Lackawanna and Luzerne Counties in Northeastern Pennsylvania. First
Liberty Bank offers a broad range of commercial banking and trust services to
individuals and small- to medium-sized businesses in its market area.

First Liberty Bank is the principal asset of First Liberty. At September 30,
2000 and on a consolidated basis, First Liberty had approximately $647 million
in assets, $497 million in total deposits, $429 million in total loans and
shareholders' equity of $60 million.

Community Bank System's Special Meeting will be held on [ ], 2001 and First
Liberty's Special Meeting will be held on [ ], 2001 (Page [ ])

Community Bank System Special Meeting. A special meeting of the Community
Bank System stockholders will be held at [ ], at [ ]:[ ] [ ].m., Eastern
time, on [ ], 2001. At the special meeting, stockholders of Community Bank
System will vote on a proposal to adopt and approve the merger agreement.

First Liberty Special Meeting. A special meeting of the First Liberty
shareholders will be held at [ ], at [ ]:[ ] [ ].m., Eastern time, on
[ ], 2001. At the special meeting, shareholders of First Liberty will vote
on a proposal to adopt and approve the merger agreement.

Record Date for Community Bank System's Special Meeting is [ ], 2001 and
Record Date for First Liberty's Special Meeting is [ ], 2001; Each Share
will Entitle You to One Vote on the Merger (Pages [ ] and [ ])

Community Bank System. You are entitled to vote at the Community Bank
System special meeting if you owned shares of Community Bank System common
stock on the record date of [ ], 2001. As of that date, there were [ ]
shares of Community Bank System common stock issued and outstanding held by
approximately [ ] holders of record. Each share of Community Bank System
common stock entitles its holder to one vote on any matter that may properly
come before the Community Bank System special meeting.

First Liberty. You are entitled to vote at the First Liberty special meeting
if you owned shares of First Liberty common stock on the record date of
[ ], 2001. As of that date, there were [ ] shares of First Liberty common
stock issued and outstanding held by approximately [ ] holders of record.
Each share of First Liberty common stock entitles its holder to one vote on any
matter that may properly come before the First Liberty special meeting.

Merger Approval Requires a Majority of the Outstanding Shares for Community
Bank System and a Majority of Votes Cast for First Liberty (Pages [ ] and [ ])

Community Bank System. Approval of the merger agreement requires the
affirmative vote of a majority of the outstanding shares of Community Bank
System common stock. This means that if any stockholder of Community Bank
System fails to vote or abstain from voting, it would have the same effect as
voting against the merger.

First Liberty. Approval of the merger agreement requires the affirmative
vote of a majority of the votes cast by the holders of First Liberty common
stock. Abstentions are not considered votes cast and, accordingly, will not
have any effect on the merger vote.

We Expect Directors and Executive Officers of Each Company to Vote Their Shares
in Favor of Approving the Merger (Page [ ])

Community Bank System. On the record date set for the Community Bank System
special meeting, the executive officers and directors of Community Bank System,
including certain related parties, had voting power with respect to an
aggregate of [ ] shares of Community Bank System common stock, or
approximately [ ]% of the shares of the Community Bank System common stock then
outstanding. Community Bank System expects that its directors and executive
officers will vote all of their shares of Community Bank System common stock in
favor of the merger agreement.

First Liberty. On the record date set for the First Liberty special meeting,
the executive officers and directors of First Liberty, including certain
related parties, had voting power with respect to an aggregate of [ ] shares
of First Liberty common stock, or approximately [ ]% of the shares of the First
Liberty common stock then outstanding. Each director and executive officer of
First Liberty executed an agreement which commits him to vote in favor of the
merger agreement all of the shares of First Liberty common stock that he is
entitled to vote.

The Boards of Directors of Community Bank System and First Liberty Recommend
You Vote to Approve the Merger (Page [ ])

Community Bank System. Community Bank System's board of directors has
unanimously approved the merger agreement, and recommends a vote FOR approval
of the merger agreement. Community Bank System stockholders should refer to the
reasons that their board of directors considered in determining whether to
adopt and approve the merger agreement on pages [ ] through [ ].

First Liberty. First Liberty's board of directors has unanimously approved
the merger agreement, and recommends a vote FOR approval of the merger
agreement. First Liberty shareholders should refer to the reasons that their
board of directors considered in determining whether to adopt and approve the
merger agreement on pages [ ] through [ ].

Terms of the Merger Agreement (Page [ ])

The merger agreement is attached to this document as Annex A. We encourage
you to read the merger agreement in its entirety. It is the legal document that
governs the merger and your rights in it. We also encourage you to read the
risk factors beginning on page [ ].

General. The merger agreement provides that First Liberty will merge with
and into Community Bank System, with Community Bank System continuing as the
surviving corporation.

Merger Consideration. If the merger is completed, First Liberty shareholders
will receive 0.56 of a share of Community Bank System common stock for each
share of First Liberty common stock they own, except for First Liberty
shareholders who properly exercise their dissenters' rights. Community Bank
System will not issue any fractional shares of its common stock. Instead, a
First Liberty shareholder will receive cash equal to the product of (1) the
closing price of Community Bank System common stock on the date that the merger
is completed, and (2) the fraction of a share of Community Bank System to which
the shareholder would otherwise be entitled. The exchange ratio of 0.56 is
fixed and will not be adjusted even if the market price of Community Bank
System common stock or First Liberty common stock fluctuates before the merger.

shares of Community Bank System common stock upon exercise. The number of
shares underlying each option, as well as the exercise price, will be adjusted
appropriately by the amount of the exchange ratio.

Completion of the Merger. The merger will become effective on the date and
at the time that we file a certificate or articles of merger with each of the
Delaware Secretary of State and the Pennsylvania Secretary of State.

Conditions to the Merger. The completion of the merger depends upon the
satisfaction of a number of conditions, including:

. Community Bank System stockholders approve the merger agreement by the
affirmative vote of at least a majority of the outstanding shares of
Community Bank System common stock;

. First Liberty shareholders approve the merger agreement by the
affirmative vote of at least a majority of the votes cast by the holders
of First Liberty common stock;

. Community Bank System and First Liberty receive all approvals or
consents required by law from any applicable governmental agency, and
all applicable notice or waiting periods have expired;

. the Securities and Exchange Commission, or the SEC, declares effective
the registration statement covering the Community Bank System common
stock to be issued in the merger, and the registration statement is not
the subject of any stop order or proceeding seeking a stop order;

. Community Bank System has complied with the rules and regulations of all
applicable state securities commissions or agencies concerning the
merger;

. the New York Stock Exchange lists the Community Bank System common stock
to be issued in the merger, subject to official notification of
issuance;

. PricewaterhouseCoopers LLP, Community Bank System's independent
auditors, delivers an opinion to First Liberty and Community Bank System
that the merger will qualify as a tax-free reorganization under Section
368 of the Internal Revenue Code;

. KPMG LLP, First Liberty's independent auditors, delivers a pooling
letter to First Liberty that First Liberty is a poolable entity under
applicable accounting principles;

. PricewaterhouseCoopers, Community Bank System's independent auditors,
delivers a pooling letter to Community Bank System that the merger will
qualify for the pooling of interests accounting treatment; and

. Berwind Financial, First Liberty's financial advisors, delivers a
written fairness opinion to First Liberty dated within five days of the
mailing of this document.

Unless prohibited by law, either of us could elect to waive a condition
designed for the benefit of the waiving party that has not been satisfied and
complete the merger anyway. Although it was not a condition to closing in the
merger agreement, Janney Montgomery Scott, Community Bank System's financial
advisors, has delivered a written fairness opinion dated as of the date of this
document.

Fees and Expenses. We will each pay our own expenses in connection with the
merger, except that we will share equally all filing fees paid to the SEC in
connection with the registration statement for the merger, and all costs
associated with the printing and mailing of this document. If, however, the
merger agreement is terminated after an "initial triggering event" occurs under
the stock option agreement, First Liberty is required to reimburse Community
Bank System for its expenses. In addition, if Community Bank System causes
First Liberty to repurchase the stock option, or shares of First Liberty common
stock issued upon exercise of the stock option, pursuant to the stock option
agreement that we have entered into at the time that the merger

agreement was executed, then First Liberty must also reimburse Community Bank
System for its expenses which have not previously been reimbursed. For details,
please see "Stock Option Agreement" on page [ ].

Termination. Either of us may call off the merger under certain
circumstances, including if:

. we both consent in writing to the termination;

. the merger is not completed before September 30, 2001, unless the merger
was not completed principally because the party seeking to terminate
breached a covenant or obligation of the merger agreement;

. we are not able to obtain required governmental approvals, after all
appeals and requests for reconsideration have been exhausted;

. any governmental entity issues a final and non-appealable order to
prohibit the completion of the merger;

. either Community Bank System stockholders or First Liberty shareholders
do not approve the merger agreement; or

. the other party materially breaches, and does not cure within 30 days,
any of the representations, warranties or covenants it has made under
the merger agreement, and the breach entitles the non-breaching party to
not complete the merger.

We can terminate the merger agreement without completing the merger, even if
the stockholders of Community Bank System and/or First Liberty have already
voted to approve the merger agreement.

Terms of the Stock Option Agreement (Page [ ])

The stock option agreement is attached to this document as Annex B. We
encourage you to read the stock option agreement in its entirety.

To induce Community Bank System to enter into the merger agreement, First
Liberty granted a stock option to Community Bank System to purchase up to
1,267,359 shares of First Liberty common stock at an exercise price of $13.25
per share. The number of shares of First Liberty common stock that may be
acquired upon exercise of the stock option may not in any event exceed 19.9% of
the issued and outstanding shares of First Liberty common stock (without
counting shares that are issued or issuable upon exercise). Under certain
circumstances, First Liberty may be required to repurchase the stock option, or
any shares purchased upon exercise of the stock option, for a cash payment
determined under the stock option agreement.

Community Bank System cannot exercise the stock option, or require First
Liberty to repurchase the stock option or any underlying shares of First
Liberty common stock, unless certain specific events take place. These events
are generally related to a competing transaction involving a merger, business
combination or other acquisition of First Liberty or its stock or assets. As of
the date of this document, we are not aware that any event of the kind has
occurred. The stock option could have the effect of discouraging other
companies that might wish to combine with or acquire First Liberty from doing
so.

Financial Interests of First Liberty Management in the Merger (Page [ ])

In considering the recommendation of the First Liberty board of directors,
First Liberty shareholders should be aware that certain of the directors and an
executive officer of First Liberty have financial interests in the merger that
are different from, and may conflict with, interests of First Liberty
shareholders. The First

Liberty board knew about these interests and determined that they did not
affect the benefits to First Liberty shareholders of the merger. These
interests are as follows:

. Three officers of First Liberty, William M. Davis, Steven R. Tokach and
Joseph R. Solfanelli, are parties to employment agreements with First
Liberty that will provide them with severance benefits if the merger is
completed:

. Mr. Davis will receive a severance payment of $490,000 under his
First Liberty employment agreement upon completion of the merger.

. Mr. Tokach will agree to defer a severance payment of $330,000 under
his First Liberty employment agreement until his employment with
Community Bank System and Community Bank terminates at any time
following completion of the merger, except under limited
circumstances.

. Mr. Solfanelli will agree to defer a severance payment of $250,000
under his First Liberty employment agreement until his employment
with Community Bank System and Community Bank terminates at any time
following completion of the merger, except under limited
circumstances.

. Mr. Davis will enter into a three-year consulting contract with
Community Bank System upon completion of the merger under which he will
receive $100,000 annually.

. Mr. Tokach and Mr. Solfanelli will each enter into three-year employment
agreements with Community Bank System under which they will receive
annual base salaries of $165,000 and $150,000, respectively, in addition
to certain other payments and benefits.

. Certain directors and executive officers of First Liberty hold stock
options to purchase an aggregate of 57,632 shares of First Liberty
common stock that will convert into options to purchase Community Bank
System common stock that are exercisable immediately after completion of
the merger. As of [ ], 2001, the difference between the aggregate
exercise price and the market value of the shares of First Liberty
common stock underlying the options, which represents the economic value
of the options, was $[ ].

. Community Bank System will establish an advisory board which includes
eight former directors of First Liberty. The advisory board will be
maintained for a period of at least four years and members of the
advisory board will receive a retainer of $12,000 per annum.

. Three directors of First Liberty, Saul Kaplan, Peter A. Sabia and Harold
Kaplan will become directors of Community Bank System and Community Bank
following the merger and will receive the same compensation in such
capacities as other board members.

Directors of Community Bank System and Community Bank Following the Merger
(Page [ ])

If the merger is completed, three of First Liberty's directors, Saul Kaplan,
Peter A. Sabia and Harold Kaplan, will be appointed to serve as members of
Community Bank System's board of directors, in addition to nine current
directors of Community Bank System. These three new directors of Community Bank
System will also be appointed to serve on the board of directors of Community
Bank.

Subject to certain limitations, Community Bank System has also agreed to re-
nominate the three designees of First Liberty on the board of directors of
Community Bank System for at least one additional three-year term after their
respective initial terms expire, and to recommend that Community Bank System
stockholders vote in favor of their reelection.

We Expect to Account for the Merger as a Pooling of Interests (Page [ ])

We expect that the merger will qualify as a pooling of interests. This means
that, for accounting and financial reporting purposes, Community Bank System
will treat the combined companies as if they had always

been one company. The directors and executive officers of both companies have
entered into an agreement intended to preserve the ability of the merger to be
accounted for as a pooling of interests.

There will be Restrictions on Resales of Community Bank System Common Stock for
Affiliates of First Liberty (Page [ ])

Shares of Community Bank System common stock which First Liberty
shareholders receive in the merger will be freely transferable, unless the
holder of the shares is an affiliate of First Liberty at the time its special
meeting is held. Under applicable federal securities laws, affiliates generally
include directors, executive officers and 10% or greater shareholders of First
Liberty common stock. Any First Liberty shareholder who is an affiliate of
First Liberty at the time of the special meeting will be subject to certain
restrictions on his or her ability to transfer shares of Community Bank System
common stock received in the merger. In addition, any First Liberty shareholder
who becomes an affiliate of Community Bank System after the merger will be
subject to similar restrictions. These restrictions are described on page [ ]
through [ ].

We Must Obtain Regulatory Approvals to Complete the Merger (Page [ ])

We must make filings with or obtain approvals from certain regulatory
authorities to effect the merger. In addition, before we complete the merger,
we will make all filings and obtain all regulatory approvals required for the
merger of our banking subsidiaries, Community Bank and First Liberty Bank.
These include the approvals of the Federal Reserve Board, the Comptroller of
the Currency and the Pennsylvania Department of Banking. In addition, Community
Bank System must apply to list the common stock to be issued in the merger with
the New York Stock Exchange.

First Liberty Shareholders Have Dissenters' Rights in the Merger (Page [ ])

If you are a First Liberty shareholder, you have the right under
Pennsylvania law to dissent from the merger, and to demand and receive cash for
the fair value of your stock instead of receiving Community Bank System common
stock in the merger. In order to assert dissenters' rights, a First Liberty
shareholder must:

. File a written notice of intent to dissent with First Liberty prior to
the shareholder vote at First Liberty's special meeting of shareholders;

. Not vote in favor of the merger;

. File a written demand for payment and deposit the certificates
representing the First Liberty shares for which dissenters' rights are
being asserted as requested by the notice that will be sent by First
Liberty or Community Bank System after the merger; and

. Comply with certain other statutory procedures set forth in Pennsylvania
law.

If you are a First Liberty shareholder and you sign and return your proxy
without voting instructions, we will vote your proxy in favor of the merger and
you will lose any dissenters' rights that you may have. We have included a copy
of sections of Pennsylvania law dealing with dissenters' rights to this
document as Annex D.

There are Differences in Shareholder Rights (Page [ ])

The rights of First Liberty shareholders as such are currently governed by
Pennsylvania law and First Liberty's articles of incorporation and bylaws. If
the merger is completed, First Liberty shareholders will become stockholders of
Community Bank System and their rights will be governed by Delaware law and the
Community Bank System's certificate of incorporation and bylaws. There are
certain differences in the rights of shareholders of the two companies.

SELECTED HISTORICAL FINANCIAL DATA

The following information is provided to assist you in analyzing the
financial aspects of the merger. This information shows selected historical
consolidated financial data for Community Bank System and First Liberty. We
derived this information from each company's audited consolidated financial
statements for the years ended December 31, 1995 through 1999, and its
unaudited financial statements for the nine months ended September 30, 1999 and
2000. The information is only a summary and should be read in conjunction with
Community Bank System's financial statements and related notes and management's
discussions and analysis contained in the annual, quarterly and other reports
filed with the SEC, and First Liberty's financial statements and related notes
and management's discussions and analysis contained elsewhere in this document.
For information on how to obtain these reports filed by Community Bank System,
please refer to "Where You Can Find More Information" on page [ ]. The
following information does not give effect to the merger between Community Bank
and Citizens National Bank which closed on January 26, 2001. We encourage you
to read "Selected Unaudited Pro Forma Financial Data" on page [ ].

Community Bank System

Selected Historical Financial Data

Nine Months ended
September 30,
(Unaudited) Years ended December 31,
--------------------- ------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------

(in thousands, except per share data)

Income Statement Data:
Interest income......... $ 107,018 $ 90,625 $ 123,888 $ 122,938 $ 117,628 $ 97,688 $ 83,387
Interest expense........ 53,695 40,680 55,947 58,543 54,752 42,422 36,307
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income..... 53,323 49,945 67,941 64,395 62,876 55,266 47,080
Provision for loan
losses................. 5,044 3,689 5,136 5,123 4,480 2,897 1,765
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses............ 48,279 46,256 62,805 59,272 58,396 52,369 45,315
Non-interest income..... 15,386 12,005 15,487 17,040 11,808 8,874 6,558
Non-interest expense.... 41,759 39,673 52,734 51,876 45,799 37,450 33,019
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cumulative effect of
change in accounting
principle.............. 0 0 0 328 0 0 0
Income before income
taxes.................. 21,906 18,588 25,559 24,764 24,406 23,793 18,854
Provision for income
taxes.................. 6,572 5,950 7,923 9,036 8,844 9,660 7,384
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income............. $ 15,334 $ 12,638 $ 17,635 $ 15,728 $ 15,562 $ 14,133 $ 11,470
========== ========== ========== ========== ========== ========== ==========
End of Period Balance
Sheet Data:
Total assets............ $1,973,580 $1,774,167 $1,840,702 $1,680,689 $1,633,742 $1,343,865 $1,152,045
Loans net of unearned
discount............... 1,081,531 982,673 1,009,223 917,220 843,212 652,474 560,151
Earning assets (includes
market value
adjustments)........... 1,800,982 1,612,016 1,664,110 1,510,760 1,455,139 1,231,058 1,034,183
Total deposits.......... 1,455,391 1,372,001 1,360,306 1,378,066 1,345,686 1,027,213 1,016,946
Long-term debt.......... 145,000 70,000 70,000 70,000 25,000 100,000 25,550
Trust securities........ 29,822 29,816 29,817 29,810 29,804 0 0
Shareholders' equity.... 121,976 111,648 108,487 120,165 118,012 109,352 100,060

Nine Months ended
September 30,
(Unaudited) Years ended December 31,
---------------------- ----------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except per share data)

Average Balance Sheet
Data:
Total assets............ $1,891,494 $1,702,105 $1,723,212 $1,670,624 $1,491,920 $1,251,826 $1,054,610
Loans net of unearned
discount............... 1,044,567 935,650 951,167 884,751 749,596 602,717 519,762
Earning assets (excludes
market value
adjustments)........... 1,760,513 1,548,107 1,572,356 1,512,175 1,363,703 1,147,455 975,257
Total deposits.......... 1,413,912 1,371,853 1,369,269 1,396,700 1,213,793 1,032,169 871,050
Long-term debt.......... 86,606 70,000 70,003 89,805 79,863 57,006 3,399
Trust securities........ 29,820 29,815 29,814 29,810 27,290 0 0
Shareholders' equity.... 112,694 117,687 115,876 120,936 110,689 103,398 84,231
Common Per Share Data:
Net income.............. $ 2.14 $ 1.73 $ 2.42 $ 2.05 $ 2.02 $ 1.83 $ 1.70
Cash dividend declared.. 0.77 0.71 0.96 0.86 0.76 0.69 0.62
Period-end book value--
stated................. 17.44 15.63 15.30 16.47 15.56 14.03 12.99
Period-end book value--
tangible............... 9.99 8.55 8.32 9.01 7.82 9.85 8.37
Common Outstanding
Shares:
Average during period
(including common stock
equivalents)........... 7,148,884 7,321,721 7,213,394 7,670,711 7,676,326 7,482,518 6,522,410
End of period (excluding
common stock
equivalents)........... 6,993,059 7,141,429 7,092,259 7,296,453 7,586,512 7,474,406 7,358,450
Selected Ratios:
Return on average total
assets................. 1.08% 0.99% 1.02% 0.94% 1.04% 1.13% 1.09%
Return on average
shareholders' equity
(excludes preferred
stock)................. 18.17% 14.36% 15.22% 13.01% 14.09% 13.88% 13.85%
Common dividend payout
ratio.................. 35.44% 40.46% 39.05% 41.15% 37.30% 37.27% 34.79%
Net interest margin
(taxable equivalent
basis)................. 4.34% 4.58% 4.46% 4.31% 4.64% 4.86% 4.88%
Noninterest income to
average assets......... 5.66% 5.32% 0.90% 1.02% 0.79% 0.71% 0.64%
Noninterest income to
operating income....... 21.40% 18.70% 18.70% 19.00% 15.30% 13.60% 12.10%
Efficiency ratio........ 52.60% 54.70% 55.20% 58.50% 55.00% 53.40% 56.70%
Non-performing loans to
period-end total
loans.................. 0.58% 0.42% 0.57% 0.43% 0.49% 0.44% 0.36%
Non-performing assets to
period-end total loans
and other real estate
owned.................. 0.66% 0.48% 0.67% 0.56% 0.60% 0.55% 0.47%
Allowance for loan
losses to period-end
loans.................. 1.35% 1.32% 1.33% 1.36% 1.47% 1.25% 1.25%
Allowance for loan
losses to period-end
non-performing loans... 234.96% 315.71% 234.93% 312.12% 297.96% 285.58% 349.69%
Allowance for loan
losses to period-end
non-performing assets.. 205.56% 274.19% 203.45% 240.74% 246.02% 224.33% 267.40%
Net charge-offs
(recoveries) to average
total loans............ 0.49% 0.46% 0.44% 0.58% 0.50% 0.29% 0.21%
Average net loans to
average total
deposits............... 73.88% 68.20% 69.47% 63.35% 61.76% 58.39% 59.67%
Period-end total
shareholders' equity to
period end assets...... 6.18% 6.29% 5.89% 7.15% 7.22% 8.14% 8.69%
Tier I capital to risk-
adjusted assets........ 9.00% 9.22% 9.28% 9.24% 9.28% 10.70% 10.62%
Total risk-based capital
to risk-adjusted
assets................. 10.23% 10.42% 10.50% 10.49% 10.53% 11.83% 11.76%
Tier I leverage ratio... 5.65% 5.79% 5.80% 5.71% 5.67% 5.88% 5.83%

First Liberty

Selected Historical Financial Data

Nine Months ended
September 30,
(Unaudited) Years ended December 31,
-------------------- -----------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------- --------- ---------
(in thousands, except per share data)

Income Statement Data:
Interest income......... $ 33,114 $ 31,679 $ 42,559 $ 42,365 $ 41,316 $ 39,939 $ 37,727
Interest expense........ 18,765 16,593 22,543 22,673 21,575 20,523 19,952
--------- --------- --------- --------- --------- --------- ---------
Net interest income..... 14,349 15,086 20,016 19,692 19,741 19,416 17,775
Provision for loan
losses................. 540 540 720 540 600 833 1,365
--------- --------- --------- --------- --------- --------- ---------
Net interest income
after provision for
loan losses............ 13,809 14,546 19,296 19,152 19,141 18,583 16,410
Non-interest income..... 1,570 1,760 2,244 1,778 2,044 2,254 1,469
Non-interest expense.... 10,572 10,277 13,992 15,359 14,328 14,024 13,589
--------- --------- --------- --------- --------- --------- ---------
Income before income
taxes.................. 4,807 6,029 7,548 5,571 6,857 6,813 4,290
Provision for income
taxes.................. 1,056 1,280 1,521 1,570 1,737 1,743 869
--------- --------- --------- --------- --------- --------- ---------
Net income.............. $ 3,751 $ 4,749 $ 6,027 $ 4,001 $ 5,120 $ 5,070 $ 3,421
========= ========= ========= ========= ========= ========= =========
End of Period Balance
Sheet Data:
Total assets............ $ 646,661 $ 643,603 $ 653,275 $ 615,370 $ 585,051 $ 576,696 $ 546,483
Loans net of unearned
discount............... 434,479 411,788 416,550 375,915 360,594 342,635 300,701
Allowance for loan
losses................. 5,493 4,784 5,107 4,618 4,562 5,017 4,787
Total deposits.......... 496,962 508,989 484,446 496,600 484,802 487,584 492,788
Securities.............. 169,266 191,428 185,908 196,563 185,129 191,208 203,347
Shareholders' equity.... 60,152 58,503 57,217 58,908 55,584 51,642 48,658
Common Per Share Data:
Net income--basic....... $ 0.59 $ 0.75 $ 0.95 $ 0.63 $ 0.81 $ 0.81 $ 0.54
Net income--diluted..... 0.59 0.74 0.94 0.63 0.80 0.80 0.54
Period-end book value--
stated................. 9.45 9.19 8.99 9.28 8.83 8.21 7.73
Common Outstanding
Shares:................ 6,368,640 6,366,984 6,366,984 6,348,548 6,296,260 6,294,720 6,294,720
Selected Ratios:
Return on average total
assets................. 0.63% 1.01% 0.95% 0.66% 0.88% 0.91% 1.12%*
Return on average
shareholders' equity
(excludes preferred
stock)................. 6.60% 10.80% 10.28% 7.06% 9.59% 10.18% 13.20%*
Common dividend payout
ratio.................. 56.04% 41.47% 44.33% 54.46% 41.39% 37.97% 57.52%
Net interest margin
(taxable equivalent
basis)................. 3.33% 3.53% 3.58% 3.63% 3.79% 3.83% 4.18%*
Noninterest income to
average assets......... .34% .41% .35% .29% .35% .40% .20%*
Non-performing loans to
period-end total
loans.................. .31% .37% .38% .58% .52% 1.51% 1.40%
Allowance for loan
losses to period-end
loans.................. 1.26% 1.16% 1.23% 1.23% 1.28% 1.46% 1.59%
Allowance for loan
losses to period-end
non-performing loans... 402% 314% 319% 211% 243% 88% 119%
Allowance for loan
losses to period-end
non- performing
assets................. 300% 229% 237% 173% 160% 84% 85%
Net charge-offs
(recoveries) to average
total loans............ .04% .10% .06% .13% .30% .19% .58%
Period-end total
shareholders' equity to
period-end assets...... 9.30% 9.09% 8.76% 9.57% 9.50% 8.95% 8.90%
Tier I capital to risk-
adjusted assets........ 14.54% 15.53% 15.62% 17.66% 15.81% 15.97% 16.13%*
Total risk-based capital
to risk-adjusted
assets................. 15.79% 16.74% 16.87% 18.91% 17.06% 17.23% 17.39%*

- --------
* Denoted ratios from 1995 are for First Jermyn Corp., the predecessor of First
Liberty. First Liberty's pooled ratios were not available because information
from Upper Valley Bancorp, Inc, which merged into First Jermyn, was not
available.

SELECTED UNAUDITED PRO FORMA FINANCIAL DATA

The following selected unaudited pro forma financial data presents the
combined financial condition of Community Bank System, Citizens National Bank
and First Liberty as of September 30, 2000, assuming that both the merger and
the pending merger between Community Bank and Citizens National Bank had
occurred as of September 30, 2000, after giving effect to certain pro forma
adjustments described in the accompanying notes. The selected unaudited pro
forma financial data also presents the combined historical results of
operations of Community Bank System and First Liberty as if the merger had been
consummated as of the first day of the periods presented. You should recognize
that the pro forma statements of income data contained below do not give effect
to the merger between Community Bank and Citizens National Bank which closed on
January 26, 2001, or any one-time charges, revenue enhancements and cost
reductions that Community Bank System expects to incur or achieve after the
merger.

The unaudited pro forma financial data as of September 30, 2000, and for the
nine months ended September 30, 2000, was prepared from the unaudited financial
statements of Community Bank System and First Liberty for the nine months ended
September 30, 2000. A portion of the unaudited pro forma statement of condition
data as of September 30, 2000 was also prepared from the unaudited financial
statements of Citizens National Bank as of September 30, 2000. The unaudited
pro forma statements of income data for the years ended December 31, 1999, 1998
and 1997 was prepared from the audited financial statements of Community Bank
System and First Liberty for the three-year period ended December 31, 1999.

The merger between Community Bank and Citizens National Bank will be
accounted for using the purchase method of accounting. This means that
Community Bank System will record in its financial statements the fair value of
the assets and liabilities of Citizens National Bank on the date of that
merger. Any excess of the purchase price paid by Community Bank System over the
fair value of Citizens National Bank's recognized assets and liabilities will
be recorded by Community Bank System as goodwill, which will be amortized over
period of up to 15 years as charges to earnings. Under the terms of that
merger, Citizens National Bank was merged into Community Bank, a subsidiary of
Community Bank System. In the transaction, Community Bank System issued
approximately 952,000 shares of its common stock (assuming no exercise of
dissenters' rights) in exchange for all of the Citizens National Bank common
stock issued and outstanding. Of the approximately 952,000 shares of Community
Bank System common stock issued, 648,100 shares were issued from Community Bank
System's treasury stock holdings and the remaining 303,900 shares were issued
from the authorized but unissued shares of Community Bank System common stock.
Community Bank System reissued all of its treasury stock in this transaction.

The merger between Community Bank System and First Liberty is expected to be
accounted for using the pooling of interests method of accounting. Under this
method of accounting, the recorded assets, liabilities, stockholders' equity,
income and expense of Community Bank System and First Liberty are combined and
reflected at their historical amounts. In the merger, First Liberty will be
merged into Community Bank System, which will issue approximately 3,566,000
shares of its common stock (assuming no exercise of dissenters' rights) in
exchange for all of the issued and outstanding shares of First Liberty common
stock. First Liberty's 60,820 shares of treasury stock will be retired and will
not be converted to shares of Community Bank System common stock in the merger.

Community Bank System expects to incur significant one-time merger charges
in connection with the both mergers. In addition, Community Bank System expects
to achieve revenue enhancements and cost reductions after the completion of
transactions. These charges, revenue enhancements and cost reductions are not
reflected in the unaudited selected pro forma financial data. The unaudited
selected pro forma financial data does not purport to represent what the
results of operations or financial position of Community Bank System would
actually have been if the mergers had in fact occurred on such dates or to
project the results of operations or

financial position of Community Bank System for any future period or date. The
information in the tables below should be read in connection with, and are
qualified by reference to, Community Bank System's financial statements and
related notes and management's discussions and analysis contained in the
annual, quarterly and other reports filed with the SEC, and First Liberty's
financial statements and related notes and management's discussions and
analysis contained elsewhere in this document. For information on how to obtain
these reports filed by Community Bank System, please refer to "Where You Can
Find More Information" on page [ ].

Pro Forma Consolidated Statements of Condition

As of September 30, 2000
(Dollars in Thousands)

Pro Forma
Pro Forma Consolidated
Consolidated Community
Community Bank System
Community Bank System Pro Forma Citizens National
Bank System Citizens National First Liberty Pooling Bank
(Historical) Bank(a) (Historical) Adjustments First Liberty
------------ ----------------- ------------- ----------- -----------------

ASSETS
Cash and due from
banks.................. $ 66,643 $ 71,748 $ 14,243 $ 85,991
Investment securities... 719,929 766,703 169,266 935,969
Loans, net of unearned
discount............... 1,081,531 1,141,007 434,479 1,575,486
Less: Reserve for loan
losses............... (14,614) (15,644) (5,493) (21,137)
Intangible assets....... 52,136 65,791 4,374 70,165
All other assets........ 67,955 72,633 29,792 102,425
---------- ---------- -------- ------- ----------
Total assets........ $1,973,580 $2,102,238 $646,661 $ -- $2,748,899
========== ========== ======== ======= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Deposits................ $1,455,391 $1,550,250 $496,962 $ -- $2,047,212
Borrowings.............. 343,100 350,950 86,381 437,331
Company obligated
mandatorily redeemable
preferred securities of
a subsidiary, Community
Capital Trust I,
holding solely junior
subordinated debentures
of Community Bank
System................. 29,822 29,822 0 29,822
Accrued interest and
other liabilities...... 23,291 24,545 3,166 27,711
---------- ---------- -------- ------- ----------
Total liabilities... 1,851,604 1,955,567 586,509 0 2,542,076
Shareholders' equity
Common stock.......... 7,641 7,945 2,009 1,557 (b) 11,511
Surplus............... 33,338 40,723 6,121 (1,753)(b) 45,091
Undivided profits..... 105,252 105,252 55,439 160,691
Accumulated other
comprehensive
income............... (7,249) (7,249) (3,221) (10,470)
Treasury stock at
cost................. (17,006) -- (196) 196 (b) --
---------- ---------- -------- ------- ----------
Total shareholders
equity............. 121,976 146,671 60,152 0 206,823
---------- ---------- -------- ------- ----------
Total liabilities
and capital........ $1,973,580 $2,102,238 $646,661 $ -- $2,748,899
========== ========== ======== ======= ==========

- --------
(a) Reflects the combined financial condition of Community Bank System and
Citizens National Bank on a pro forma basis, assuming that the merger
between Community Bank and Citizens National Bank had occurred as of
September 30, 2000. Also reflects certain pro forma and other adjustments.
(b) Reflects (1) the issuance of approximately 3,566,000 shares of Community
Bank System common stock in exchange for 6,368,460 outstanding shares of
First Liberty common stock, (2) the retirement of 60,820 shares of First
Liberty's treasury stock, and (3) the adjustment of common stock and
surplus to reflect the resulting legal capital of Community Bank System.

PRO FORMA CONSOLIDATED STATEMENTS OF INCOME

For Nine Months Ended September 30, 2000
(Dollars in Thousands)

Pro Forma
Consolidated
Community Pro Forma Community
Bank First Pooling Bank System
System Liberty Adjustments First Liberty(a)
--------- ------- ----------- ----------------

Interest Income:
Interest and fees on loans.... $ 71,068 $25,015 $ 96,083
Interest and dividends on
investments.................. 35,950 8,099 44,049
-------- ------- ---- --------
Total interest income....... 107,018 33,114 0 140,132
-------- ------- ---- --------
Interest expense:
Interest on deposits.......... 36,342 14,649 50,991
Interest on borrowings........ 17,353 4,116 21,469
-------- ------- ---- --------
Total interest expense...... 53,695 18,765 0 72,460
-------- ------- ---- --------
Net interest income............. 53,323 14,349 0 67,672
Less: Provision for loan
losses......................... 5,044 540 5,584
-------- ------- ---- --------
Net interest income after
provision for loan losses.... 48,279 13,809 0 62,088
-------- ------- ---- --------
Other income:
Fiduciary and investment
income....................... 1,858 522 2,380
Service charges on deposit
accounts..................... 5,708 516 6,224
Commissions on investment
products..................... 3,392 0 3,392
Other service charges,
commissions and fees......... 4,639 479 5,118
Investment security gains
(losses)..................... (212) 53 (159)
-------- ------- ---- --------
Total other income.......... 15,385 1,570 0 16,955
-------- ------- ---- --------
Other expenses:
Salary and employee benefits.. 21,378 5,912 27,290
Occupancy expense, net and
equipment & furniture
expense...................... 5,724 1,941 7,665
Amortization of intangible
assets....................... 3,483 126 3,609
Other......................... 11,175 2,593 13,768
-------- ------- ---- --------
Total other expenses........ 41,760 10,572 0 52,332
-------- ------- ---- --------
Income before income taxes...... 21,904 4,807 0 26,711
Income taxes.................... 6,572 1,056 0 7,628
-------- ------- ---- --------
Net income...................... $ 15,332 $ 3,751 $-- $ 19,083
======== ======= ==== ========
Earnings per share: Basic....... $ 2.17 $ 0.59 $ 1.80
Diluted......................... $ 2.14 $ 0.59 $ 1.79
======== ======= ==== ========
Dividends per share............. $ 0.77 $ 0.33 $ 0.71
======== ======= ==== ========

- --------
(a) Does not reflect any one-time charges, revenue enhancements or cost savings
that Community Bank System expects to incur or achieve in connection with
the merger

PRO FORMA CONSOLIDATED STATEMENTS OF INCOME

For Year Ended December 31, 1999
(Dollars in Thousands)

Pro Forma
Consolidated
Community Pro Forma Community Bank
Bank First Pooling System
System Liberty Adjustments First Liberty(a)
--------- ------- ----------- ----------------

Interest Income:
Interest and fees on loans.... $84,853 $30,727 $115,580
Interest and dividends on
investments.................. 39,035 11,832 50,867
------- ------- ---- --------
Total interest income....... 123,888 42,559 0 166,447
------- ------- ---- --------
Interest expense:
Interest on deposits.......... 42,774 19,128 61,902
Interest on borrowings........ 13,173 3,415 16,588
------- ------- ---- --------
Total interest expense...... 55,947 22,543 0 78,490
------- ------- ---- --------
Net interest income............. 67,941 20,016 0 87,957
Less: Provision for loan
losses......................... 5,136 720 5,856
------- ------- ---- --------
Net interest income after
provision for loan losses.... 62,805 19,296 0 82,101
------- ------- ---- --------
Other income:
Fiduciary and investment
income....................... 2,344 666 3,010
Service charges on deposit
accounts..................... 7,013 683 7,696
Commissions on investment
products..................... 1,288 0 1,288
Other service charges,
commissions and fees......... 5,479 670 6,149
Investment security gains
(losses)..................... (638) 225 (413)
------- ------- ---- --------
Total other income.......... 15,486 2,244 0 17,730
------- ------- ---- --------
Other expenses:
Salary and employee benefits.. 26,388 7,212 33,600
Occupancy expense, net and
equipment & furniture
expense...................... 7,384 2,462 9,846
Amortization of intangible
assets....................... 4,615 61 4,676
Other......................... 14,346 4,257 18,603
------- ------- ---- --------
Total other expenses........ 52,733 13,992 0 66,725
------- ------- ---- --------
Income before income taxes...... 25,558 7,548 0 33,106
Income taxes.................... 7,923 1,521 0 9,444
------- ------- ---- --------
Net income...................... $17,635 $ 6,027 $-- $ 23,662
======= ======= ==== ========
Earnings per share: Basic....... $ 2.45 $ 0.95 $ 2.20
Diluted......................... $ 2.42 $ 0.94 $ 2.17
======= ======= ==== ========
Dividends per share............. $ 0.96 $ 0.42 $ 0.89
======= ======= ==== ========

- --------
(a) Does not reflect any one-time charges, revenue enhancements or cost savings
that Community Bank System expects to incur or achieve in connection with
the merger.

PRO FORMA CONSOLIDATED STATEMENTS OF INCOME

For Year Ended December 31, 1998
(Dollars in Thousands)

Pro Forma
Consolidated
Community Pro Forma Community Bank
Bank First Pooling System
System Liberty Adjustments First Liberty(a)
--------- ------- ----------- ----------------

Interest Income:
Interest and fees on loans... $ 82,778 $30,305 $113,083
Interest and dividends on
investments................. 40,160 12,060 52,220
-------- ------- ---- --------
Total interest income...... 122,938 42,365 0 165,303
-------- ------- ---- --------
Interest expense:
Interest on deposits......... 49,669 19,834 69,503
Interest on borrowings....... 8,874 2,839 11,713
-------- ------- ---- --------
Total interest expense..... 58,543 22,673 0 81,216
-------- ------- ---- --------
Net interest income............ 64,395 19,692 0 84,087
Less: Provision for loan
losses........................ 5,123 540 5,663
-------- ------- ---- --------
Net interest income after
provision for loan losses... 59,272 19,152 0 78,424
-------- ------- ---- --------
Other income:
Fiduciary and investment
income...................... 1,922 496 2,418
Service charges on deposit
accounts.................... 6,630 699 7,329
Commissions on investment
products.................... 1,222 0 1,222
Other service charges,
commissions and fees........ 5,307 536 5,843
Investment security gains
(losses).................... 1,959 47 2,006
-------- ------- ---- --------
Total other income......... 17,040 1,778 0 18,818
-------- ------- ---- --------
Other expenses:
Salary and employee
benefits.................... 25,750 7,080 32,830
Occupancy expense, net and
equipment & furniture
expense..................... 7,587 2,426 10,013
Amortization of intangible
assets...................... 4,640 61 4,701
Other........................ 13,899 5,792 19,691
-------- ------- ---- --------
Total other expenses....... 51,876 15,359 0 67,235
-------- ------- ---- --------
Income before income taxes..... 24,436 5,571 0 30,007
Income taxes................... 8,902 1,570 0 10,472
-------- ------- ---- --------
Income before change in
accounting.................... 15,534 4,001 -- 19,535
Cumulative effect of change in
accounting principle, net of
taxes......................... 194 0 194
-------- ------- ---- --------
Net income..................... $ 15,728 $ 4,001 $-- $ 19,729
======== ======= ==== ========
Earnings per share: Basic...... $ 2.08 $ 0.63 $ 1.78
Diluted........................ $ 2.05 $ 0.63 $ 1.76
======== ======= ==== ========
Dividends per share............ $ 0.86 $ 0.35 $ 0.78
======== ======= ==== ========

- --------
(a) Does not reflect any one-time charges, revenue enhancements or cost savings
that Community Bank System expects to incur or achieve in connection with
the merger.

PRO FORMA CONSOLIDATED STATEMENTS OF INCOME

For Twelve Months Ended December 31, 1997
(Dollars in Thousands)

Pro Forma
Consolidated
Community Pro Forma Community Bank
Bank First Pooling System
System Liberty Adjustments First Liberty(a)
--------- ------- ----------- ----------------

Interest Income:
Interest and fees on loans... $ 71,563 $29,350 $100,913
Interest and dividends on
investments................. 46,065 11,966 58,031
-------- ------- ---- --------
Total interest income...... 117,628 41,316 0 158,944
-------- ------- ---- --------
Interest expense:
Interest on deposits......... 44,590 19,294 63,884
Interest on borrowings....... 10,162 2,281 12,443
-------- ------- ---- --------
Total interest expense..... 54,752 21,575 0 76,327
-------- ------- ---- --------
Net interest income............ 62,876 19,741 0 82,617
Less: Provision for loan
losses........................ 4,480 600 5,080
-------- ------- ---- --------
Net interest income after
provision for loan losses... 58,396 19,141 0 77,537
-------- ------- ---- --------
Other income:
Fiduciary and investment
income...................... 1,725 402 2,127
Service charges on deposit
accounts.................... 5,055 807 5,862
Commissions on investment
products.................... 1,002 0 1,002
Other service charges,
commissions and fees........ 4,040 1,026 5,066
Investment security gains
(losses).................... (14) (191) (205)
-------- ------- ---- --------
Total other income......... 11,808 2,044 0 13,852
-------- ------- ---- --------
Other expenses:
Salary and employee
benefits.................... 22,945 7,460 30,405
Occupancy expense, net and
equipment & furniture
expense..................... 6,154 2,198 8,352
Amortization of intangible
assets...................... 3,703 61 3,764
Other........................ 12,996 4,609 17,605
-------- ------- ---- --------
Total other expenses....... 45,798 14,328 0 60,126
-------- ------- ---- --------
Income before income taxes..... 24,406 6,857 0 31,263
Income taxes................... 8,844 1,737 10,581
-------- ------- ---- --------
Net income..................... $ 15,562 $ 5,120 $-- $ 20,682
======== ======= ==== ========
Earnings per share: Basic...... $ 2.05 $ 0.81 $ 1.87
Diluted........................ $ 2.02 $ 0.80 $ 1.84
======== ======= ==== ========
Dividends per share............ $ 0.76 $ 0.35 $ 0.72
======== ======= ==== ========

- --------
(a) Does not reflect any one-time charges, revenue enhancements or cost savings
that Community Bank System expects to incur or achieve in connection with
the merger.

COMPARATIVE UNAUDITED PER SHARE DATA

The following table shows information, for the periods indicated, about
Community Bank System's and First Liberty's historical net income per share,
dividends per share and book value per share. The table also contains pro forma
information that reflects the merger of Community Bank System and First Liberty
accounted for as a pooling of interests, on the assumption that our two
companies had always been combined for accounting and financial reporting
purposes. The First Liberty pro forma equivalent data was obtained by
multiplying the combined company pro forma information by the exchange ratio of
0.56.

You should read the information in the following table in conjunction with
the historical financial information and related notes contained in the annual,
quarterly and other reports filed by Community Bank System with the SEC, and
the historical financial information of First Liberty included elsewhere in
this document. For information on how to obtain the reports filed by Community
Bank System, please refer to "Where You Can Find More Information" on page [ ].
You should also read this information in conjunction with the pro forma
condensed financial information set forth under the caption "Unaudited Pro
Forma Condensed Financial Statements" on page [ ]. You should not rely on the
pro forma information as being indicative of the results that we will achieve
in the merger.

The information in the table does not reflect the merger between Community
Bank and Citizens National Bank which was completed on January 26, 2001.

Historical Pro Forma
----------------- -------------------
Community First
Bank First Combined Liberty
System Liberty Company Equivalent
--------- ------- -------- ----------

Per Common Share Data:
Basic Net Income
Nine Months Ended September 30, 2000.... $ 2.17 $0.59 $ 1.80 $ 1.01
Year Ended December 31, 1999............ 2.45 0.95 2.20 1.23
Year Ended December 31, 1998............ 2.08 0.63 1.78 1.00
Year Ended December 31, 1997............ 2.05 0.81 1.87 1.05
Diluted Net Income
Nine Months Ended September 30, 2000.... $ 2.14 $0.59 $ 1.78 $ 1.00
Year Ended December 31, 1999............ 2.42 0.94 2.17 1.22
Year Ended December 31, 1998............ 2.05 0.63 1.76 0.99
Year Ended December 31, 1997............ 2.02 0.80 1.84 1.03
Cash Dividends Declared
Nine Months Ended September 30, 2000.... $ 0.77 $0.33 $ 0.71 $ 0.40
Year Ended December 31, 1999............ 0.96 0.42 0.89 0.50
Year Ended December 31, 1998............ 0.86 0.35 0.78 0.44
Year Ended December 31, 1997............ 0.76 0.35 0.72 0.40
Book Value
As of September 30, 2000................ $17.44 $9.36 $17.97 $10.06
As of December 31, 1999................. 15.30 8.99 16.39 9.18

RISK FACTORS

In addition to the other information included in this document, you should
consider the matters described below carefully in determining whether to
approve the merger agreement.

The Value of the Community Bank System Common Stock to be Received in the
Merger May Vary

Upon completion of the merger, each share of First Liberty common stock will
be automatically converted into 0.56 of a share of Community Bank System common
stock. This exchange ratio is fixed and there will be no adjustment even if the
market price of Community Bank System common stock or First Liberty common
stock fluctuates higher or lower. Neither party is permitted to "walk away"
from the merger because of changes in Community Bank System's or First
Liberty's stock price. As a result, the value of the shares First Liberty
shareholders receive in the merger will not be known at the time they vote on
the merger and may go up or down as the market price of Community Bank System
common stock goes up or down. The specific dollar value of Community Bank
System common stock to be received by First Liberty shareholders upon
completion of the merger will depend on the market value of Community Bank
System common stock at the time of completion of the merger. The share price of
Community Bank System common stock is by nature subject to the general price
fluctuations in the market for publicly traded equity securities and have
experienced volatility. We cannot predict the market price of Community Bank
System common stock at any time before the completion of the merger or the
market price of Community Bank System common stock after the completion of the
merger.

We May Fail to Implement the Merger Successfully, Achieve Savings and Realize
the Other Anticipated Benefits from the Merger Because of Difficulties in
Integrating Our Business Operations

The integration of our companies following the merger will be complex and
time-consuming and will present us with challenges. As a result, we may not be
able to operate the combined company as effectively as we expect. We may also
fail to achieve the anticipated potential benefits of the merger as quickly or
as cost effectively as we anticipate or may not be able to achieve those
benefits at all. Specifically, we will face significant challenges integrating
the two companies' organizations, procedures and operations in a timely and
efficient manner and retaining key personnel. In addition, the management of
Community Bank System will have to dedicate substantial effort to integrating
our two companies and, therefore, its focus and resources may be diverted from
other strategic opportunities and from operational matters. We may face similar
difficulties in the integration of Citizens National Bank.

We May Pursue Acquisitions and Investments that Could Adversely Affect Our
Business

In the future, we may continue to make acquisitions of and investments in
businesses that could complement or expand our business. If we identify an
acquisition candidate, we may not be able to successfully negotiate or finance
the acquisition or integrate the acquired businesses into our existing
business. To complete future acquisitions, we may issue equity securities,
incur debt, assume contingent liabilities or have amortization expenses and
write-downs of acquired assets, which could cause our earnings per share to
decline.

Changes in Interest Rates Affect Our Profitability and Assets

Changes in prevailing interest rates may hurt our business. We derive our
income mainly from the difference or "spread" between the interest earned on
loans, securities and other interest-earning assets, and interest paid on
deposits, borrowings and other interest-bearing liabilities. In general, the
larger the spread, the more we earn. When market rates of interest change, the
interest we receive on our assets and the interest we pay on our liabilities
will fluctuate. This can cause decreases in our spread and can affect our
income.

Changes in market interest rate could reduce the value of our financial
assets. Fixed-rate investments, mortgage-backed and related securities and
mortgage loans generally decrease in value as interest rates rise. In addition,
interest rates affect how much money we can lend. For example, when interest
rates rise, loan originations tend to decrease.

If we are unsuccessful in managing the effects of changes in interest rates,
our financial condition and results of operations could suffer.

Regional Economic Factors May Have an Adverse Impact on Our Business.

Substantially all of Community Bank System's business before the merger is,
and a significant portion of our business after the merger will be, with
customers in Upstate New York. Following the merger, a substantial portion of
our business will also be with customers in Northeastern Pennsylvania. Most of
our customers are individuals and small and medium-sized businesses which are
dependent upon the regional economy. Adverse changes in economic and business
conditions in our markets could adversely affect our borrowers, their ability
to repay their loans and to borrow additional funds or buy financial services
and products from us, and consequently our financial condition and performance.

We Face Strong Competition from Other Banks and Financial Institutions which
Can Hurt Our Business

We conduct our banking operations in a number of competitive local markets.
In those markets, we compete against commercial banks, savings banks, savings
and loans associations, credit unions, mortgage banks, brokerage firms, and
other financial institutions. Many of these entities are larger organizations
with significantly greater financial, management and other resources than we
have, and they offer the same or similar banking or financial services that we
offer in our markets. Moreover, new and existing competitors may expand their
business in or into our markets. Increased competition in our markets may
result in a reduction in loans, deposits and other sources of our revenues.
Ultimately, we may not be able to compete successfully against current and
future competitors.

We Depend on Dividends from Our Banking Subsidiaries for Cash Revenues, but
Those Dividends Are Subject to Restrictions

Our ability to satisfy our obligations and pay cash dividends to our
stockholders is primarily dependent on the earnings of and dividends from our
subsidiary banks. However, payment of dividends by the bank subsidiaries is
limited by dividend restrictions and capital requirements imposed by bank
regulations.

Anti-Takeover Provisions May Prevent or Discourage Takeover Attempts in Which
Our Stockholders May Receive a Premium

After the merger, First Liberty shareholders will become stockholders of
Community Bank System. Community Bank System's certificate of incorporation and
by-laws contain provisions that could make it more difficult for a third party
to acquire, or could discourage a third party from attempting to acquire,
control of Community Bank System. These provisions allow Community Bank
System's board to issue, without stockholder approval (subject to rules of the
New York Stock Exchange, if applicable), preferred stock with rights senior to
those of its common stock and impose various procedural and non-procedural
requirements that could make it more difficult to effect certain corporate
actions. The certificate of incorporation of Community Bank System also
provides for a classified or "staggered" board of directors, a supermajority
vote requirement for board and stockholder approval of certain business
combination transactions and a prohibition against written consents in lieu of
a stockholders' meeting.

In addition, under Community Bank System's stockholder protection rights
plan, holders of Community Bank System common stock are entitled to one
purchase right for each outstanding share of common stock they hold,
exercisable under certain specified circumstances involving an unsolicited
offer or attempt to acquire Community Bank System. The purchase rights have the
anti-takeover effect of causing substantial dilution to a person or group that
attempts to acquire Community Bank System on terms not approved by Community
Bank System's board of directors.

The foregoing provisions are intended to avoid costly takeover battles and
lessen Community Bank System's exposure to coercive takeover attempts at a
unfair price, and are designed to maximize shareholder value in connection with
unsolicited takeover attempts. The provisions, however, could reduce the
premium

that potential acquirors might be willing to pay in an acquisition, which may
in turn reduce the market price that investors might be willing to pay in the
future for shares of Community Bank System common stock.

A WARNING ABOUT FORWARD-LOOKING INFORMATION

We have each made forward-looking statements in this document and in certain
documents that we refer to in this document. These forward-looking statements
are subject to risks and uncertainties. These statements are based on the
beliefs and assumptions of each respective company's management, and on
information currently available to that management. Forward-looking statements
include statements preceded by, followed by or that include the words "will,"
"believes," "expects," "anticipates," "intends," "plans," "estimates" or
similar expressions.

Although we believe these forward-looking statements are reasonable, you
should not place undue reliance on the forward-looking statements, which are
based on current expectations. Actual results may differ materially from those
expressed in our forward-looking statements.

Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results of Community Bank
System following completion of the merger may differ materially from those
expressed in these forward-looking statements. You should note that many
factors, some of which are discussed under "Risk Factors", may affect these
results and are beyond our ability to control or predict. For those statements,
we claim the protection of the safe harbor contained in the Private Securities
Litigation Reform Act of 1995.

THE COMPANIES

Community Bank System

Community Bank System is a Delaware corporation registered as a bank holding
company under the Bank Holding Company Act. Community Bank System was
incorporated in April 1983. At September 30, 2000 and after giving pro forma
effect to the merger between Community Bank and Citizens National Bank, which
closed on January 26, 2001, Community Bank System had on a consolidated basis
approximately $2.1 billion in total assets, $1.55 billion in total deposits,
$1.13 billion in total loans and shareholders' equity of $147 million. Its
common stock is publicly traded on the New York Stock Exchange under the symbol
CBU. Community Bank System, with its principal executive offices in DeWitt, New
York, is the parent company of Community Bank.

Community Bank is a commercial banking franchise headquartered in Canton,
New York, with 72 customer facilities and 54 ATM's stretching diagonally from
Northern New York to the Southern Tier and west to Lake Erie. Community Bank is
a national bank and a member of the Federal Reserve System and the Federal Home
Loan Bank System, and its deposits are insured by the Federal Deposit Insurance
Corporation, up to applicable limits.

Community Bank is committed to serving the financial needs of customers in
local communities within its market areas. Community Bank makes 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.
However, Community Bank focuses predominantly on the retail borrowers, which
enables its loan portfolio to be highly diversified.

The subsidiaries of Community Bank provide treasury management services,
securities brokerage, investment management services, insurance products, and
pension administration and consulting services.

For additional information concerning the business of Community Bank System
and its financial condition, results of operations and prospects, you should
refer to the documents incorporated in this document by reference. See "Where
You Can Find More Information" on page [ ].

First Liberty

Business

First Liberty is a Pennsylvania business corporation registered as a bank
holding company under the Bank Holding Company Act. First Liberty was
incorporated in February 1994. At September 30, 2000 and on a consolidated
basis, First Liberty had approximately $647 million in total assets, $497
million in total deposits, $429 million in total loans and shareholders' equity
of $60 million. First Liberty's common stock is publicly traded in the over-
the-counter market under the symbol FLIB and is quoted on the OTC Bulletin
Board, an electronic quotation service for securities not quoted on Nasdaq.

First Liberty, with its principal executive offices in Jermyn, Pennsylvania,
is the parent company of First Liberty Bank & Trust. First Liberty Bank is a
Pennsylvania-chartered banking institution with trust powers. It serves
Lackawanna and Luzerne Counties in Northeastern Pennsylvania through 13 banking
offices and 16 ATMs. First Liberty Bank or its predecessors have been in
operation continuously since 1902. First Liberty Bank's deposits are insured by
the Federal Deposit Insurance Corporation, up to applicable limits.

Through its branch system, First Liberty Band provides various community
oriented domestic lending and depository services to fit both commercial and
individual needs. Lending services include commercial and individual real
estate mortgage and construction loans, secured and unsecured loans and lines
of credit. Deposit services include savings, club, money market, NOW, checking
and certificate of deposit accounts. First Liberty Bank has experienced a
relatively stable deposit base and no material amount of deposits is obtained
from a single depositor or group of depositors, including government entities.

For additional information concerning the business of First Liberty and its
financial condition, results of operations and prospects, you should refer to
the documents First Liberty has filed with the SEC. See "Where you can find
More Information" on page [ ].

Properties

First Liberty Bank presently conducts its business through its main branch
office located at 645 Washington Avenue, Jermyn, Pennsylvania and the following
additional branch offices:

. Keyser Avenue Branch (1700 N. Keyser Avenue, Scranton, Pennsylvania);

. Jessup Branch (210 Church Street, Jessup, Pennsylvania);

. Minooka Branch (500 Davis Street, Scranton, Pennsylvania);

. Carbondale Branch (67 Salem Avenue, Carbondale, Pennsylvania);

. Daleville Branch (Route 502, Moscow, Pennsylvania);

. Olyphant Branch (128 Lackawanna Avenue, Olyphant, Pennsylvania);

. Wyoming Avenue Branch (1300 Wyoming Avenue, Scranton, Pennsylvania);

. Pittston Branch (45 S. Main Street, Pittston, Pennsylvania);

. Kingston Branch (480 Pierce Street, Kingston, Pennsylvania);

. Dickson City Branch (901 Commerce Boulevard, Dickson City,
Pennsylvania);

. Spruce Street Branch (400 Spruce Street, Scranton, Pennsylvania); and

. Clarks Summit Branch (100 Old Lackawanna Trail Road, Clarks Summit,
Pennsylvania).

All of these branches are owned by First Liberty Bank, except for First
Liberty's main office, the Keyser Avenue branch, the Pittston branch, the
Kingston branch, the Spruce Street branch and the Clarks Summit branch, which
are leased. The leases for the main office in Jermyn and for the Keyser Avenue
branch and the Spruce Street branch expire in 2004. The leases for the
Kingston, the Clarks Summit and Pittston branches expire in 2002, 2007 and
2010, respectively.

Legal Proceedings

First Liberty and First Liberty Bank are not involved in any legal
proceedings other than routine nonmaterial legal proceedings occurring in the
ordinary course of business.

Information Concerning First Liberty Directors and Officers

The following table sets forth information concerning directors of First
Liberty and executive officers of First Liberty who are not also directors,
including their principal occupations or employment during the past five years
and their ownership of First Liberty common stock, as of [ ], 2001, the
record date for the First Liberty special meeting of shareholders. The
following includes information with respect to persons known by First Liberty
to have beneficially owned 5% or more of the outstanding shares of First
Liberty common stock as of the record date.

Sole Shared Percent of
Name and Principal Age and Voting and Voting and Total Shares Total
Occupation During Past Position Investment Investment Beneficially Shares
Five Years Since(1) Power Power Owned Outstanding
- ---------------------- -------- ---------- ---------- ------------ -----------

CLASS I DIRECTORS
Kuzma Leschak, Jr....... 75 -- 18,500 38,700(2) .6%
Jermyn, PA 1950
Chairman, Board of
Directors
I. Leo Moskovitz........ 95 4,000 -- 101,200(3) 1.6
Jermyn, PA 1953
Retired President of
Predecessor to First
Liberty Bank
Michael A. Barbetti..... 52 6,612 3,524 17,120(4) 3
Scranton, PA 1991
Certified Public
Accountant
Norman E. Woodworth..... 70 46,056 -- 108,584(5) 1.7
Peckville, PA 1985
Retired
Fred J. Gentile......... 73 927 36,128 48,079(6) .7
Lake Ariel, PA Retired 1966

CLASS II DIRECTORS
Edmund J. Biancarelli... 86 3,600 137,700 141,300 2.2%
Jessup, PA 1964
Medical Doctor
William M. Davis........ 64 2,000 90,828 95,288(7) 1.5
Jermyn, PA 1966
President and CEO of
First Liberty and First
Liberty Bank
William K. Nasser, Jr... 47 5,636 2,628 12,504(8) 0.2
Dunmore, PA
President, Nasser & Co. 1997
Peter A. Sabia.......... 68 108 308,795 400,308(9) 6.3
Dunmore, PA 1984
Owner of Valley Dodge
Truck Center
Thomas G. Speicher...... 53 -- 25,456 27,456(10) 0.4
Archbald, PA 1996
President and CEO of TR
Associates
Steven R. Tokach........ 53 1,000 20,720 21,720 0.3
Mountaintop, PA
Executive Vice President
of First Liberty and
First Liberty Bank 1997

CLASS III DIRECTORS
David M. Epstein,
Esquire................ 61 14,848 -- 79,168(11) 1.2%
Charlotte, NC
Attorney 1985
Robert T. Kelly......... 73 91,280 -- 92,660(12) 1.4
Jessup, PA 1971
Certified Public
Accountant
Harold P. McGovern...... 41 11,466 -- 11,466 0.2
Carbondale, PA 1998
President,
McGovern Insurance
Agency
Saul Kaplan(13)......... 74 880,318 -- 891,342(14) 13.9
Scranton, PA Owner, 1974
Montage Foods

Harold Kaplan(13)....... 66 209,728 -- 220,752(15) 3.4
Dalton, PA Owner, 1986
Montage Foods
Joseph P. Coviello...... 50 548 43,100 54,672(16) 0.9
Clarks Summit, PA 1990
Attorney

EXECUTIVE OFFICERS
Richard Masucci......... 52 -- -- 5,512(17) --
Senior Vice President of 1998
First Liberty Bank
Joseph R. Solfanelli.... 55 500 -- 500 --
Executive Vice President 2000
of First Liberty Bank
since May 2000; prior
thereto, General
Counsel of First
Liberty Bank since
September 1998; prior
thereto, private
attorney
All Directors and
Officers as a group (19
Persons)............... -- 1,278,127 688,519 2,368,331(18) 36.8

- --------
(1) Includes period served as a director of predecessor institutions of First
Liberty and First Liberty Bank.
(2) Includes 20,200 shares owned in various capacities by his children.
(3) Includes 97,200 shares owned individually by his spouse.
(4) Includes 924 shares owned individually by his spouse and 6,060 shares owned
by his son.
(5) Includes 43,045 shares owned individually by his spouse and 11,448 shares
owned by his children. Also includes 8,024 shares that he has right to
acquire pursuant to vested options.
(6) Includes 11,024 shares that he has right to acquire pursuant to vested
options.
(7) Includes 2,400 shares in a self-directed individual retirement account.
(8) Includes 400 shares owned by his children and 3,840 shares held in a self-
directed individual retirement account.
(9) Includes 91,405 shares owned in various capacities by his children.
(10) Includes 2,000 shares held in a self-directed individual retirement
account.
(11) Includes 19,000 shares owned by his mother and 45,320 shares owned
individually by his spouse.
(12) Includes 1,380 shares owned individually by his spouse.
(13) Saul Kaplan and Harold Kaplan are brothers.
(14)Includes 11,024 shares that he has right to acquire pursuant to vested
options.
(15)Includes 11,024 shares that he has right to acquire pursuant to vested
options.
(16)Includes 11,024 shares that he has right to acquire pursuant to vested
options.
(17)Represents shares he has right to acquire pursuant to vested stock options.
(18) Includes an aggregate of 57,632 shares that certain directors and
executive officers of First Liberty have right to acquire pursuant to
vested options.

The board of directors of First Liberty is identical to the board of
directors of First Liberty Bank. First Liberty Bank holds bimonthly meetings.
Each non-employee director of First Liberty Bank receives $1,000 per meeting
held unless the director fails to attend two meetings during the year, in which
case the director is paid thereafter only for meetings actually attended. First
Liberty does not pay directors' fees.

Certain Relationships and Related Transactions

Certain directors and executive officers of First Liberty, and associates of
such persons (including corporations of which such persons are officers or 10%
beneficial owners), were customers of and had transactions with First Liberty
Bank in the ordinary course of business during 1999. All loans made to those
persons were made in the ordinary course of business on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with other persons, and did not involve more than
the normal risks of collectibility or present other unfavorable features. It is
expected that any other transactions with directors and officers and their
associates in the future will be conducted on the same basis.

Management's Discussion and Analysis of Financial Condition and Results of
Operations

Forward-Looking Statements

The discussions below include certain "forward-looking statements"
concerning the future operations of First Liberty. It is management's desire to
take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. This statement is for the express purpose of
availing First Liberty of the protections of the safe harbor with respect to
all forward-looking statements contained in the discussion in this section.
Forward looking statements describe the future plans and strategies including
expectations of First Liberty's future financial results. Management's ability
to predict results or the effect of future plans and strategy is inherently
uncertain. Factors that could affect results include interest rate trends,
competition, the general economic climate in Northeastern Pennsylvania, the
mid-Atlantic region and country as a whole, loan delinquency rates, and changes
in federal and state regulation. These factors should be considered in
evaluating the forward-looking statements, and undue reliance should not be
placed on such statements.

For the Nine Months Ended September 30, 2000 and 1999

Overview

First Liberty's net income for the nine months ended September 30, 2000 was
$3.8 million or $.59 per diluted share compared to $4.7 million and $.74 per
diluted share for the same nine month period in the preceding year. The
decrease in net income was primarily attributable to a decrease in net interest
income, combined with an increase in noninterest expense.

First Liberty recorded an annualized return on average assets of .63% for
the nine-month period ended September 30, 2000, compared to 1.01% for the same
period in 1999. Return on average equity of 6.60% was recorded for the nine-
month period ended September 30, 2000, compared to 10.80% for the same period
in 1999.

At September 30, 2000, First Liberty had total assets of $646.7 million
compared to $653.3 million at December 31, 1999. The decline in total assets
primarily represents maturities and sales of securities with the proceeds used
to fund repayments of other borrowings.

First Liberty is susceptible to a continued increasing interest rate
environment that may erode the net interest margin. Strategies to enhance
earnings and improve the interest rate exposure of First Liberty will be
considered, such as the sale of existing mortgage-backed securities available
for sale and purchasing higher yielding, rate sensitive assets with the
proceeds.

First Liberty's wholly owned subsidiary, First Liberty Bank, is one of the
largest independent community banks in Northeastern Pennsylvania.

Financial Condition

Cash and Due from Banks and Federal Funds Sold

Cash and due from banks decreased approximately $11.8 million to $14.2
million at September 30, 2000 from $26.0 million at December 31, 1999 as First
Liberty utilized excess liquidity to pay down other borrowed money.

Securities

Securities available for sale have decreased $16.6 million or 9.0% to $169.3
million from $185.9 million at December 31, 1999. This decrease was primarily
driven by the maturity of $2.1 million, the sale of $5.3 million, and paydowns
received of $11.2 million of the securities available for sale portfolio. These
proceeds were used to pay down other borrowings and to fund loan growth.

Loans Receivable, Net

Aggregate loans receivable totaled $435.1 million at September 30, 2000, an
increase of $17.9 million from $417.2 million at December 31, 1999. This
increase is primarily a result of approximately $10.4 million in commercial and
$10.6 million in commercial real estate loan originations during the nine
months ended September 30, 2000.

Non-Performing Assets

First Liberty's total non-performing assets decreased approximately $325,000
to $1.8 million or .28% of total assets at September 30, 2000 as compared to
$2.2 million or .33% of total assets at December 31, 1999. Loans greater than
ninety days delinquent but still accruing increased from $154,000 at December
31, 1999 to $302,000 at September 30, 2000. Non-accrual loans decreased
approximately $380,000 to $1.1 million due in part to two commercial properties
being transferred to other real estate owned in addition to $229,000 in loan
charge offs.

Real estate owned and repossessed assets decreased from $558,000 at December
31, 1999 to $465,000 as of September 30, 2000, due to the sale of five
residential properties from the real estate owned portfolio. This was offset by
the addition of three properties into the real estate owned portfolio and the
transfer off our vehicles into repossessed assets. There were no significant
gains or losses on the sale of real estate owned during the nine months ended
September 30, 2000.

9/30/00 12/31/99
---------- ----------

Nonaccrual............................................ $1,066,000 $1,446,000
Loans 90 day or more delinquent....................... $ 302,000 $ 154,000
Restructured.......................................... -- --
---------- ----------
Total non-performing loans.......................... $1,368,000 $1,600,000
Real estate owned & repossessed assets................ 465,000 558,000
---------- ----------
Total non-performing assets......................... $1,833,000 $2,158,000

At September 30, 2000, First Liberty's allowance for loan losses amounted to
$5.5 million or 1.26% of gross loans receivable. At December 31, 1999, First
Liberty's allowance for loan losses was $5.1 million or 1.22% of gross loans
receivable. The allowance for loan losses as of September 30, 2000 is an amount
that management believes will be adequate to absorb known and inherent losses
on existing loans, based on periodic evaluations of the loan portfolio by
management. These evaluations take into consideration such factors as changes
in the nature and volume of the loan portfolio, overall portfolio quality,
review of specific problem loans, current economic conditions that may affect
the borrower's ability to pay and other relevant matters.

Deposits

Deposits increased $12.5 million or 2.6% from $484.4 million at December 31,
1999 to $496.9 million at September 30, 2000. A primary reason for the increase
in deposits is the purchase of the Mellon branches in the beginning of the
third quarter.

Equity

At September 30, 2000, total equity was $60.2 million or 9.3% or total
assets compared to $57.2 million or 8.8% of total assets as of December 31,
1999. Total equity increased partially due to the retention of net income
during the intervening period. In addition, there was an increase in
accumulated other comprehensive income due to market changes in the securities
available for sale portfolio.

Results of Operations

Net Income

First Liberty's net income for the three months ended September 30, 2000
decreased to $1.2 million compared to $1.7 million for the three months ended
September 30, 1999 primarily due to declines in both net interest income and
non-interest income.

First Liberty's net income was $3.8 million for the nine months ended
September 30, 2000, compared to $4.7 million recorded in the comparable prior
period. This $900,000 decrease was also primarily due to declines in both net
interest income and non-interest income.

Net Interest Income

Net interest income before provision for loan losses amounted to $4.7
million and $14.3 million for the three-month and nine-month periods ended
September 30, 2000 versus $5.1 million and $15.1 million for the comparable
prior periods ended September 30, 1999.

Total interest income increased to $11.2 million and $33.1 million for the
three and nine-month periods ended September 30, 2000 from $10.8 million and
$31.7 million during the comparable prior periods. The average interest-earning
assets increased $10.8 million for the nine months ended September 30, 2000
compared to the nine months ended September 30, 1999. In addition the yield
earned on the average interest-earning assets increased 20 basis points during
the nine months ended September 30, 2000 compared to the 1999 period.

Total interest expense increased to $6.4 million and $18.8 million for the
three and nine months ended September 30, 2000 from $5.6 million and $16.6
million for the comparable prior period. The increase for the three-month
period is primarily due to an increase in interest expense on federal funds
purchased, offset by a decrease in interest expense on capitalized lease
obligations and borrowed funds. The increase for the nine-month period is
primarily due to the average balance of federal funds purchased and other
borrowings increasing by $33.9 million during the nine months ended September
30, 2000, compared to the comparable 1999 period. In addition, for the nine-
months ended September 30, 2000 average rates paid on deposits and federal
funds purchased/other borrowings increased 25 and 76 basis points,
respectively, compared to the comparable 1999 period.

Provision for Loan Losses

First Liberty establishes a provision for loan losses, which is charged to
operations, in order to maintain the allowance for loan losses at a level which
is deemed to be appropriate based upon an assessment of prior loss experience,
the volume and type of lending presently being conducted by First Liberty,
industry standards, past due loans, economic conditions in First Liberty's
market area generally and other factors related to the collectibility of First
Liberty's loan portfolio. First Liberty's provision for loan losses remained
consistent at $180,000 for the three months ended September 30, 2000 and
September 30, 1999, as well as for the nine months ended September 30, 2000 and
September 30, 1999, at $540,000. Although management utilizes its best judgment
in providing for inherent losses, there can be no assurance that First Liberty
will not have to increase its provisions for loan losses in the future as a
result of the future increases in non-performing loans or for other reasons
which could adversely affect First Liberty's results of operations. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the allowance for loan losses. Such agencies may
require First Liberty to recognize additions to the allowance for loan losses
based on their judgments of information which is available to them at the time
of their examination.

Noninterest Income

Noninterest income for the three and nine month periods ended September 30,
2000 was $568,000 and $1.6 million compared to $699,000 and $1.8 million for
the same periods in the prior year. The decrease for the three month period was
the result of a $138,000 decrease in gains on sale of securities combined with
a $35,000 decrease in other noninterest income offset by a $19,000 increase in
service charges and fees and a $23,000 increase in trust income. The decrease
over the nine month period was due to a $172,000 decrease in gains on sale of
securities and a $51,000 decrease in other noninterest income offset by a
$30,000 increase in trust income.

Noninterest Expense

Noninterest expenses for the three month period ended September 30, 2000
increased $87,000 to $3.6 million from the same period in the prior year, while
over the nine month period ended September 30, 2000 noninterest expenses
increased $295,000 to $10.6 million from the same period in the prior year. The
increase over the three month period was primarily the result of a $164,000
increase in salaries and benefits and $27,000 increase in foreclosure and other
real estate expenses offset by a $144,000 decrease in other expenses. The
increase over the nine month period was the result of the $532,000 and $147,000
increases in salaries and benefits and net occupancy and furniture/equipment
expenses, respectively, as a result of opening three additional branches. The
increases were offset by a $106,000 decrease in data processing services and a
$267,000 decrease in other expenses. The decrease in data processing services
was primarily the result of First Liberty reconfiguring certain vendor
contracts to realize efficiencies permitted by the merger of the two
predecessor banks into First Liberty Bank.

Income Taxes

Income tax expense totaled $331,000 and $1.1 million for the three and nine-
month periods ended September 30, 2000 compared to $430,000 and $1.3 million
for the comparable prior periods. These amounts resulted in effective tax rates
calculated at 22.1% for the three months and 22.0% for the nine months ended
September 30, 2000, compared to 20.3% for the three months ended September 30,
1999 and 21.2% for the nine months ended September 30, 1999. Over the three-
and nine-month periods ended September 30, 2000, First Liberty has decreased
their holdings of municipal securities.

Liquidity and Capital Adequacy

First Liberty's primary source of funds on long term and short term basis
are deposits, principal and interest payments on loans, mortgage backed
securities, and advances from the Federal Home Loan Bank. First Liberty uses
the funds generated to support its lending and investment activities as well as
any other demands for liquidity such as deposit out flows.

First Liberty has continued to maintain the required levels of liquid assets
as defined by federal regulations.

Shareholders' equity increased $3.0 million to $60.2 million at September
30, 2000. It is management's intention to continue paying a reasonable return
on shareholders' investment while retaining adequate earnings to allow for
future growth.

The Federal Reserve Board measures capital adequacy for bank holding
companies by using a risk-based capital frame-work and by monitoring compliance
with minimum leverage ratio guidelines. The minimum ratio of total risk-based
capital to risk-adjusted assets is 8% at September 30, 2000, of which 4% must
be Tier I

capital. First Liberty's total risk-based capital ratio was 15.79% at September
30, 2000. First Liberty's Tier I risk-based capital ratio was 14.54% at
September 30, 2000.

In addition, the Federal Reserve Board has established minimum leverage
ratio guidelines for bank holding companies. These guidelines provide for a
minimum leverage ratio of 3% for bank holding companies that meet certain
criteria, including that they maintain the highest regulatory rating. All other
bank holding companies are required to maintain a leverage ratio of 3% plus an
additional cushion of at least 100 to 200 basis points. The Federal Reserve
Board has not advised First Liberty of any specific minimum leverage ratio
applicable to it. First Liberty's leverage ratio was 9.19% at September 30,
2000.

The Federal Deposit Insurance Corporation Improvement Act, or FDICIA,
establishes minimum capital requirements for all depository institutions and
established five capital tiers: "well capitalized," "adequately capitalized,"
"under-capitalized," "significantly under-capitalized," and "critically under-
capitalized." FDICIA imposes significant restrictions on the operations of a
bank which is not at least adequately capitalized. A depository institutions'
capital tier will depend upon where its capital levels are in relation to
various other capital measures which include a risk-based capital measure, a
leverage ratio capital measure and other factors. Under regulations adopted,
for an institution to be well capitalized it must have a total risk-based
capital ratio of at least 10%, a Tier I risk-based capital ratio of at least
6%, and a Tier I leverage ratio of at least 5%, and not be subject to any
specific capital order or directive.

At September 30, 2000, the First Liberty Bank's total risk-based capital,
Tier I risk-based capital and Tier I leverage ratios were 15.39%, 14.14% and
9.16%, respectively.

Market Risk and Interest Rate Risk

First Liberty uses simulation analysis to help monitor and manage interest
rate risk. In this analysis First Liberty examines the result of 100, 200 and
300 basis point change in market interest rates and the corresponding effect on
net interest income. It is assumed that the change is instantaneous and that
all rates move in a parallel manner. In addition, it is assumed that rates on
core deposit products such as NOWs, savings accounts, and the money market
deposit accounts will be adjusted by 50% of the assumed rate change.
Assumptions are also made concerning prepayment speeds on mortgage loans and
mortgage securities. The results of this rate shock are a useful tool to assist
First Liberty in assessing interest rate risk inherent in their balance sheet.

The results of this rate shock analysis as of September 30, 2000 are as
follows:

Net Interest
Income Change
(After tax,
Change in Rate in thousands)
-------------- -------------

+300 (3,342.2)
+200 (2,229.0)
+100 (1,110.0)
-100 937.6
-200 1,673.0
-300 2,262.2

For the Years Ended December 31, 1999, 1998 and 1997

Introduction and Business

The following discussion and analysis presents the significant changes in
the results of operations and financial condition for the periods shown. The
discussion should be read in conjunction with First Liberty's consolidated
financial statements and notes included elsewhere in this document. Tabular
information is presented in thousands of dollars, except as indicated.

At December 31, 1999, First Liberty owned all of the outstanding common
stock of its bank subsidiary, First Liberty Bank. First Liberty formed a non-
bank subsidiary, First of Jermyn Realty Company, Inc., during 1990. However,
this subsidiary has been inactive since inception.

Acquisition

On June 30, 1998, First Liberty consummated its acquisition of Upper Valley
Bancorp, Inc., the holding company of National Bank of Olyphant, or NBO. NBO
was, as of December 31, 1998, a $263 million national-chartered bank with three
branches in Olyphant, Scranton, and Pittston, Pennsylvania. Upper Valley
shareholders received .689 shares of First Liberty common stock for each Upper
Valley share owned.

The transaction was accounted for as a pooling of interests and all prior
periods have been restated to reflect the acquisition. The total value of the
transaction was approximately $52.1 million based upon First Liberty's stock
price prior to finalization of the acquisition. As a result of this
acquisition, First Liberty recognized merger-related expenses of $1,098,000 in
the second quarter of 1998.

First Liberty operated and managed First National Bank of Jermyn, or FNBJ,
and NBO as separate subsidiaries and segments until approximately the first
quarter of 1999.

On February 16, 1999, First Liberty merged FNBJ and NBO under the name of
"First Liberty Bank & Trust." Concurrent with this merger, First Liberty
changed its bank charter from a national bank to a state-chartered commercial
bank subject to regulation by the Pennsylvania Department of Banking. First
Liberty Bank operates a branch bank system located in Lackawanna County,
Pennsylvania. First Liberty Bank offers all services normally provided by a
community bank, including deposit, safekeeping, loan functions, and trust
services through its branch systems.

Results of Operations

Net income for 1999 was $6,027,000, an increase of 50.64% from the prior
year. This increase was primarily attributable to a non-recurring charge of
approximately $1.1 million recorded in 1998 for merger related costs. In
addition, income for Trust services and gains on the sale of securities
increased in 1999. The following Table (Table I) presents the amount and
percentage of increase (decrease) for the major components of net income for
the years under review.

Table I

Increase (Decrease)

1999 vs. 1998 1998 vs. 1997
---------------- ----------------
Amount Percent Amount Percent
------- ------- ------- -------

Interest income.......................... $ 194 .46% $ 1,049 2.54%
Interest expense......................... (130) (.57)% 1,098 5.09%
Net interest income...................... 324 1.65% (49) (.25)%
Provision for loan losses................ 180 33.33% (60) (10.00)%
Net interest income after provision for
loan losses............................. 144 .75% 11 .06%
Noninterest income....................... 466 26.21% (266) (13.01)%
Noninterest expense...................... (1,367) (8.90)% 1,031 7.20%
Income before federal income tax
provision............................... 1, 977 35.49% (1,286) (18.75)%
Federal income tax provision............. (49) (3.12)% (167) (9.61)%
Net income............................... $ 2,026 50.64% $(1,119) (21.86)%

Net Interest Income

Table II illustrates average balances and the average tax-equivalent yield
earned by First Liberty Bank on its interest-earning assets and the average
interest rate associated with its interest-bearing liabilities for 1999, 1998,
and 1997. Table III exhibits the volume and yield/rate variances for interest-
earning assets and interest-bearing liabilities.

Table II

Average Balances And Rates

1999 1998 1997
------------------------ ------------------------ ------------------------
Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ------ -------- -------- ------ -------- -------- ------

Interest earning assets:
Loans..................
Commercial, Financial,
real estate and
agriculture........... $159,434 $12,733 7.99% $107,387 $ 8,240 7.67% $ 96,831 $ 8,178 8.45%
Real estate--
residential Mortgage.. 161,943 12,288 7.56% 191,988 15,589 8.12% 191,361 15,767 8.24%
Installment--net....... 71,108 5,979 8.41% 68,247 6,522 9.56% 62,418 5,606 8.98%
Total loans (including
fees)................ 392,485 31,000 7.90% 367,622 30,351 8.26% 350,610 29,551 8.43%
Securities:
Taxable................ 152,116 9,163 6.02% 140,474 8,453 6.02% 152,307 9,465 6.22%
Tax-exempt............. 42,112 3,268 7.76% 46,456 3,574 7.69% 34,151 2,678 7.84%
Total Securities...... 194,228 12,431 6.40% 186,930 12,027 6.43% 186,458 12,143 6.51%
Federal Funds sold..... 1,532 73 4.77% 11,214 606 5.40% 12,964 718 5.54%
Interest-bearing
deposits in banks...... 9,759 439 4.50% 11,285 642 5.69% 290 16 5.52%
Total Interest-earning
assets................ 598,004 $43,943 7.35% 577,051 $43,626 7.56% 550,322 $42,428 7.71%
Noninterest-earning
assets................. 34,839 29,133 29,070
TOTAL ASSETS.......... $632,843 $606,184 $579,392
Interest-bearing
liabilities:
Deposits Savings, Club,
NOW, and money market
accounts.............. $144,520 $ 3,142 2.17% $149,019 $ 3,532 2.37% $161,590 $ 4,310 2.67%
Certificates of
deposits.............. 310,566 15,986 5.15% 299,118 16,302 5.45% 275,296 14,984 5.44%
Total Interest-bearing
Deposits............... 455,086 19,128 4.20% 448,137 19,834 4.43% 436,886 19,294 4.42%
Federal Funds
Purchased............. 5,603 306 5.46% 30 1 3.33% 38 2 7.89%
Borrowed Funds......... 54,949 3,047 5.55% 50,031 2,767 5.53% 38,309 2,201 5.75%
Capitalized lease
obligation............ 610 62 10.16% 699 71 10.16% 779 78 10.0%
Total Interest-bearing
liabilities........... 516,248 $22,543 4.37% 498,897 $22,673 4.55% 476,012 $21,575 4.53%
Noninterest bearing
liabilities........... 57,992 50,619 50,008
Shareholders' Equity... 58,603 56,668 53,372
TOTAL LIABILITIES AND
SHAREHOLDERS'
EQUITY............... $632,843 $606,184 $579,392
Net Interest Income.... $21,400 $20,953 $20,853
Interest rate spread... 2.98% 3.01% 3.18%
Margin Analysis:
Interest
Income/interest--
earning assets........ 7.35% 7.56% 7.71%
Interest
Expense/interest--
earning assets........ 3.77% 3.93% 3.92%
Net Interest
Income/interest--
earning assets........ 3.58% 3.63% 3.79%
Tax Equivalent
Adjustments:
Loans.................. $ 273 $ 46 $ 201
Securities............. 1,111 1,215 911
Total................. $ 1,384 $ 1,261 $ 1,112

- --------
(1) Installment loans are stated net of unearned income.
(2) Average loan balances include non-accrual loans.
(3) Average balances represent average daily balances.
(4) Yields on securities available for sale were computed using historical
amortized cost.

Table III

Volume and Yield/Rate Variances

1999 compared to 1998 1998 compared to 1997
----------------------- --------------------------
Volume Yield/Rate Net Volume Yield/Rate Net
------ ---------- ---- ------ ---------- -------

Interest income:
Loans................... $2,059 $(1,410) $649 $1,434 $ (634) $ 800
Securities..............
Taxable................. 710 -- 710 (736) (276) (1,012)
Tax-exempt.............. (335) 29 (306) 964 (68) 896
Federal funds sold...... (523) (10) (533) 97 (209) (112)
Interest-bearing
deposits in banks...... (87) (116) (203) 607 19 626
------ ------- ---- ------ ------- -------
Total interest-earning
assets............... 1,824 (1,507) 317 2,367 (1,169) 1,198
Interest expense:
Savings, Club, NOW, and
money market accounts.. (105) (285) (390) (336) (442) (778)
Certificates of
deposit................ 621 (937) (316) 1,295 23 1,318
Federal funds
purchased.............. 186 119 305 (1) (0) (1)
Borrowed Funds.......... 269 11 280 674 (108) 566
Capitalized lease
obligation............. (9) -- (9) (8) 1 (7)
------ ------- ---- ------ ------- -------
Total interest-bearing
liabilities.......... 962 (1,092) (130) 1,624 (526) 1,098
------ ------- ---- ------ ------- -------
Net interest income....... $ 862 $ (415) $447 $ 743 $ (643) $ 100

- --------
(1) The change in interest due to both volume and yield/rate has been allocated
to change due to volume and change due to yield/rate in proportion to the
absolute value of change in each.
(2) Balances of non-accrual loans and related income recognized have been
included for computation purposes.
(3) Tax-exempt income has been converted to a tax-equivalent basis using an
incremental rate of 34% in each of the three years.

The increase in 1999 taxable equivalent interest income was driven by
increased average balances of loans and taxable securities, partially offset by
decreases in the yields on all earning asset categories, except tax-exempt
securities and commercial real estate loans. The increase in 1998 taxable
equivalent interest income as compared to 1997 was primarily due to a similar
positive volume and negative rate relationship. The 1999 decrease in interest
expense was primarily due to decreased rates on certificates of deposit and
savings and NOW deposits, while the 1998 increase in interest expense was
primarily due to higher balances of certificates of deposit and borrowed funds.

As shown in Table II and III, 1999 taxable-equivalent net interest income
increased $447,000 (2.1%) compared to 1998. Interest income increased $317,000
and interest expense decreased $130,000. The 1999 net interest margin was 3.58%
(5 basis points below 1998). The decline in the net interest margin was a
result of competitive pressures and federal monetary policy causing
yields/rates to decrease for total interest-earning assets to greater degree
than the decrease seen on rates for total interest-bearing liabilities.

Taxable-equivalent net interest income for 1998 increased $100,000 (0.5%)
over 1997. Interest income increased $1,198,000 and interest expense increased
$1,098,000. The 1998 net interest margin was 3.63% (16 basis points below
1997). The decline in the net interest margin was a result of competitive
pressures causing yields/rates to increase for total interest-bearing
liabilities and decrease for total interest-earning assets. Net interest income
as a percentage of interest income also fell in 1998 compared to 1997 due to
increased competition in the local retail banking market.

Allowance and Provision for Loan Losses

The allowance for loan losses is established through a provision for loan
losses charged to expense. The allowance is an amount that management believes
will be adequate to absorb known and inherent losses in the existing loan
portfolio. See Note 1 to First Liberty's audited consolidated financial
statements with regard to First Liberty Bank's policy for its provision and
allowance for loan losses.

The allowance for loan losses was $5,107,000 at December 31, 1999, as
compared to $4,618,000 at December 31, 1998, an increase of 10.59%. The
allowance was 1.23% of total loans (net of unearned discount and fees) at
December 31, 1999. The provision for loan losses increased to $720,000 in 1999
from $540,000 in 1998.

A significant portion of First Liberty Bank's loans are collateralized by
residential and commercial real estate located in Northeastern Pennsylvania
with a primary concentration in Lackawanna County. First Liberty Bank's primary
concentration of credit risk is related to the real estate market in the
aforementioned area. The ultimate collectibility of most of First Liberty
Bank's loan portfolio is greatly affected by the economic conditions within
Northeastern Pennsylvania. Management is not aware of any other significant
concentrations of credit risk within its loan portfolio.

Table IV illustrates the changes in allowance for loan losses for the
previous five years including charge-offs, recoveries and percent of net
charge-offs to average loans outstanding during each period.

Table V illustrates the allocation of the allowance for loans for each
period. These allocations are no more than estimates and are subject to
revision as conditions change.

Table IV

Changes in Allowance for Loan Losses

Years Ended December 31,
--------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------

Allowance for loan losses at beginning
of period............................. $4,618 $4,562 $5,017 $4,787 $5,193
Charge-offs:
Domestic:
Commercial, financial and
agricultural........................ 238 313 315 330 347
Real estate commercial and
residential mortgage................ 220 256 821 366 1,584
Installment.......................... 218 208 171 69 59
------ ------ ------ ------ ------
Total.............................. $ 676 $ 777 $1,307 $ 765 $1,990
Recoveries:
Domestic:
Commercial, financial and
agricultural........................ 379 232 189 98 134
Real estate--commercial and
residential mortgage................ 25 28 35 48 63
Installment.......................... 41 33 28 16 22
------ ------ ------ ------ ------
Total.............................. $ 445 $ 293 $ 252 $ 162 $ 219
Net charge-offs...................... 231 484 1,055 603 1,771
Additions charged to operations...... 720 540 600 833 1,365
Allowance for loan losses at end of
period.............................. $5,107 $4,618 $4,562 $5,017 $4,787
Percentage of net charge-offs during
the period to average loans
outstanding during the period....... .06% .13% .30% .19% .58%
Percentage of allowance for loan
losses to total loans--net of
unearned income, period end......... 1.23% 1.23% 1.28% 1.46% 1.59%
Percentage of allowance for loan
losses to total nonperforming loans,
period end.......................... 319% 211% 243% 88% 119%

Table V

Allocation of Allowances for Loan Losses

December 31,
-----------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
% of Loans In % of Loans In % of Loans In % of Loans In % of Loans In
Each Category to Each Category to Each Category to Each Category to Each Category to
Total Amount Total Amount Total Amount Total Amount Total Amount
Loans Loans Loans Loans Loans
-----------------------------------------------------------------------------------------

Domestic:
Commercial, financial
and agriculture....... $ 1,940 15% $ 1,196 18% $ 934 18% $ 1,001 13% $ 1,322 14%
Real estate--commercial
and residential
mortgage.............. 772 68% 1,284 64% 1,424 64% 1,898 70% 2,001 71%
Installment............ 189 17% 138 18% 242 18% 210 17% 158 15%
Unallocated............ 2,206 -- 2,000 -- 1,962 -- 1,908 -- 1,306 --
--------- ------ --------- ------ --------- ------ --------- ------ --------- ------
Total................ $ 5,107 100% $ 4,618 100% $ 4,562 100% $ 5,017 100% $ 4,787 100%
========= ====== ========= ====== ========= ====== ========= ====== ========= ======

Allocations for commercial, financial and agricultural loans are determined
by reviewing significant loans. Allocations for real estate and consumer loans
are based on historical losses, delinquency trends and current economic
conditions. The unallocated portion is established by management to absorb
inherent losses in the portfolio. The allocated allowances for real estate
loans decreased in 1999 over 1998 based on the lower levels of nonperforming
loans in that category. These allocations are estimates and are subject to
revision as conditions change.

Noninterest Income

Noninterest income generally consists of service charges on deposits, fees
for customer services, fees from the Small Business Administration, gains on
sales of loans, and other infrequent types of transactions.

Noninterest income increased due to an increase in income from trust
services. In addition, gains on sale of securities increased by $178,000 for
the year ended December 31, 1999, as compared to 1998 primarily as a result of
gains on the sale of municipal securities approximating $138,000.

Noninterest Expense

The following Table (Table VI) summarizes major components of non-interest
expense for the periods shown.

Table VI

Non-Interest Expense

1999 1998 1997
------------------ ------------------ -------------------
Percent to Total Percent to Total Percent to Total
Interest Earning Interest Earning Interest Earning
------------------ ------------------ -------------------
Amount Assets Amount Assets Amount Assets
--------- -------- --------- -------- --------- --------

Salaries and benefits... $ 7,212 1.21% $ 7,080 1.21% $ 7,460 1.36%
Net occupancy, furniture
and equipment expense.. 2,462 .41 2,426 .41% 2,198 .40%
Data processing
services............... 352 .06 650 .11% 627 .11%
Foreclosure and other
real estate expenses... 56 .00 351 .06% 496 .09%
Merger related costs.... -- -- 1,098 .19% -- --
Fidelity loss
(recovery)............. -- -- -- -- (372) (.07)%
Other expense........... 3,910 .65 3,754 .64% 3,919 .71%
--------- ------ --------- ------ --------- ------
Total................. $ 13,992 2.33% $ 15,359 2.62% $ 14,328 2.60%
========= ====== ========= ====== ========= ======

Salaries and benefits increased in 1999 as a result of growth in personnel
in 1999. Total full-time equivalent employees numbered 232 at December 31,
1999, and 204 at December 31, 1998. The level of full-time equivalent employees
increased in 1999 as compared to 1998 primarily as a result of new branches
being opened in Dickson City and Kingston.

Occupancy costs and furniture and equipment expense increased in 1999
primarily as a result of the increased costs associated with the new branches.
Data processing services expense decreased $298,000 in 1999 primarily as a
result of First Liberty Bank discontinuing the Fiserv service contract. In
1998, First Liberty Bank had service contracts with Fiserv and Jack Henry, the
servicer for Upper Valley Bancorp. In 1999, First Liberty Bank decided to keep
only the Jack Henry contract.

The decrease in foreclosure and other real estate expenses between 1998 and
1999 was primarily due to the resolution of certain loans in the Binghamton
loan portfolio in 1998. This was a portfolio of loans purchased by NBO prior to
the merger in 1998.

Other expense increased from December 31, 1998 to December 31, 1999
primarily due to an increase in office expense for updating stationary and
other supplies to reflect the new First Liberty logo and name. Other expense
for 1999 also includes approximately $87,000 for the first year of amortization
of the Olyphant Housing Partnership investment.

Merger-related expenses of $1,098,000 were charged to income in the second
quarter of 1998 as a result of the June 30, 1998 merger with Upper Valley
Bancorp.

During the first quarter of 1997 First Liberty discovered certain
irregularities involving an employee. Management accrued its full estimate of
the fidelity loss as of December 31, 1996 in noninterest expense. In 1997, the
amount of the loss was recovered (less a $50,000 deductible) under First
Liberty's Fidelity Bond Insurance Policy.

Income Tax Provision

Fluctuations in the 1999, 1998, and 1997 income tax provisions and effective
tax rates result, generally, from the changes in federal taxable income and in
tax-free income on securities and loans. The decrease in the effective tax rate
from 28.2% for 1998 to 20.1% for 1999 is attributable to First Liberty's low
income housing credit related to the Olyphant Housing Partnership investment.
The provision for income taxes includes federal, state, and local income taxes
currently payable and those deferred because of temporary differences between
the financial statement and tax bases of assets and liabilities.

The deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the periods in which those temporary
differences are expected to be recovered or settled.

Securities

The investment policy of First Liberty Bank, as approved by its board of
directors, requires management to maintain adequate liquidity, generate a
favorable return on investments without incurring undue interest rate and
credit risk and to complement First Liberty Bank's lending activities. First
Liberty Bank primarily utilizes investments in securities for liquidity
management and as a method of deploying excess funding not utilized for loan
organizations. Generally, First Liberty Bank's investment policy is more
restrictive than applicable banking regulations allow and, accordingly, First
Liberty Bank has invested primarily in U.S. government and agency securities,
which qualify as liquid assets under applicable regulations, federal funds, and
U.S. government sponsored agency issued mortgage-backed securities. First
Liberty Bank's investment portfolio consists of those securities that are
categorized as held-to-maturity, available-for-sale or held for trading. First
Liberty Bank does

not currently maintain a portfolio of securities categorized as held for
trading. At December 31, 1999, the available-for-sale securities portfolio
totaled $185,908,000, or 28.5% of assets.

The following Table (Table VII) shows maturity data and related weighted-
average yields as of December 31, 1999 and carrying values as of December 31,
1999, 1998, and 1997. Yields on available for sale securities are computed
using historical amortized cost.

Table VII

Securities Portfolio

December 31, 1999
-----------------------------------------------------------
After one After five After
One Year through through ten No stated
or less five years ten years years maturity Total
-------- ---------- ---------- -------- --------- --------

Securities available for
sale...................
U.S. Treasuries.........
Market value.......... $1,001 $ -- $ -- $ -- $ -- $ 1,001
Yield................. 5.81% -- -- -- -- 5.81%
Municipal securities....
Market value.......... 1,020 2,375 7,285 23,537 -- 34,217
Yield................. 4.20% 4.23% 5.22% 5.06% -- 5.01%
Mortgage-backed
securities and U.S.
government agencies....
Market value.......... 1,531 7,486 -- 57,342 -- 66,359
Yield................. 6.24% 6.22% -- 6.14% -- 6.15%
Collateralized mortgage
obligations and U.S.
government agencies....
Market value.......... -- 40,986 14,946 22,423 -- 78,355
Yield................. -- 5.80% 6.21% 6.19% -- 5.99%
Other securities........
Market value.......... -- 250 -- -- 5,726 5,976
Yield................. 6.30% 6.71% 6.69%
Total market value...... $3,552 $51,097 $22,231 $103,302 $5,726 $185,908
Weighted average yield.. 5.53% 5.79% 5.89% 5.91% 6.71% 5.89%

December 31,
--------------------------
1999 1998 1997
-------- -------- --------

Securities available for sale......................
U.S. Treasuries.................................... $ 1,001 $ 22,279 $ 15,512
Municipal securities............................... 34,217 48,575 5,657
Mortgage-backed securities and U.S. government
agencies.......................................... 66,359 70,309 37,819
Collateralized mortgage obligations and U.S.
government agencies............................... 78,355 49,446 63,172
Other securities................................... 5,976 5,954 1,605
-------- -------- --------
Total.............................................. $185,908 $196,563 $123,765
Investment securities held to maturity U.S.
Treasuries........................................ $ -- $ -- $ 27,180
Municipal securities............................... -- -- 30,891
Other.............................................. -- -- 3,293
-------- -------- --------
Total............................................ $ -- $ -- $ 61,364
======== ======== ========

Loans

During 1999, gross loans, net of unearned income, grew $40,635,000 to
$416,550,000 at December 31, 1999. The largest increase was in real estate
loans, which increased $35,258,000 to $270,866,600 at December 31, 1999,
compared to $235,608,000 at December 31, 1998. The increase in the installment
loan portfolio was primarily due to home equity loans and, to a lesser degree,
auto loans.

The following Table (Table VIII) shows consolidated loans at December 31,
1999, 1998, 1997, 1996 and 1995 (including non-accrual loans), and summarizes
the maturity data for loans-gross as of December 31, 1999.

Table VIII

Loans

1999 1998 1997 1996 1995
-------- -------- -------- -------- --------

Real estate--commercial and
residential mortgage............ $270,866 $235,608 $226,551 $233,191 $205,907
Commercial, financial and
agricultural.................... 64,513 67,659 64,822 44,730 41,505
Installment...................... 70,760 67,323 64,321 58,452 45,879
Real state--construction......... 11,110 6,266 6,030 7,250 8,538
-------- -------- -------- -------- --------
Total loans--gross............. 417,249 376,856 361,724 343,623 301,829
Less: unearned income............ 699 941 1,130 1,147 1,336
Total gross loans, net of
unearned income............... $416,550 $375,915 $360,594 $342,476 $300,493
======== ======== ======== ======== ========

December 31, 1999
--------------------------------------------
Within Over
one After one year but five
year within five years years Total
------- ------------------ -------- --------

Real estate--commercial and
residential mortgage and
construction.................... $14,108 $25,784 $237,980 $277,872
Commercial, financial and
agricultural.................... 7,923 14,054 46,640 68,617
Installment...................... 2,645 39,551 28,564 70,760
------- ------- -------- --------
Total loans--gross............. $24,676 $79,389 $313,184 $417,249
======= ======= ======== ========
Fixed rate....................... 17,582 72,586 234,773 324,941
Variable rate.................... 7,094 6,803 78,411 92,308
------- ------- -------- --------
Total loans--gross............. $24,676 $79,389 $313,184 $417,249
======= ======= ======== ========

Management is not aware of any trends or uncertainties within its loan
portfolio which it reasonably expects will materially impact future operating
results or capital resources nor is management aware of any information which
would cause it to have serious doubts as to the ability of its performing
borrowers to comply with current loan repayment terms.

Table IX summarizes First Liberty Bank's non-performing assets at December
31, 1999, 1998, 1997, 1996, and 1995.

Table IX

Non-Performing Assets

1999 1998 1997 1996 1995
------ ------ ------ ------ ------

Non-accrual loans(1)....................... $1,446 $1,740 $1,607 $4,449 $3,622
Loans past due 90 days or more and still
accruing.................................. 154 445 290 713 578
Total non-performing loans................. 1,600 2,185 1,897 5,162 4,200
Real estate owned other than bank
premises.................................. 558 479 953 817 1,423
------ ------ ------ ------ ------
Total.................................... $2,158 $2,664 $2,850 $5,979 $5,623
====== ====== ====== ====== ======

- --------
(1) See Note 4 to First Liberty's audited consolidated financial statements
contained elsewhere in this document concerning interest income on non-
accruing loans, and Note 1 to the consolidated financial statements--Loans
caption--concerning First Liberty Bank's policy with regard to accrual of
interest.

An analysis of non-accrual loans as of December 31, 1999, 1998, 1997, 1996,
and 1995 is as follows:

1999 1998 1997 1996 1995
------ ------ ------ ------ ------

Real estate--commercial and residential
mortgage.................................. $1,180 $1,377 $ 987 $3,006 $2,569
Commercial................................. 266 363 620 1,443 1,053
------ ------ ------ ------ ------
Total.................................... $1,446 $1,740 $1,607 $4,449 $3,622
====== ====== ====== ====== ======

At December 31, 1999 and 1998, First Liberty had impaired loans totaling
approximately $798,000 and $979,000, respectively, all of which had a related
allowance for impairment. At December 31, 1999 and 1998, the allowance for
losses on impaired loans totaled $311,000 and $202,000, respectively.

Deposits

Table X summarizes the average deposits and rates paid on deposit categories
of average total deposits for the last three years.

Table X

Average Deposits

1999 1998 1997
---------------- ---------------- ----------------
Average Average Average Average Average Average
Deposits Rates Deposits Rates Deposits Rates
-------- ------- -------- ------- -------- -------

Deposits:
Domestic:
NOW accounts.............. $ 22,039 1.48% $ 24,383 1.77% $ 26,999 1.21%
Savings deposits.......... 91,923 2.12% 94,580 2.51% 95,347 2.59%
Other time deposits....... 3,270 2.74% 5,222 1.22% 17,394 4.75%
Money market accounts..... 27,288 2.15% 24,834 2.66% 21,850 2.25%
Certificates of deposit... 310,566 5.15% 299,118 5.45% 275,296 5.44%
-------- -------- --------
Total interest bearing...... 455,086 448,137 436,886
Noninterest-bearing
demand................... 53,874 50,422 46,082
-------- -------- --------
Total....................... $508,960 $498,559 $482,968

The level of certificates of deposit increased in 1999 due to growth in
First Liberty Bank's newest branches in Kingston and Dickson City. The level of
certificates of deposit increased in 1998 as compared to 1997 primarily due to
growth in First Liberty Bank's branches in Daleville and Carbondale.

Table XI summarizes the maturity distribution of time deposits greater than
$100,000 at December 31, 1999 and 1998 (including open time deposits and
savings accounts).

Table XI

Maturity Distribution of Time Deposits Greater Than $100,000

December 31, 1999 December 31, 1998
----------------- -----------------

Domestic:
Certificates of deposit:
Three months or less................... $26,373 $17,909
Over three months through twelve
months................................ 25,883 20,330
Over one year through three years...... 7,982 12,057
Over three years....................... 3,378 1,836
------- -------
Total Certificates of deposit........ $63,616 $52,132
======= =======

Capital Adequacy

A strong capital position is important to the continued profitability of
First Liberty and promotes depositor and investor confidence. First Liberty's
capital consists of shareholders' equity, which provides a basis for future
growth and expansion and also provides a buffer against unexpected losses.
Shareholders' equity decreased $1,691,000 to $57,217,000 at December 31, 1999.
It is management's intention to continue paying a reasonable return on
shareholders' investment while retaining adequate earnings to allow for
continued growth.

However, First Liberty's ability to pay dividends to shareholders is
dependent on its ability to receive dividend payments from First Liberty Bank
(see note 14 to First Liberty's audited consolidated financial statements
contained elsewhere in this document).

The Federal Reserve Board measures capital adequacy for bank holding
companies by using a risk-based capital framework and by monitoring compliance
with minimum leverage ratio guidelines. The minimum ratio of total risk-based
capital to risk-adjusted assets is 8% at December 31, 1999, of which 4% must be
Tier I Capital. First Liberty's total risk-based capital was 16.87% at December
31, 1999 and 18.91% at December 31, 1998. First Liberty's Tier I risk-based
capital ratio was 15.62% at December 31, 1999, and 17.66% at December 31, 1998.

The FDICIA, as well as other requirements, establishes five capital tiers:
"well capitalized," "adequately capitalized," "under-capitalized,"
"significantly under-capitalized," and "critically under-capitalized." The
FDICIA imposes significant restrictions on the operations of a bank which is
not at least adequately capitalized. A depository institution's capital tier
will depend upon where its capital levels are in relation to various other
capital measures which include a risk-based capital measure, a leverage ratio
capital measure and other factors. Under regulation adopted, for an institution
to be well capitalized it must have a total risk-based capital ratio of at
least 10%, a Tier I risk-based capital ratio of at least 6%, and a Tier I
leverage ratio of at least 5%, and not be subject to any specific capital order
or directive.

At December 31, 1999, First Liberty Bank was classified as well-capitalized
with total risk-based capital, Tier 1 risk-based capital and Tier 1 leverage
ratios of 16.47%, 15.22% and 9.41%.

Market Risk and Interest Rate Risk

Market risk is the risk of loss from adverse changes in market prices and
rates. First Liberty's market risk arises primarily from interest rate risk
inherent in its lending, investment, and deposit taking activities. To that
end, management actively monitors and manages its interest rate risk exposure.
First Liberty's profitability is affected by fluctuations in interest rates. A
sudden and substantial increase in interest rates may adversely impact First
Liberty's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the same
basis. First Liberty monitors the impact of changes in interest rates on its
net interest income using several tools. One measure of First Liberty's
exposure to differential changes in interest rates between assets and
liabilities is shown in First Liberty's Maturity and Rate Sensitivity Analysis.

The following Table (Table XII) summarizes First Liberty Bank's sensitivity
to interest rate fluctuations at December 31, 1999 for certain interest
sensitivity periods.

Table XII

Maturity and Rate Sensitivity Analysis

Zero to Over three Over six After on year After
three months to six months to one but within five five
months months year years years Total
-------- ------------- ------------- --------------- -------- --------

Interest-earning assets:
Securities.............. $ 20,939 $ 9,498 $ 17,486 $ 84,344 $ 53,624 $185,891
Loans (net of unearned
income)................ 69,865 22,809 42,854 229,816 51,206 416,550
Federal funds sold and
interest earning
deposits............... 6,019 -- -- -- -- 6,019
-------- -------- -------- -------- -------- --------
Total............... $ 96,823 $ 32,307 $ 60,340 $314,160 $104,830 $608,460
-------- -------- -------- -------- -------- --------
Interest-bearing
liabilities:
Now accounts............ 3,374 1,047 2,095 12,567 4,189 23,272
Money market accounts... 4,304 2,279 4,557 9,114 -- 20,254
Savings(1).............. 12,975 4,578 9,491 48,321 16,107 91,472
Time.................... 100,097 68,611 54,819 74,768 1,650 299,945
FHLB advances and
federal funds
purchased.............. 67,478 28 10,056 25,452 5,003 108,017
-------- -------- -------- -------- -------- --------
Total............... $188,228 $ 76,543 $ 81,018 $170,222 $ 26,949 $542,960
-------- -------- -------- -------- -------- --------
Interest rate
sensitivity gap........ (91,405) (44,236) (20,678) 143,938 77,881 65,500
Cumulative interest rate
sensitivity gap........ (91,405) (135,641) (156,319) (12,381) 65,500 --
Cumulative interest rate
sensitivity ratio(2)... (13.99)% (20.76)% (23.93)% (1.90)% 10.03%

- --------
(1) The amount shown as repricing within 0 to 3 months is that portion which,
based upon average balances, is considered sensitive to changes in interest
rates. First Liberty Bank's historical experience has been that total
savings account balances exhibit minimal movement with changes in interest
rates. Accordingly, a percentage of First Liberty Bank's savings account
balances are not as rate sensitive and are classified in the "After five
years" category.
(2) Represents the cumulative interest rate sensitivity gap as a percentage of
total assets.

As shown above, First Liberty Bank has a negative gap (interest-sensitive
assets are less than interest-sensitive liabilities) within the next year,
which generally indicates that an increase in rates may lead to a decrease in
net interest income and a decrease in rates may lead to an increase in net
interest income. Although First Liberty Bank is substantially liability
sensitive within the next year, management believes that customer behavior
patterns and product pricing allow First Liberty Bank to reduce interest rate
risk to acceptable levels.

In addition to gap management, First Liberty also uses simulation analysis
to help monitor and manage interest rate risk. In this analysis First Liberty
examines the result of a 100, 200, and 300 basis point change in market
interest rates and the effect on net interest income. It is assumed that the
change is instantaneous and that all rates move in a parallel manner. In
addition, it is assumed that rates on core deposit products such as NOWs,
savings accounts, and the money market deposit accounts will be adjusted by 50%
of the assumed rate change. Assumptions are also made concerning prepayment
speeds on mortgage loans and mortgage securities. The results of this rate
shock are a useful tool to assist First Liberty in assessing interest rate risk
inherent in their balance sheet. Below are the results of this rate shock
analysis as of December 31, 1999 and 1998.

Net Interest Income Change (After tax, in thousands)

Change in Rates December 31, 1999 December 31, 1998
--------------- ----------------- -----------------

+300..................................... $(3,203) $(1,406)
+200..................................... (2,126) (932)
+100..................................... (1,059) (428)
-100..................................... 907 252
-200..................................... 1,673 425
-300..................................... 2,253 617

Accounting Developments

In June 1998, the Financial Accounting Standards Board, or FASB, issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement (as amended by SFAS No. 137 in June 1999) establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for
changes in the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. If certain conditions are met, a
derivative may be specifically designated as (a) a hedge of certain exposure to
changes in the fair value of a recognized asset or liability or an unrecognized
firm commitment; (b) a hedge of the exposure to variable cash flows of a
forecasted transaction; or (c) a hedge of certain foreign currency exposure.
SFAS No. 133, as amended, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Earlier adoption is permitted. First Liberty
adopted SFAS No. 133 in its fourth quarter of 1998, including its provision for
the potential reclassification of investments, resulting in a $60.3 million
transfer of securities from held-to-maturity to available-for-sale and an
increase of $725,000 of unrealized gains, net of taxes, on securities available
for sale. The adoption of this statement did not affect operating results of
First Liberty.

Year 2000

Year 2000 issues result from the inability of many computer programs or
computerized equipment to accurately calculate, store or use data for the year
2000 or later. These potential shortcomings could result in a system failure or
miscalculations, causing disruptions of operation, including among other
things, a temporary inability to process transactions, track important customer
information, provide convenient access to this information, or engage in normal
business operations. First Liberty did not incur any additional costs for the
Year 2000 in the year ended December 31, 1999. While lingering concern exists
about certain dates during Year 2000, the most significant date, January 1,
2000, has passed without incident. As of the date of this document, First
Liberty has not experienced any significant Year 2000 problems relating to its
internal or third-party computer systems, nor has First Liberty experienced any
issues regarding the ability of commercial customers to meet debt services as a
result of Year 2000 issues. First Liberty will continue to monitor systems for
problems in the future; however, the costs related to that process are not
expected to be significant.

Liquidity

Liquidity involves First Liberty's ability to raise funds to support asset
growth, meet deposit withdrawal and other borrowing needs, maintain reserve
requirements and otherwise operate First Liberty on an ongoing basis. To adjust
for the effects of a changing interest rate environment and deposit structure,
First Liberty's management monitors its liquidity requirements through its
asset/liability management program. his program, along with other management
analysis, enables the bank to meet its cash flow requirements and adapt to the
changing needs of individual customers and the requirements of regulatory
agencies.

Among the sources of asset liquidity are cash and due from banks, federal
funds sold, securities available for sale, mortgage loans available for sale,
and funds received from the repayment of loans and the maturing of

investments. The total carrying value of cash and due from banks, federal funds
sold, securities available for sale, and mortgage-backed securities available
for sale, with maturities of less than one year was $29,575,000 at December 31,
1999. In addition to these sources of liquidity and loan repayments, First
Liberty has the ability to secure borrowings collateralized by the securities
portfolio. At December 31, 1999 First Liberty had a maximum borrowing capacity
available to it of approximately $263 million from the Federal Home Loan Bank
of Pittsburgh.

Through the use of these and other sources, management believes First
Liberty has adequate liquidity in both the short-term and the long-term to
carry out First Liberty's growth and profitability strategies. First Liberty's
ability to pay dividends depends primarily on the ability of First Liberty Bank
to pay dividends to First Liberty. Note 15 of the audited consolidated
financial statements provides information as to the limitations on dividend and
other funds transfers from First Liberty's subsidiary. Such limitations are not
expected to adversely impact the ability of First Liberty to meet its future
dividend and other cash obligations.

SPECIAL MEETING OF THE STOCKHOLDERS OF COMMUNITY BANK SYSTEM

General

Community Bank System will hold a special meeting of its stockholders on
[ ], 2001 at [ ]:[ ] [ ].m., Eastern time, at [ ]. At the
special meeting, Community Bank System stockholders will vote upon a proposal
to adopt and approve the merger agreement. Community Bank System stockholders
may also vote upon a proposal to adjourn or postpone the special meeting for
the purpose of, among other things, allowing additional time for the
solicitation of proxies to approve the merger agreement.

Record Date; Voting Power

Holders of record of Community Bank System common stock at the close of
business on [ ], 2001, may vote at the special meeting. This date is
called a "record date." As of the record date, there were [ ] issued
and outstanding shares of Community Bank System common stock held by
approximately [ ] holders of record. Community Bank System stockholders
have one vote per share on any matter that may properly come before the special
meeting. Brokers who hold shares of Community Bank System common stock as
nominees will not have discretionary authority to vote these shares without
instructions from the beneficial owners. Any shares of Community Bank System
common stock for which a broker has submitted an executed proxy but for which
the beneficial owner has not given instructions on voting to the broker are
referred to as "broker non-votes." These broker non-votes will have the same
effect as a vote against the merger agreement.

Vote Required

The presence in person or by proxy of the holders of a majority of the
shares of Community Bank System common stock outstanding on the record date
will constitute a quorum for the transaction of business at the special
meeting. Community Bank System will count abstentions and broker non-votes for
purposes of establishing the presence of a quorum at the special meeting. The
approval of the proposal to approve the merger agreement requires the
affirmative vote of a majority of the shares of Community Bank System common
stock outstanding on the record date. Because broker non-votes and abstentions
are not affirmative votes, they will have the effect of a vote against the
proposal to approve the merger agreement.

On the record date, the executive officers and directors of Community Bank
System, including certain of their related parties, had voting power with
respect to an aggregate of [ ] shares of Community Bank System common
stock, or approximately [ ]% of the shares of Community Bank System common
stock then outstanding. Community Bank System expects that all of its directors
and executive officers will

vote in favor of the approval of the merger agreement all of the shares of
Community Bank System common stock that they are entitled to vote.

On the record date, to the knowledge of First Liberty, its directors and
executive officers did not beneficially own any shares of Community Bank System
common stock.

Recommendation of the Community Bank System Board

The board of directors of Community Bank System has unanimously approved and
adopted the merger agreement and the transactions contemplated by it. The board
believes that the merger is fair to and in the best interests of the Community
Bank System stockholders. It unanimously recommends that Community Bank System
stockholders vote FOR approval of the merger agreement.

Solicitation and Revocation of Proxies

Community Bank System has enclosed a form of proxy with this document.
Shares represented by a proxy will be voted at the Community Bank System
special meeting as specified in the proxy. Proxies that are properly signed and
dated but which do not have voting instructions will be voted by the proxy
holders FOR the merger agreement and in the discretion of the proxy holders as
to any other matter which may properly come before the Special Meeting.

Community Bank System stockholders may instead vote their proxy by using
touch-tone telephone by following the directions on the enclosed form of proxy.
If any Community Bank System stockholder votes by both methods, only the last
vote that is submitted will be counted and each previous vote will be
disregarded.

Community Bank System is asking its stockholders to vote by completing,
dating and signing the accompanying proxy card and returning it promptly in the
enclosed postage-paid envelope or by using touch-tone telephone as described on
the proxy card, whether or not they intend to attend the special meeting in
person.

If a Community Bank System stockholder delivers a properly executed proxy or
properly votes by touch-tone telephone, he or she may revoke the proxy at any
time before it is exercised at the special meeting. A Community Bank System
stockholder may revoke his or her proxy by:

. filing with Secretary of Community Bank System prior to the special
meeting, at Community Bank System's principal executive offices, either
a written revocation of the proxy or a duly executed proxy containing a
later date;

. vote by touch-tone telephone at a later time prior to the special
meeting; or

. attending the special meeting and voting in person. Being present at the
special meeting, by itself, will not revoke the proxy. A Community Bank
System stockholder must vote in person if he or she wishes to revoke the
proxy.

Community Bank System will bear the cost of solicitation of proxies.
Community Bank System and First Liberty will share equally the cost of printing
and mailing this document. In addition to solicitation by mail, directors,
officers and employees of Community Bank System may solicit proxies from
stockholders by telephone, in person or through other means. These persons will
not receive additional compensation, but they will be reimbursed for the
reasonable out-of-pocket expenses they incur in connection with this
solicitation, if any. Although it has not determined to do so as of the date of
this document, Community Bank System may also engage a proxy solicitation firm
to aid in the solicitation of proxies. Community Bank System expects to pay
customary fees and reimburse certain out-of-pocket expenses of any proxy
solicitation firm engaged by it. Community Bank System also expects to make
arrangements with brokerage firms, fiduciaries and other custodians who hold
shares of record as nominees to forward this document and other solicitation
materials to

the beneficial owner of these shares. Community Bank System will reimburse
these brokerage firms, fiduciaries and other custodians for their reasonable
out-of-pocket expenses in connection with this solicitation. Under certain
circumstances, First Liberty must reimburse Community Bank System's expenses
incurred in connection with the merger. Please see "Fees and Expenses;
Reimbursement" on page [ ].

Other Matters

Community Bank System is unaware of any matter to be presented at its
special meeting other than the proposal to approve the merger agreement. If
other matters are properly presented at the special meeting, the persons named
in the proxy will have authority to vote all properly executed proxies in
accordance with their judgment on any such matter. This includes, for example,
any proposal to adjourn or postpone the special meeting. Proxies that have been
designated to vote against approval of the merger agreement will not be voted
in favor of any proposal to adjourn or postpone the special meeting for the
purpose of soliciting additional proxies to approve the merger agreement.

SPECIAL MEETING OF THE STOCKHOLDERS OF FIRST LIBERTY

General

First Liberty will hold a special meeting of its shareholders on
[ ], 2001 at [ ]:[ ] [ ].m., Eastern time, at [ ]. At
the special meeting, First Liberty shareholders will vote upon a proposal to
adopt and approve the merger agreement. First Liberty shareholders may also
vote upon a proposal to adjourn or postpone the special meeting for the purpose
of, among other things, allowing additional time for the solicitation of
proxies to approve the merger agreement.

Record Date; Voting Power

Holders of record of First Liberty common stock at the close of business on
[ ], 2001, may vote at the special meeting. This date is called a "record
date." As of the record date, there were [ ] issued and outstanding
shares of First Liberty common stock held by approximately [ ] holders of
record. First Liberty shareholders have one vote per share on any matter that
may properly come before the special meeting. Brokers who hold shares of First
Liberty common stock as nominees will not have discretionary authority to vote
these shares without instructions from the beneficial owners. Any shares of
First Liberty common stock for which a broker has submitted an executed proxy
but for which the beneficial owner has not given instructions on voting to the
broker are referred to as "broker non-votes." These broker non-votes will not
have the same effect as a vote against the merger agreement.

Vote Required

The presence in person or by proxy of the holders of a majority of the
shares of First Liberty common stock outstanding on the record date will
constitute a quorum for the transaction of business at the special meeting.
First Liberty will count abstentions and broker non-votes for purposes of
establishing the presence of a quorum at the special meeting. The approval of
the proposal to approve the merger agreement requires the affirmative vote of a
majority of the votes cast by the holders of First Liberty common stock at the
special meeting. Broker non-votes and abstentions are not considered votes cast
and, accordingly, they will not have the effect of a vote against the proposal
to approve the merger agreement.

On the record date, the executive officers and directors of First Liberty,
including certain of their related parties, had voting power with respect to an
aggregate of [ ] shares of First Liberty common stock, or approximately
[ . ]% of the shares of First Liberty common stock then outstanding. All
of the directors and executive officers of First Liberty have agreed in writing
to vote in favor of the approval of the merger agreement all of the shares of
First Liberty common stock that they are entitled to vote.

On the record date, to the knowledge of Community Bank System, its directors
and executive officers did not beneficially own any shares of First Liberty
common stock.

Recommendation of the First Liberty Board

The board of directors of First Liberty has unanimously adopted and approved
the merger agreement and the transactions contemplated by it. The board
believes that the merger is fair to and in the best interests of the First
Liberty shareholders. It unanimously recommends that First Liberty shareholders
vote FOR approval of the merger agreement.

Solicitation and Revocation of Proxies

First Liberty has enclosed a form of proxy with this document. Shares
represented by a proxy will be voted at the First Liberty special meeting as
specified in the proxy. Proxies that are properly signed and dated but which do
not have voting instructions will be voted by the proxy holders FOR the
approval of the merger agreement and in the discretion of the proxy holders as
to any other matter which may properly come before the Special Meeting.

First Liberty is asking its shareholders to vote by completing, dating and
signing the accompanying proxy card and returning it promptly in the enclosed
postage-paid envelope, whether or not they intend to attend the special meeting
in person.

If a First Liberty shareholder delivers a properly executed proxy, he or she
may revoke the proxy at any time before it is exercised at the special meeting.
A First Liberty shareholder may revoke his or her proxy by:

. filing with Secretary of First Liberty prior to the Special Meeting, at
First Liberty's principal executive offices, either a written revocation
of the proxy or a duly executed proxy containing a later date; or

. attending the special meeting and voting in person. Being present at the
special meeting, by itself, will not revoke the proxy. A First Liberty
shareholder must vote in person if he or she wishes to revoke the proxy.

First Liberty will bear the cost of solicitation of proxies. First Liberty
and Community Bank System will share equally the cost of printing and mailing
this document. In addition to solicitation by mail, directors, officers and
employees of First Liberty may solicit proxies from shareholders by telephone,
in person or through other means. These persons will not receive additional
compensation, but they will be reimbursed for the reasonable out-of-pocket
expenses they incur in connection with this solicitation, if any. Although it
has not determined to do so as of the date of this document, First Liberty may
also engage a proxy solicitation firm to aid in the solicitation of proxies.
First Liberty expects to pay customary fees and reimburse certain out-of-pocket
expenses of any proxy solicitation firm engaged by it. First Liberty also
expects to make arrangements with brokerage firms, fiduciaries and other
custodians who hold shares of record as nominees to forward this document and
other solicitation materials to the beneficial owner of these shares. First
Liberty will reimburse these brokerage firms, fiduciaries and other custodians
for their reasonable out-of-pocket expenses in connection with this
solicitation. Under certain circumstances, First Liberty must reimburse
Community Bank System's expenses incurred in connection with the merger. Please
see "Fees and Expenses; Reimbursement" on page [ ].

Other Matters

First Liberty is unaware of any matter to be presented at its special
meeting other than the proposal to approve the merger agreement. If other
matters are properly presented at the special meeting, the persons named in the
proxy will have authority to vote all properly executed proxies in accordance
with their judgment on any such matter. This includes, for example, any
proposal to adjourn or postpone the special meeting. Proxies that have been
designated to vote against approval of the merger agreement will not be voted
in favor of any proposal to adjourn or postpone the special meeting for the
purpose of soliciting additional proxies to approve the merger agreement.

THE MERGER

The detailed terms of the merger are contained in the merger agreement
attached as Annex A to this document. The following discussion and the
discussion under "The Merger Agreement" describe the more important aspects of
the merger and material terms of the merger agreement. These descriptions are
only a summary and thus must be qualified by reference to the merger agreement,
which is attached as Annex A. We urge you to read the merger agreement
carefully.

General

Effect of the Merger; Management. The merger agreement provides that, after
approvals by our respective shareholders and the satisfaction or waiver of the
other conditions to the merger, First Liberty will merge with and into
Community Bank System, which will continue as the surviving corporation. The
certificate of incorporation and bylaws of Community Bank System will be the
certificate of incorporation and bylaws of Community Bank System after the
merger. The directors and officers of Community Bank System immediately prior
to the merger will be the directors and officers of Community Bank System after
the merger until they resign or until their successors are duly elected and
qualified. In addition, Saul Kaplan, Peter A. Sabia and Harold Kaplan, each
currently a director of First Liberty, will be elected to the board of
directors of Community Bank System. Upon completion of the merger, Steven R.
Tokach, Executive Vice President of First Liberty, will be appointed to serve
as President and Chief Executive Officer of the division of Community Bank
operating in the market areas currently served by First Liberty, and Joseph R.
Solfanelli, General Counsel and Executive Vice President of First Liberty, will
be appointed to serve as Executive Vice President and Chief Legal Officer of
that division.

Bank Merger; Use of First Liberty Name. Following the merger of Community
Bank System and First Liberty, we expect to merge First Liberty Bank with and
into Community Bank, with Community Bank as the continuing bank. We intend to
complete this bank merger as soon as practicable after the completion of the
merger of the parent companies. Community Bank System currently intends to
continue to use the First Liberty Bank name in connection with the operation of
the First Liberty Bank branches for a period of at least three years after the
completion of the merger, subject to certain considerations described under
"Use of First Liberty Bank Name" on page [ ].

Closing; Effectiveness of the Merger. We will close the merger on the first
business day, or any other day we mutually agreed to, after the satisfaction or
waiver of all conditions to the merger agreement and after we obtain all
necessary regulatory approvals. The merger will become effective on the date
and at the time that we file a certificate or articles of merger with each of
the Delaware Secretary of State and the Pennsylvania Secretary of State.

We are working to complete the merger in the second quarter of calendar year
2001, but we must first obtain the necessary regulatory approvals and the
approvals of Community Bank System stockholders and the First Liberty
shareholders at the respective special meeting, and satisfy other conditions.
We cannot assure you as to when or if all the conditions to the merger will be
met, and it is possible we will not complete the merger at all.

Consideration to be Received by First Liberty Shareholders. At the
completion of the merger, each issued and outstanding share of First Liberty
common stock, other than shares held by shareholders who have properly
exercised their dissenters' rights, will convert into a right to receive 0.56
of a share of Community Bank System common stock. This exchange ratio is fixed
and will not be adjusted before the merger unless Community Bank System changes
the number of outstanding its common stock before the merger through any stock
split, recapitalization, reclassification or other similar change, or sets a
record date for any of the foregoing events prior to the completion of the
merger. In that case, the exchange ratio will be appropriately adjusted.

Community Bank System will not issue any fractional shares in the merger.
Instead, a First Liberty shareholder will receive cash in an amount equal to
the product of (1) the closing price of Community Bank System on the New York
Stock Exchange on the date that the merger is completed, as reported in The
Wall Street Journal, and (2) the fraction of a share of Community Bank System
common stock that the shareholder would have otherwise been entitled to receive
in the merger. Community Bank System will pay no interest on any cash in lieu
of fractional shares.

You may obtain current market quotation for the Community Bank System common
stock from a number of sources. We expect the market price of the Community
Bank System common stock will fluctuate between the date of this document and
the date of the merger and after the merger. Therefore, the value of the shares
of Community Bank System common stock that First Liberty shareholders may
receive in the merger may increase or decrease prior to and after the merger.

Stock Options. If the merger is completed, each outstanding, unexercised
option to purchase shares of First Liberty common stock will no longer
represent a right to acquire shares of First Liberty common stock but will be
assumed by Community Bank System, so that the holder of the option will have a
right to purchase shares of Community Bank System upon exercise. The number of
shares of Community Bank System common stock issuable upon the exercise of the
assumed option will equal the number of shares of First Liberty common stock
formerly covered by the option multiplied by 0.56 and the exercise price for
each share of Community Bank System common stock will be the previously stated
exercise price of the option divided by 0.56. Shares issuable upon the exercise
of options to acquire Community Bank System common stock will be issuable in
accordance with the terms of the respective plans and grant agreements of First
Liberty under which First Liberty issued the options.

Background of the Merger

In the spring of 2000, the First Liberty board authorized its executive
committee (consisting of directors William Davis, Joseph Coviello, Steven
Tokach, Harold Kaplan, Peter A. Sabia, Timothy Speicher and Kuzma Leschak) to
meet, together with First Liberty's general counsel, Joseph Solfanelli, with
Berwind Financial to review First Liberty's strategic alternatives as a
community bank with approximately $650 million in assets located in
northeastern Pennsylvania. In the board's view, a review of strategic
alternatives was appropriate at this time in light of potential changes in the
competitive environment for financial institutions in First Liberty's market
area including as a result of the passage in November 1999 of the Gramm-Leach-
Bliley Act, which for the first time permits affiliations among commercial
banks, securities firms, insurance firms and other financial institutions, and
the acquisition by a large out-of-state bank holding company of two financial
institutions in First Liberty's market area. On May 24, 2000, the executive
committee of the First Liberty board of directors instructed Berwind Financial
to prepare and submit an engagement letter for its services, to commence a due
diligence investigation of First Liberty, and to reconvene with the committee
on June 2, 2000.

On June 2, 2000, Berwind Financial met with the executive committee to
discuss First Liberty's strategic alternatives. Berwind Financial reviewed with
the committee certain strategic alternatives available to First Liberty,
including, a continued course of independence, a merger with another financial
institution of similar size, a so-called "merger of equals," or a sale of First
Liberty to a larger financial institution. Berwind Financial reviewed potential
valuation ranges of First Liberty under each of the potential strategies.
Following its review of the alternatives presented by Berwind Financial, the
committee elected to investigate the possibility of the sale of First Liberty
to a larger financial institution and authorized Berwind Financial to prepare
an offering memorandum describing First Liberty for distribution to one or more
potential buyers. The committee also authorized Berwind Financial to contact
confidentially certain financial institutions believed to have a potential
interest in acquiring First Liberty.

At the direction of the First Liberty board, Berwind Financial generated a
list of banking companies that potentially could have a strategic interest in
exploring a merger or acquisition of First Liberty based on size and geography.
After reviewing the list, the board authorized Berwind Financial to make
confidential inquiries to

seventeen of the companies reviewed. Of the companies contacted, thirteen
executed confidentiality agreements and received various information pertaining
to the operations and financial performance of First Liberty. In late June
2000, members of the executive committee of the First Liberty board and Berwind
Financial met with three of the thirteen companies that received materials to
exchange additional information and discuss the merits of entering into a
potential transaction. Of the three companies that held meetings, two, a
Pennsylvania-based financial holding company of approximately equal asset size
with First Liberty and a bank holding company based outside of Pennsylvania
(other than Community Bank System) of a larger size to First Liberty expressed
interest in entering into a transaction with First Liberty and submitted oral
and written indications of interest. All of the other companies contacted up to
that point elected not to pursue a transaction with First Liberty.

On July 19, 2000, Berwind Financial met with First Liberty's board of
directors to discuss the indications of interest received from the Pennsylvania
and out-of-state holding companies. The board declined to explore the
indication of interest received from the Pennsylvania financial holding company
on the basis of the preliminary price proposed in the transaction and elected
to postpone discussions with the out-of-state bank holding company until its
other pending transaction was completed.

On July 24, 2000, Berwind Financial recommended to the executive committee
of First Liberty that it authorize Berwind Financial to contact Community Bank
System as a potential affiliation partner for First Liberty. The committee
approved Berwind Financial's recommendation and Berwind Financial thereafter
delivered information about First Liberty to Community Bank System following
execution of a confidentiality agreement.

Community Bank System has traditionally concentrated its business activities
on providing community banking services in its market areas in Upstate New
York. Over the past several years, the environment for independent community
banks in general, and specifically in the market areas served by Community Bank
System have become increasingly competitive, particularly because of
competition from non-bank financial institutions. The resulting pressures on
both margins and loan growth have been compounded by the high cost of
maintaining skilled staff while simultaneously introducing competitive customer
service technology and new products. As a result of these factors, Community
Bank System has long recognized the need to grow and diversify, and has
established an active program to identify, review and evaluate potential
business combinations, acquisitions and other strategic opportunities in
traditional banking and financial services businesses. In particular, over the
last few years, Community Bank System had evaluated various opportunities to
establish its presence in Pennsylvania to expand and diversify its market areas
and customer base. As part of these efforts, Community Bank System had engaged
Janney Montgomery Scott to act as its financial advisor in Pennsylvania. Prior
to being contacted by Berwind Financial, however, Community Bank System had not
identified First Liberty as a potential acquisition target.

At the August 16, 2000 meeting of the board of directors of Community Bank
System, Sanford A. Belden, President and Chief Executive Officer of Community
Bank System, distributed an information memorandum on First Liberty prepared by
Berwind Financial, as well as other documents setting forth certain key
information on First Liberty. Mr. Belden presented highlights of the
information contained in the distributed materials. After discussion, the board
authorized management to gather further information on First Liberty, and
directed management to thereafter recommend whether Community Bank System
should continue to proceed with the acquisition of First Liberty.

On August 25, 2000, Community Bank System orally informed Berwind Financial
of its interest in acquiring First Liberty at a price of approximately $13.00
per share in a stock-for-stock exchange, assuming completion of satisfactory
due diligence, board approvals, and negotiation and execution of definitive
agreements. Following a meeting on August 30 at which Berwind Financial and the
First Liberty executive committee discussed the Community Bank System oral
indication of interest, the executive committee authorized Berwind Financial to
continue a dialogue with Community Bank System and for management of First
Liberty to meet with representatives of Community Bank System.

On September 21, 2000, members of management of Community Bank System and a
representative from Janney Montgomery Scott met with members of First Liberty
management and representatives of Berwind Financial in Scranton, Pennsylvania.
The parties discussed the operating philosophies and strategies of their
respective organizations as well as the possible merits of combining the two
organizations. At this meeting, First Liberty requested Community Bank System
to submit, on or before October 6, 2000, a written indication of interest to
acquire First Liberty.

On September 29, 2000, the strategic/executive committee of Community Bank
System's board of directors met by telephone conference call. A representative
of Janney Montgomery Scott and Mr. Belden led a review of presentation
materials prepared by Janney Montgomery Scott, which included detailed
information on First Liberty's operations, financial condition and assets. The
Janney Montgomery Scott representative and Mr. Belden engaged in a lengthy
discussion with the committee regarding the proposed terms of the transaction,
including the exchange ratio, the pro forma balance sheets and income
statements for the combined company, and the potential impact of the merger to
the combined company's earnings per share in light of cost saving and revenue
enhancement opportunities. The committee authorized management to provide First
Liberty an indication of interest with a proposed exchange ratio in the range
of 0.55 and 0.58, subject to the results of due diligence review by Community
Bank System.

Community Bank System submitted on October 6 a written, non-binding
indication of interest in acquiring First Liberty in a stock-for-stock
transaction having a fixed exchange ratio of between 0.55 and 0.58 shares of
Community Bank System stock for each First Liberty share.

In the meantime, the transaction which had prevented the other out-of-state
bank holding company from engaging in substantive discussions with First
Liberty had terminated. On October 9, 2000, the executive committee directed
Berwind Financial to contact this other out-of-state financial institution to
determine whether or not they continued to have any interest in acquiring First
Liberty. This other bank holding company affirmed its continued interest in
First Liberty and Berwind Financial accordingly requested them to submit a non-
binding indication of interest. On October 17, the other out-of-state bank
holding company provided an oral indication of interest in acquiring First
Liberty in a stock-for-stock transaction.

On October 19, 2000, Berwind Financial and the executive committee of First
Liberty met to review and discuss both indications of interest. The committee
authorized Berwind Financial to arrange for due diligence examinations with
both Community Bank System and the other out-of-state bank holding company.
Both institutions conducted on-site due diligence of First Liberty in early
November 2000. During this time period, members of the executive committee of
Community Bank System's board of directors also met with certain members of
First Liberty's board of directors and management to discuss their strategic
positions, as well as the strategic benefits available to both institutions in
a business combination.

On November 9, 2000, the strategic/executive committee of the board of
directors of Community Bank System held a meeting by telephone conference call.
Mr. Belden reviewed with the committee the results of Community Bank System's
due diligence of First Liberty, including its financial statements, asset
quality and certain integration issues. The committee then discussed the
proposed structure and terms of the merger, as well as a pro forma financial
model for the merger, the potential impact of the merger on earnings per share
and the anticipated cost-savings and revenue enhancements. A representative of
Janney Montgomery Scott, who participated on the call at the committee's
invitation, reviewed the bidding strategy and process with the committee. The
committee then engaged in a discussion regarding the proposed exchange ratio,
and authorized management to offer an exchange ratio of .55 shares of Community
Bank System common stock for each share of First Liberty common stock, pending
the meeting of the full board of directors scheduled for November 14, 2000.

On November 10, 2000, the other out-of-state bank holding company submitted
a revised written non-binding indication of interest which proposed a stock-
for-stock transaction based on a fixed exchange ratio resulting in a price to
First Liberty shareholders of approximately $13.20 per share at that time.

From November 10 to November 15, 2000, Berwind Financial continued to
negotiate with both parties certain elements of their indications of interest.

The board of directors of Community Bank System held a regularly scheduled
meeting on November 14, 2000. Representatives of Janney Montgomery Scott were
also present at the invitation of the board. Mr. Belden began the meeting with
a discussion on the findings of Community Bank System's due diligence
investigation of First Liberty and its business, assets and operations. Janney
Montgomery Scott's representatives then gave a detailed presentation of its
financial analysis of the proposed merger, including a summary of the
transaction, transaction assumptions, a pro forma financial model and
sensitivity and other analyses. A lengthy discussion on the proposed range of
the exchange ratio for the merger ensued. Following the discussion, Janney
Montgomery Scott opined orally to the board of directors that the exchange
ratio of up to 0.56 of a share of Community Bank System common stock for each
share of First Liberty common stock was fair from a financial point of view to
the stockholders of Community Bank System. The board then authorized management
to submit to First Liberty a revised indication of interest with an exchange
ratio of between 0.552 and 0.56, and to continue to negotiate with First
Liberty within that parameter. Later that day, Community Bank System
transmitted to First Liberty a revised indication of interest proposing an
exchange ratio of 0.552, and indicated that Community Bank System may be
willing to increase the exchange ratio if First Liberty can identify additional
cost savings and revenue enhancements from the merger.

On November 15, after its receipt of additional financial information and
analyses on potential cost savings and revenue enhancements from First Liberty
and after further discussions with First Liberty's management, Community Bank
System agreed to increase the exchange ratio from 0.552 shares of Community
Bank System common stock for each share of First Liberty common stock to 0.56
Community Bank System shares for each First Liberty share (resulting in a price
to First Liberty shareholders of approximately $14.00 per share at that time).
The other institution declined to increase its proposed exchange ratio.

On November 16, 2000, the board of directors of First Liberty met with
representatives of Berwind Financial and First Liberty's outside counsel,
Stevens & Lee, P.C., to review the two indications of interest. Representatives
of Berwind Financial presented a report containing a detailed analysis of the
two proposed offers, a comparison of the financial performance of both
companies measured against a peer group, and other relevant financial analyses,
including an analysis of earnings per share and book value dilution to each
potential acquiror as a result of their offer price. The indicated pricing
analyses were based on common stock prices as of November 10, 2000 and showed
the Community Bank System offer at $14.00 per First Liberty share for a total
deal consideration of $89.6 million versus the other offer at $13.20 per First
Liberty share for a total deal consideration of $84.4 million. Based on the
analysis and discussion with Berwind Financial and Stevens & Lee, the board of
directors authorized and directed Berwind Financial and Stevens & Lee to
contact Community Bank System's advisors and commence negotiation of a
definitive merger agreement based on the terms contained in Community Bank
System's revised indication of interest letter. The board also instructed
management and its advisors to conduct due diligence on Community Bank System
and to reconvene with the board for consideration of a proposed definitive
agreement of merger during the week of November 27.

On November 17, 2000, Community Bank System's outside counsel, Bond,
Schoeneck & King, LLP, transmitted to First Liberty and Stevens & Lee the
initial drafts of the merger agreement, the stock option agreement and a form
of voting agreements. Stevens & Lee provided its preliminary comments on the
agreements to Community Bank System and Bond, Schoeneck & King on November 22,
2000. On November 24, 2000, the parties' respective outside counsel held a
conference telephone call to discuss Stevens & Lee's comments. On November 25,
2000, Stevens & Lee delivered to Community Bank System and its counsel the
initial drafts of forms of the employment agreements for Steven R. Tokach and
Joseph R. Solfanelli, and a form of consulting agreement for William M. Davis.
The parties and their respective counsel continued to negotiate the agreements
during the week of November 25, 2000.

On November 29, 2000, First Liberty's board of directors again met with
representatives of Berwind Financial and Stevens & Lee. Counsel reviewed with
the board the terms of the proposed definitive merger

agreement, including the exchange ratio, the various covenants and conditions
contained in the merger agreement, including the requirement that the receipt
of shares of Community Bank System common stock by First Liberty shareholders
in the transaction be tax-free to them and the provisions requiring for a
period after closing an advisory board consisting of eight First Liberty
directors and the continuing representation on Community's board of three First
Liberty directors, the termination provisions of the merger agreement, and the
terms of the stock option agreement that Community Bank System required in the
transaction. Berwind Financial presented an additional detailed analysis of the
transaction and provided to the board of directors its written opinion that the
exchange ratio set forth in the proposed definitive merger agreement was fair
from a financial point of view to the shareholders of First Liberty. First
Liberty's board of directors authorized management to execute the merger
agreement on the terms presented.

On November 29, 2000, Community Bank System's board of directors held a
special meeting by telephone conference call. At the invitation of the board,
representatives of Janney Montgomery Scott and Bond, Schoeneck & King also
participated on the call. The board discussed the proposed terms of the
definitive merger agreement and other ancillary agreements, and reviewed the
changes to the agreements proposed by First Liberty and its outside counsel.
The board also discussed various other issues pertaining to the merger. The
board then reviewed an update to the presentation and financial analysis
originally presented by Janney Montgomery Scott at the November 14 board
meeting. Following discussion, the board unanimously authorized Community Bank
System to enter into the merger agreement and other transaction documents.

Messrs. Belden and Davis executed and delivered the merger agreement and the
stock option agreement on behalf of their respective companies on November 29,
2000. After the close of markets on the same day, the parties issued a joint
press release to announce the execution of the merger agreement. All of the
directors and executive officers of First Liberty executed the voting
agreements as of November 29, 2000.

On February 2, 2001, Messrs. Belden and Davis executed an amendment to the
merger agreement which contained a technical revision requested by
PricewaterhouseCoopers in the condition to closing dealing with the tax opinion
to be rendered by PricewaterhouseCoopers in connection with the merger.

Community Bank System's Reasons for the Merger; Recommendation of Community
Bank System's Board of Directors

In reaching its determination to approve and adopt the merger agreement, the
board of directors of Community Bank System considered a number of factors,
including:

. that fact that the acquisition of First Liberty will expand Community
Bank System's operations beyond New York to new market areas in
Northeastern Pennsylvania, thereby diversifying its geographical markets
and customer base;

. the business, operations, technology, asset quality, competitive
position, stock price performance, financial condition and earnings of
First Liberty on an historical and a prospective basis;

. the fact that First Liberty's deposit base will provide an additional
core deposit funding source for the combined company;

. the fact that First Liberty's capital position is expected to increase
the tangible equity to assets ratio, Tier I leverage ratio and tangible
book value per share of the combined company over those of Community
Bank System;

. the fact that First Liberty's superior asset quality is expected to
improve the combined company's non-performing assets ratio, loan loss
reserve to non-performing loans ratio and net charge-offs to average
loans ratio over those of Community Bank System;

. the potential for the combined company to enhance revenue growth by
providing financial products and services not currently offered by First
Liberty, such as online banking, benefit plan

administration, investment management, comprehensive cash management,
brokerage services and insurance, to customers of First Liberty;

. the increased access to First Liberty's market areas, which have a
higher average household income and growth potential than many of the
New York market areas served by Community Bank System, presenting an
opportunity for greater growth of financial services revenues of the
combined company;

. the fact that that the existing senior management of First Liberty will
continue to participate in the management of the combined company's
operations in the market areas currently served by First Liberty after
the merger;

. the anticipated operating efficiencies, cost savings and opportunities
for revenue enhancements of the combined company following the
completion of the merger, and the likelihood that they would be achieved
after the merger;

. the detailed analysis and financial presentation of Community Bank
System's financial advisors, Janney Montgomery Scott, to the board of
directors of Community Bank System, and the oral opinion of Janney
Montgomery Scott that, as of November 14, 2000, the exchange ratio for
the merger was fair to the Community Bank System stockholders from a
financial point of view;

. the exchange ratio for the merger and the resulting relative interests
of Community Bank System stockholders in the common stock of the
combined company;

. the potential impact of the merger on the market value of Community Bank
System common stock and earnings per share of the combined company;

. the anticipated increase in the ownership of the common stock of the
combined company by its directors and officers as a result of the
significant ownership of First Liberty common stock by the persons
expected to become directors or officers of the combined company; this
increased insider ownership will further align the interests of the
directors and officers of the combined company with those of the
stockholders;

. the anticipated increase in the ownership of the combined company's
stock by non-institutional investors, which may increase the proportion
of long-term holders of the common stock of the combined company,
thereby potentially reducing trading volatility;

. the expected cultural compatibility of First Liberty and Community Bank
System, which share the same banking philosophy of serving the financial
needs of customers in local communities and stressing the local
character of business, superior customer service, knowledge of the
customer and customer needs, and quick and local decision-making;

. agreements by Steven R. Tokach and Joseph R. Solfanelli, executive
officers of First Liberty, to defer the payment of the change-of-control
severance otherwise payable under their existing employment agreements
with First Liberty as a result of the merger;

. the commercial real estate lending expertise of First Liberty, which is
expected to benefit the combined company in the expansion of its lending
activities in New York and Pennsylvania;

. the stock option granted by First Liberty to Community Bank System to
acquire 19.9% of the issued and outstanding shares of First Liberty
common stock under certain circumstances, which stock option is intended
to discourage third parties from making a competing offer to acquire
First Liberty by increasing the financial cost of acquisition by third
parties;

. the intended tax treatment of the merger as a tax-free reorganization,
and the intended accounting treatment of the merger as a pooling of
interests which will benefit the tangible capital position of the
combined company; and

. the likelihood of receiving all of the regulatory approvals required for
the merger.

For the reasons above, Community Bank System's board has unanimously
determined the merger to be fair and in the best interests of Community Bank
System and its stockholders. Accordingly, the board has unanimously approved
the merger agreement and the merger, and unanimously recommends that
stockholders of Community Bank System vote "FOR" approval of the merger
agreement.

This discussion of the factors considered by Community Bank System's board
of directors does not list every factor considered by the board but includes
all material factors considered by the board. In reaching its determination to
approve and adopt the merger agreement and to recommend that Community Bank
System stockholders vote in favor of the approval of the merger agreement, the
board did not give relative or specific importance to each of the factors
listed above, and individual directors may have given differing importance to
different factors.

First Liberty's Reasons for the Merger; Recommendation of First Liberty's Board
of Directors

First Liberty's board of directors believes that the merger will provide
holders of First Liberty common stock the opportunity to realize significant
long-term value on a tax-free basis through a combination with a larger
institution with favorable financial characteristics and greater financial and
product resources. The transaction will also provide First Liberty shareholders
with a premium to First Liberty's recent stock prices, increased liquidity and
a significant increase in cash dividends per share. In the course of reaching
its determination, First Liberty's board consulted with legal counsel with
respect to its legal duties and the terms of the merger agreement. The board
also consulted with its financial advisor on the financial aspects of the
transaction and the fairness of the exchange ratio from a financial point of
view.

In reaching its determination that the merger is fair to, and in the best
interests of, First Liberty and its shareholders, First Liberty's board of
directors considered a number of factors, including the following. The
following discussion of the information and factors considered by the board is
not intended to be exhaustive, but does include all material factors considered
by the board.

. The familiarity of First Liberty's board of directors with and review of
the business, financial condition, results of operations and future
prospects, including the potential for growth and profitability in First
Liberty's market area. In this regard, First Liberty's board of
directors took note of continuing pressure on its net interest margin
and also noted the relatively low percentage of First Liberty's fee-
based revenue as a percentage of total revenue. The board compared First
Liberty's financial performance for the period 1996 to 1999 to the
median performance of a peer group of ten bank holding companies of
between $500 million and $1 billion in assets headquartered in
Pennsylvania. The performance of the peer group banks during this time
period, based on its median results, exceeded that of First Liberty in
terms of both return on average equity (14.08% to 9.28%) and return on
average assets (1.31% to .85%). The median net interest margin for the
peer group was 4.34% versus 3.71% for First Liberty. Finally, the
compound annual growth rate for the peer group during the period
examined in terms of assets, loans and deposits was 14.4%, 12.8% and
11.3%, respectively, versus 3.1%, 6.5%, and .5% for First Liberty.

. The existing and prospective business environment in which First Liberty
conducts business in northeastern Pennsylvania, including national and
local economic conditions, the competitive and evolving environment for
financial institutions generally as a result of many factors, including
new banking legislation in November 1999 which for the first time
permits affiliations among banks, securities firms and insurance firms,
and the competitive environment for financial institutions in First
Liberty's market area in particular. On this last point, First Liberty's
board of directors noted the recent acquisitions of Lake Ariel Bancorp
and Pioneer American Holding Company by NBT Bancorp, a large, New York-
based bank holding company, which acquisitions would, in the board's
view, have the effect of increasing competition in First Liberty's
market area.

. Pro forma and other financial information relating to the merger. Based
on First Liberty financial information at September 30, 2000 and
Community Bank System's stock price on November 27,

2000, the price payable in the transaction represented approximately
17.6x First Liberty's trailing twelve-month earnings, a premium of
approximately 145% to both book value and tangible book value. On a pro
forma basis, the price represented significant increases in earnings per
share and annual cash dividends (37.45%). The board also specifically
noted that, on the basis of a contribution analysis using current
financial statements and considering Community Bank System's acquisition
of Citizens National Bank, First Liberty shareholders would own
approximately 31% of the combined company based on a contribution of 24%
of total assets, 28% of total loans, 24% of total deposits, 29% of total
equity, and 20% of estimated first year income.

. Stock price and other financial information regarding Community Bank
System. The board noted that, based on September 30, 2000 financial
information, Community Bank System's stock price was trading at a
relatively low multiple of 8.8x trailing twelve-month earnings,
indicating, in the board's view, potential upside in Community Bank
System's stock price. The board also specifically noted that, for the
period ending September 30, 2000, Community Bank System's non-interest
income as a percentage of total revenue was over 20%, and that, on an
annualized basis, Community Bank System's returns on average assets and
average equity were 1.08% and 18.17%, respectively. The board also
considered Community Bank System's asset quality ratios and performance
ratios through September 30, 2000 and for each of the five years ended
December 31, 1999, as well as a comparison of Community Bank System
against the median performance of a group of eleven peer group bank
holding companies with between $1.5 billion and $3.5 billion in assets
located in New York, Pennsylvania and New Jersey.

. Stock trading information regarding Community Bank System shares. From a
liquidity perspective, the board viewed positively the listing of
Community Bank System's common stock on the New York Stock Exchange. The
board also reviewed volume information with respect to its shares and
the shares of Community Bank System. The board concluded that the stock
exchange listing of Community Bank System shares coupled with its
greater market capitalization would provide significantly greater
liquidity to First Liberty shareholders.

. Historical trading prices of First Liberty and Community Bank System
common stock considered in the context of the proposed exchange ratio.
The board noted that Community Bank System's proposed price represented
a premium of approximately 24% to First Liberty's stock price on October
31, 2000, prior to the commencement of due diligence of First Liberty by
Community Bank System and another potential buyer.

. A comparison of the price Community Bank System will pay in the merger
with the prices paid in comparable transactions announced after June 30,
1999. The board noted that Community Bank System's proposed price equals
approximately 17.6x First Liberty's trailing twelve-month earnings as of
September 30, 2000, which is consistent with the median prices paid in
comparable transactions analyzed in terms of national transactions (28
transactions), recent transactions announced after January 1, 2000 (12
transactions), and transactions involving sellers with performance
characteristics similar to those of First Liberty (5 transactions). The
board also noted that the price multiple of 17.6x, based on First
Liberty's trailing twelve-month earnings for the period ended September
30, 2000, exceeded the median price paid in four regional transactions
of institutions located in New York, Pennsylvania and New Jersey.

. The tax-free nature of the transaction to shareholders of First Liberty
(see generally, "--Material Federal Income Tax Consequences").

. First Liberty's alternatives to the merger, including the level of
interest expressed in First Liberty by other financial institutions as a
result of the extensive process followed by Berwind Financial at the
direction of the executive committee of the board of directors to
contact and obtain indications of interest from other financial
institutions, and the conclusion of First Liberty's board that Community
Bank System's proposal was more favorable than any other indication of
interest or proposal received by First Liberty.

. The presentations of Berwind Financial to First Liberty's board of
directors on November 16, 2000 and November 29, 2000, including the
written opinion of Berwind Financial that, as of November 29, 2000, the
exchange ratio was fair to First Liberty's shareholders from a financial
point of view.

. The results of the due diligence investigation of Community Bank System
undertaken by members of First Liberty's management team and
representatives of Berwind Financial.

. The potential impact of an acquisition by Community Bank System on First
Liberty's employees, customers and the communities in which First
Liberty maintains Community Bank System banking offices, the board
specifically noting that the transaction would constitute Community Bank
System's initial strategic acquisition in Pennsylvania, resulting, in
the board's view, in reduced disruption to First Liberty's employee and
customer bases than would an acquisition by in-market acquiror.

. The anticipated cost savings and revenue enhancements available to the
combined company as a result of the merger. The board considered as
reasonable Community Bank System's estimate within the first year
following the transaction of approximately $3.2 million of pre-tax cost
savings, representing 22% of First Liberty's total non-interest expense,
and approximately $3.2 million in revenue enhancement opportunities.

. The other terms of the merger agreement as reviewed by outside counsel
to First Liberty, including the requirement that the transaction be
accounted for as a pooling of interests.

. Community Bank System's agreement to operate for a period of at least
three years the former branch offices of First Liberty under the
divisional name "First Liberty Bank & Trust," coupled with Community
Bank System's agreement that three directors of First Liberty would
continue to serve on the boards of directors of both Community Bank
System and Community Bank System Bank, and that Community Bank System
would maintain an advisory board consisting of an additional eight First
Liberty directors for a period of at least four years after closing.

For these reasons, the board of directors of First Liberty has unanimously
determined the merger to be fair and in the best interests of First Liberty and
its shareholders. Accordingly, the board has unanimously approved the merger
agreement and the merger, and unanimously recommends that shareholders of First
Liberty vote "FOR" approval of the merger agreement.

In reaching its determination to approve and recommend the merger and the
merger agreement, First Liberty's board of directors did not assign any
specific weight to the factors described above, and individual directors may
have weighed factors differently.

Fairness Opinion of Community Bank System's Financial Advisors

Community Bank System retained Janney Montgomery Scott LLC to act as its
financial advisors and render a fairness opinion in connection with the merger.
In this discussion, we will refer to Janney Montgomery Scott as "JMS." As part
of its engagement, JMS delivered its oral opinion to Community Bank System's
board of directors that as of November 14, 2000, based upon and subject to the
various considerations set forth therein, the exchange ratio was fair from a
financial point of view to the holders of Community Bank System common stock.
JMS has confirmed its opinion in written form as of the date of this document.

The full text of JMS's written opinion, which sets forth the assumptions
made, matters considered and limitations of the review undertaken, is attached
as Annex D to this document and is incorporated herein by reference. We urge
you to read the opinion in its entirety. The summary of the opinion that
follows is qualified in its entirety by reference to the full text of the
opinion itself. The JMS opinion is directed only to the exchange ratio and does
not constitute a recommendation to any holder of Community Bank System common
stock as to how such shareholder should vote at the Community Bank System
special meeting.

Community Bank System selected JMS to render its opinions based upon its
qualifications, expertise and experience. JMS has knowledge of, and experience
with, the Pennsylvania and New York banking markets and banking organizations
operating in this market and was selected by Community Bank System because of
its knowledge of, experience with, and reputation in the financial services
industry.

In arriving at its opinion, JMS, among other things:

. Reviewed the historical financial performances, current financial
positions and general prospects of Community Bank System and First
Liberty;

. Considered the proposed financial terms of the merger and examined the
projected consequences of the merger with respect to, among other
things, market value, earnings per share and tangible book value per
share of Community Bank System common stock;

. To the extent deemed relevant, analyzed selected public information of
certain other banks and bank holding companies and compared Community
Bank System and First Liberty from a financial point of view to these
other banks and bank holding companies;

. Reviewed the historical market price ranges and trading activity
performance of the common stocks of Community Bank System and First
Liberty;

. Reviewed publicly available information such as annual reports and SEC
filings of Community Bank System and First Liberty;

. Compared the terms of the merger with the terms of certain other
comparable transactions to the extent information concerning such
acquisitions was publicly available;

. Discussed with certain members of senior management of Community Bank
System and First Liberty the strategic aspects of the merger, including
estimated cost savings from the merger;

. Reviewed the merger agreement; and

. Performed other analyses and examinations as deemed necessary.

JMS relied without independent verification upon the accuracy and
completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its opinions. With respect to Community Bank
System's financial forecasts reviewed by JMS in rendering its opinions, JMS
assumed that such financial forecasts were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
management of Community Bank System as to the future financial performance of
Community Bank System. JMS did not make an independent evaluation or appraisal
of the assets (including loans) or liabilities of Community Bank System or
First Liberty nor was it furnished with any such appraisal. JMS also did not
independently verify and has relied on and assumed that all allowances for loan
and lease losses set forth in the balance sheets of Community Bank System and
First Liberty were adequate and complied fully with applicable law, regulatory
policy and sound banking practice as of the date of such financial statements.

The following is a summary of selected analyses prepared and analyzed by JMS
in connection with its opinion but does not purport to be a complete
description of the analyses undertaken by JMS. The preparation of a fairness
opinion is a complex process involving subjective judgments and is not
necessarily susceptible to a partial analysis or summary description. JMS
believes that its analyses must be considered as a whole and that selecting
portions of the analyses and the factors considered therein, without
considering all factors and analyses, could create an incomplete view of the
analyses and processes underlying its opinion.

In performing its analyses, JMS made numerous assumptions with respect to
industry performance, business and economic conditions and various other
matters, many of which cannot be predicted and are beyond the control of
Community Bank System, First Liberty and JMS. Any estimates contained in JMS'
analyses are not necessarily indicative of future results or values, which may
be significantly more or less favorable than such estimates. Estimates on the
values of companies do not purport to be appraisals or

necessarily reflect the prices at which companies or their securities may
actually be sold. Because such estimates are inherently subject to uncertainty,
neither Community Bank System or JMS assumes responsibility if future results
or actual values are materially different from these estimates.

Comparable Company Analysis. JMS compared selected financial and operating
data for Community Bank System with those of a peer group of selected bank
holding companies located in Pennsylvania, New York and New Jersey with assets
between $1 billion and $3 billion. In this discussion, we will refer to this
peer group as the "Community Bank System Peer Group." The analysis compared
equity as a percentage of assets, loans as a percentage of deposits, non-
performing loans as a percentage of loans, loan loss reserves as a percentage
of non-performing loans, non-performing assets and loans 90 days past due as a
percentage of assets, non-performing assets and loans 90 days past due as a
percentage of equity and loan loss reserves, non-performing assets as a
percentage of assets, net charge-offs as a percentage of average loans, return
on average assets, return on average equity, net interest margin, efficiency
ratios, and dividend yield. The analysis also compared price per share as a
percentage of book value per share, price per share as a percentage of tangible
book value per share, price per share as a multiple of trailing earnings per
share, year-to-date and one-year price changes, and average daily trading
volume.

In addition, JMS also compared selected financial and operating data for
First Liberty with those of a peer group of selected bank holding companies
located in Pennsylvania, New York and New Jersey with assets between $500
million and $1 billion. In this discussion, we will refer to this peer group as
the "First Liberty Peer Group." The analysis compared equity as a percentage of
assets, loans as a percentage of deposits, non-performing loans as a percentage
of loans, loan loss reserves as a percentage of non-performing loans, non-
performing assets and loans 90 days past due as a percentage of assets, non-
performing assets and loans 90 days past due as a percentage of equity and loan
loss reserves, non-performing assets as a percentage of assets, net charge-offs
as a percentage of average loans, return on average assets, return on average
equity, net interest margin, efficiency ratios, and dividend yields. The
analysis also compared price per share as a percentage of book value per share,
price per share as a percentage of tangible book value per share, price per
share as a multiple of trailing earnings per share, year-to-date and one-year
price changes, and average daily trading volume.

Analysis of Stock Price and Volume. JMS compared the stock price
performance of Community Bank System to the performance of the Community Bank
System Peer Group and the Nasdaq Bank Composite from November 14, 1999 through
November 14, 2000. The analysis indicated that Community Bank System
outperformed the Peer Group composite while its performance was commensurate
with that of the Nasdaq Bank Composite during this time period. JMS also
compared the stock price per share performance of First Liberty to the
performance of the aforementioned First Liberty Peer Group and the Nasdaq Bank
Composite from November 14, 1999 through November 14, 2000. The analysis
indicated that First Liberty performed at a rate significantly lower than both
the Peer Group composite and the Nasdaq Bank Composite during this period.

Pro Forma Merger Analysis. Using earnings estimates for Community Bank
System and First Liberty as reported by First Call and based on conversations
with the respective managements, JMS analyzed certain pro forma effects
resulting from the merger based on the proposed exchange ratio. Based on this
information, the analysis indicated that, relative to Community Bank System's
performance on a stand-alone basis, the merger could result in earnings per
share dilution of less than 1% during the first year of combined operations.
The merger could also result in an increase to Community Bank System's tangible
book value per share and its return on equity of approximately 13% and 3%,
respectively. The analysis also indicated that First Liberty could experience
estimated earnings per share accretion of between 70% and 75% in the first year
following the merger. Its cash dividends per share could also increase between
43% and 47%.

Analysis of Selected Merger and Acquisition Transactions. JMS analyzed
certain financial aspects of selected mergers and acquisitions of bank holding
companies in three ways. The first looked at all transactions

in the Mid-Atlantic region of the United States since November 1, 1999
involving sellers with assets between $500 million and $1 billion. The second
analysis looked at transactions since November 1, 1999 involving sellers
located in Pennsylvania, New Jersey and New York. The third analysis compared
transactions that have occurred since July 1, 1998 in northeastern
Pennsylvania. In each analysis, JMS compared the sellers' equity as a
percentage of assets, return on average assets, return on average equity, non-
performing assets as a percentage of total assets, price per share as a
percentage of book value per share, price per share as a percentage of tangible
book value per share, price per share as a multiple of trailing earnings per
share, price as a percentage of deposits, price as a percentage of assets and
the tangible book premium as a percentage of core deposits. In summary, the
indicated value to be offered by Community Bank System was consistent with the
values offered in the transactions described herein.

Discounted Dividend Analysis. JMS performed an analysis that estimated the
future stream of after-tax earnings and dividends of First Liberty through
December 31, 2005. To approximate the terminal value of First Liberty's common
stock at December 31, 2005, JMS applied price/earnings multiples ranging from
twelve to sixteen times First Liberty's terminal year earnings and applied
price/book value multiples ranging from 80% to 180%. The range of multiples
used reflected a variety of scenarios regarding the growth and profitability
prospects of First Liberty. The dividend and income streams were then
discounted to present value using various assumptions regarding required rates
of return of holders or prospective buyers of First Liberty common stock. As
calculated by JMS, the implied transaction value per share of First Liberty
common stock was within the range of values indicated by this analysis.

JMS stated that the discounted dividend analysis is a widely used valuation
methodology but noted that it relies on numerous assumptions, including
earnings growth rates, terminal values and discount rates. The analysis did not
purport to be indicative of the actual values or expected values of Community
Bank System common stock.

In reaching its opinion as to fairness, none of the analyses performed by
JMS was assigned a greater significance by JMS than any other. As a result of
its consideration of the aggregate of all factors present and analyses
performed, JMS reached the conclusion, and opined, that the exchange ratio, as
set forth in the merger agreement is fair from a financial point of view to
holders of Community Bank System common stock.

In connection with delivering its written opinion dated as of the date of
this document, JMS updated certain analyses described above to reflect current
market conditions and events occurring since the date of the merger agreement.
These reviews and updates led JMS to conclude that it was not necessary to
change the conclusions it had reached in connection with its initial opinion.

JMS, as part of its investment banking business, is regularly engaged in the
valuation of assets, securities and companies in connection with various types
of asset and security transactions, including mergers, acquisitions, private
placements, and valuation for various other purposes and in the determination
of adequate consideration in such transactions.

The opinion of JMS was based solely upon the information available to it and
the economic, market and other circumstances as they existed as of the date
hereof; events occurring after the date hereof could materially affect the
assumptions used in preparing its opinion. JMS has not undertaken to reaffirm
or revise its opinion or otherwise comment upon any events occurring after the
date of the opinion.

In delivering its opinion, JMS assumed that in the course of obtaining the
necessary regulatory and governmental approvals for the merger, no restrictions
would be imposed on the combined company that would have a materially adverse
effect on the contemplated benefits of the merger. JMS also assumed that there
would not occur any change in applicable law or regulation that would cause a
materially adverse change in the prospects or operations of Community Bank
System and First Liberty after the merger.

Pursuant to the terms of the engagement letter dated July 20, 2000,
Community Bank System agreed to pay JMS a fee equal to 0.10% (ten basis points)
of First Liberty's consolidated assets under generally accepted accounting
principles as of the last day of the month immediately preceding the execution
of the definitive agreement. Based upon First Liberty's consolidated total
assets as of September 30, 2000 of approximately $646.66 million, JMS's fees
would have been approximately $646,660. Community Bank System paid JMS 50% of
the estimated fee upon the signing of the definitive merger agreement. In
addition, Community Bank System agreed to pay JMS the remaining 50% upon the
closing of the transaction and to reimburse JMS for its reasonable out-of-
pocket expenses. Whether or not the merger is completed, Community Bank System
has agreed to indemnify JMS and certain related persons against certain
liabilities relating to or arising out of its engagement.

Fairness Opinion of First Liberty's Financial Advisors

Pursuant to an engagement letter dated as of June 2, 2000, First Liberty
retained Berwind Financial to act as its financial advisor in connection with
First Liberty's consideration of a possible business combination. In connection
with the merger with Community Bank System, the First Liberty board requested
Berwind Financial to render its opinion as to the fairness, from a financial
point of view, of the exchange ratio to the holders of First Liberty common
stock. At the November 29, 2000 meeting at which First Liberty's board
considered and approved the merger agreement, Berwind Financial rendered its
opinion to the board that, based upon and subject to the various considerations
set forth in the opinion, as of November 29, 2000, the exchange ratio was fair
to the holders of First Liberty common stock from a financial point of view. We
will refer to the opinion as of November 29, 2000, as the "November Opinion"
and the opinion as of [ ], 2001 as the "Proxy Opinion."

The full text of Berwind Financial's Proxy Opinion, which sets forth the
assumptions made, matters considered and limitations of the review undertaken,
is attached as Annex C to this document, is incorporated herein by reference,
and should be read in its entirety in connection with this document. The
summary of the opinion of Berwind Financial set forth below is qualified in its
entirety by reference to the full text of the opinion attached as Annex C to
this document.

Berwind Financial was selected to act as First Liberty's financial advisor
in connection with the merger based upon its qualifications, expertise,
reputation and experience. Since 1997, Berwind Financial has formally acted as
financial advisor to First Liberty and its predecessor, The First Jermyn Corp.,
at various times on a contractual basis. Berwind Financial has knowledge of,
and experience with the Pennsylvania, New York and surrounding banking markets
as well as banking organizations operating in those markets and was selected by
First Liberty because of its knowledge of, experience with, and reputation in
the financial services industry. Berwind Financial, as part of its investment
banking business, is engaged regularly in the valuation of assets, securities
and companies in connection with various types of asset and securities
transactions, including mergers, acquisitions, private placements, and
valuations for various other purposes and in the determination of adequate
consideration in such transactions.

On November 29, 2000, First Liberty's board of directors approved and
executed the merger agreement. Prior to the approval, Berwind Financial
delivered its November Opinion to First Liberty's board stating that, as of
that date, the exchange ratio pursuant to the merger agreement was fair to the
shareholders of First Liberty from a financial point of view. Berwind Financial
reached the same opinion as of the date of its Proxy Opinion. The full text of
the Proxy Opinion which sets forth assumptions made, matters considered and
limits on the review undertaken is attached as Annex C to this document.

No limitations were imposed by First Liberty's board of directors upon
Berwind Financial with respect to the investigations made or procedures
followed by Berwind Financial in rendering the November Opinion or the Proxy
Opinion.

In arriving at its opinion, Berwind Financial, among other things:

. reviewed the historical financial performance, current financial
position and general prospects of First Liberty and Community Bank
System and reviewed certain internal financial analyses and forecasts
prepared by the management of First Liberty and Community Bank System;

. reviewed the merger agreement;

. reviewed and analyzed the stock market performance of First Liberty and
Community Bank System;

. studied and analyzed the consolidated financial and operating data of
First Liberty and Community Bank System;

. considered the terms and conditions of the merger between First Liberty
and Community Bank System as compared with the terms and conditions of
comparable bank, bank holding company and financial holding company
mergers and acquisitions;

. met and/or communicated with certain members of First Liberty's and
Community Bank System's senior management to discuss their respective
operations, historical financial statements and future prospects;

. reviewed this document;

. compared the financial performance of First Liberty and Community Bank
System and the prices and trading activity of the stocks of First
Liberty and Community Bank System with those of certain other comparable
publicly-traded banks, bank holding companies and financial holding
companies and their securities;

. discussed the strategic objectives of the merger and the plans for the
combined company with senior executives of First Liberty and Community
Bank System, including estimates of the cost savings and other synergies
projected by First Liberty and Community Bank System for the combined
company;

. participated in discussions and negotiations among representatives of
First Liberty and Community Bank System and their financial and legal
advisors; and

. conducted such other financial analyses, studies and investigations as
we deemed appropriate.

In connection with rendering its November Opinion and Proxy Opinion, Berwind
Financial assumed that in the course of obtaining the necessary regulatory and
governmental approvals for the merger, no restriction will be imposed on
Community Bank System or First Liberty that would have a material adverse
effect on the contemplated benefits of the Merger. Berwind Financial also
assumed that there will not occur any change in applicable law or regulation
that would cause a material adverse change in the prospects or operations of
Community Bank System after the merger.

Berwind Financial relied without independent verification upon the accuracy
and completeness of all of the financial and other information reviewed by and
discussed with it for purposes of its opinions. With respect to First Liberty's
and Community Bank System's financial forecasts and other information reviewed
by Berwind Financial in rendering its opinions, Berwind Financial assumed that
such information was reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of First Liberty and
Community Bank System as to their most likely future performance and the cost
savings and other potential synergies (including the amount, timing and
achievability thereof) anticipated to result from the merger. Berwind Financial
did not make an independent evaluation or appraisal of the assets (including
loans) or liabilities of First Liberty or Community Bank System nor was it
furnished with any appraisal. Berwind Financial also did not independently
verify and has relied on and assumed that all allowances for loan and lease
losses set forth in the balance sheets of First Liberty and Community Bank
System were adequate and complied fully with applicable law, regulatory policy
and sound banking practice as of the date of such financial statements. In
addition, Berwind Financial did not review credit files of either First Liberty
or Community Bank System.

The following is a summary of selected analyses prepared by Berwind
Financial and presented to First Liberty's board in connection with the
November Opinion and analyzed by Berwind Financial in connection with the
November Opinion and the Proxy Opinion. In connection with delivering its Proxy
Opinion, Berwind Financial updated certain analyses described below to reflect
current market conditions and events occurring since the date of the November
Opinion. The reviews and updates led Berwind Financial to conclude that it was
not necessary to change the conclusions it had reached in connection with
rendering the November Opinion.

Comparable Companies and Comparable Acquisition Transaction Analyses.
Berwind Financial compared selected financial, operating, and stock market data
for First Liberty with those of a peer group of SEC-reporting banks, bank
holding companies, and financial holding companies with assets between $500
million and $1 billion, as of the most recent financial period publicly
available, headquartered in Pennsylvania. Financial, operating, and stock
market data, ratios and multiples compared in the analysis of this First
Liberty peer group included but were not limited to:

. return on average assets;

. return on average shareholders' equity;

. shareholders' equity to asset ratios;

. certain asset quality ratios;

. price to book value;

. price to tangible book value; and

. price to earnings and dividend yield.

Berwind Financial also compared selected financial, operating and stock
market data for Community Bank System with those of a peer group of selected
SEC-reporting banks, bank holding companies, and financial holding companies
with assets greater than $1.5 billion and less than $3.5 billion, as of the
most recent period publicly available, headquartered in New York, Pennsylvania
and New Jersey. Financial, operating and stock market data, ratios and
multiples compared in the analysis of the Community Bank System peer group
included, but were not limited to:

. return on average assets;

. return on average shareholders' equity;

. shareholders' equity to asset ratios;

. certain asset quality ratios;

. price to book value;

. price to tangible book value; and

. price to earnings and dividend yield.

Berwind Financial also compared the multiples of book value, tangible book
value, and latest twelve months' earnings inherent to the merger with the
multiples paid in recent acquisitions of banks, bank holding companies and
financial holding companies that Berwind Financial deemed comparable. The
transactions deemed comparable by Berwind Financial included both interstate
and intrastate bank, bank holding company and financial holding company
acquisitions announced after June 30, 1999, in which the selling institution's
assets were between $400 million and $1.2 billion as of the most recent period
publicly available prior to announcement. Berwind Financial compared this
"national group" as a whole as well as certain of its subgroups, including a
regional group, a recently announced group and a performance group with the
First Liberty/Community Bank System transaction. The "regional group" included
transactions involving banks,

bank holding companies and financial holding companies in which the acquired
company was located in Pennsylvania, New York or New Jersey. The "recently
announced group" included transactions involving banks, bank holding companies
and financial holding companies which were announced within the last several
months. The "performance group" included transactions involving banks, bank
holding companies and financial holding companies which exhibited certain
similar financial performance characteristics as First Liberty.

No company or transaction, however, used in this analysis is identical to
First Liberty, Community Bank System or the merger. Accordingly, an analysis of
the result of the foregoing is not mathematical; rather, it involves complex
considerations and judgments concerning differences in financial and operating
characteristics of the companies and other factors that would affect the public
trading values of the companies or company to which they are being compared.

Discounted Dividend Analyses. Using discounted dividend analyses, Berwind
Financial estimated the present value of First Liberty common stock after a
five year period by applying a range of earnings multiples to First Liberty's
terminal year earnings under various growth assumptions. The range of multiples
used reflected a variety of scenarios regarding the growth and profitability
prospects of First Liberty. The terminal values were then discounted to present
value using a range of discount rates reflecting the rate of return required by
holders or prospective buyers of First Liberty common stock. Using discounted
dividend analyses, Berwind Financial also estimated the present value of
Community Bank System common stock after a five year period by applying a range
of earnings multiples to Community Bank System's terminal year earnings under
various growth assumptions. The range of multiples used reflected a variety of
scenarios regarding the growth and profitability prospects of Community Bank
System. The terminal values were then discounted to present value using a range
of discount rates reflecting the rate of return required by holders or
prospective buyers of Community Bank System common stock. These present values
were then multiplied by the transaction exchange ratio to determine the pro
forma value to holders of First Liberty common stock.

In connection with the discounted dividend analysis performed, Berwind
Financial considered and discussed with First Liberty's board how the present
value analysis would be affected by changes in the underlying assumptions,
including variations with respect to the growth rate of assets, net interest
spread, non-interest income, non-interest expenses and dividend payout ratio.
Berwind Financial noted that the discounted dividend stream and terminal value
analysis is a widely used valuation methodology, but the assumptions that must
be made, and the results of this analysis, are not necessarily indicative of
actual values or future results.

Pro Forma Relative Value and Contribution Analyses. Berwind Financial
analyzed the changes in the amount of earnings, book value and dividends
represented by one share of First Liberty common stock prior to the merger and
the number of shares of Community Bank System common stock after the merger
resulting from the exchange ratio. The analysis considered, among other things,
the changes that the merger would cause to First Liberty's earnings per share,
book value per share and indicated cash dividends per share. In reviewing the
pro forma combined earnings, equity and assets of Community Bank System based
on the merger with First Liberty, Berwind Financial analyzed the contribution
that First Liberty would have made to the combined company's earnings, assets,
loans, deposits and equity as of and for the most recent quarterly period ended
as of the date of the Proxy Opinion. Berwind Financial also reviewed the
percentage ownership that First Liberty shareholders would hold in the combined
company. In conducting these analyses, Berwind Financial considered Community
Bank System's acquisition of Citizens National Bank.

Hurdle Rate Analysis. Using a range of discount rates and earnings
multiples, Berwind Financial estimated a range of compound annual earnings per
share growth rates required over a five year period for First Liberty to obtain
a per share valuation level comparable to the consideration offered by
Community Bank System on an independent basis at the end of five years. Berwind
Financial calculated a range of future values of the per share implied value of
the Community Bank System transaction over a five-year period based on a range
of discount rates. The range of discount rates reflected the expected rate of
return required by holders or

prospective buyers of First Liberty common stock. Using a range of price to
earnings multiples reflective of the growth and profitability prospects of
First Liberty, Berwind Financial calculated First Liberty's potential earnings
per share at the end of five years by dividing the price to earnings multiples
into the range of future values. The annual growth rate was calculated based on
the potential earnings per share values at the end of five years and First
Liberty's current annual earnings per share. Berwind Financial then compared
this earnings growth rate with First Liberty's historical and estimated future
earnings growth rates.

In connection with the hurdle rate analysis performed, Berwind Financial
considered and discussed with First Liberty's board how the analysis would be
affected by changes in the underlying assumptions, including variations with
respect to the range of discount rates and price to earnings multiples used.

In connection with rendering its November Opinion and Proxy Opinion, Berwind
Financial performed a variety of financial analyses. Although the evaluation of
the fairness, from a financial point of view, of the exchange ratio in the
merger was to some extent a subjective one based on the experience and judgment
of Berwind Financial and not merely the result of mathematical analysis of
financial data, Berwind Financial principally relied on the previously
discussed financial valuation methodologies in its determinations. Berwind
Financial believes its analyses must be considered as a whole and that
selecting portions of such analyses and factors considered by Berwind Financial
without considering all such analyses and factors could create an incomplete
view of the process underlying Berwind Financial's opinions. In its analysis,
Berwind Financial made numerous assumptions with respect to business, market,
monetary and economic conditions, industry performance and other matters, many
of which are beyond First Liberty and Community Bank System's control. Any
estimates contained in Berwind Financial's analyses are not necessarily
indicative of future results or values, which may be significantly more or less
favorable than such estimates.

In reaching its opinion as to fairness, none of the analyses or factors
considered by Berwind Financial was assigned any particular weighting by
Berwind Financial than any other analysis. As a result of its consideration of
the aggregate of all factors present and analyses performed, Berwind Financial
reached the conclusion, and opined, that the exchange ratio pursuant to the
merger agreement was fair to the shareholders of First Liberty from a financial
point of view.

Berwind Financial's Proxy Opinion was based solely upon the information
available to it and the economic, market and other circumstances as they
existed as of the date its Proxy Opinion was delivered; events occurring after
the date of its Proxy Opinion could materially affect the assumptions used in
preparing its Proxy Opinion. Berwind Financial has not undertaken to reaffirm
and revise its Proxy Opinion or otherwise comment upon any events occurring
after the date of the Proxy Opinion.

Pursuant to the terms of the engagement letter dated June 2, 2000, First
Liberty has paid Berwind Financial $150,000 for serving as financial advisor
and delivering its November Opinion. First Liberty has also agreed to pay
Berwind Financial approximately $563,000 upon the consummation of the merger
for acting as financial advisor in connection with the merger. Whether or not
the merger is consummated, First Liberty has also agreed to reimburse Berwind
Financial for all reasonable out-of-pocket expenses incurred in connection with
the services provided by Berwind Financial and to indemnify Berwind Financial
and certain related persons against certain liabilities relating to or arising
out of its engagement.

The full text of the Proxy Opinion of Berwind Financial dated as of the date
of this document, which sets forth assumptions made and matters considered, is
attached as Annex C to this document. First Liberty's shareholders are urged to
read the Proxy Opinion in its entirety. Berwind Financial's Proxy Opinion is
directed only to the exchange ratio pursuant to the merger agreement from a
financial point of view, is for the information of the board of directors of
First Liberty, and does not address any other aspect of the merger nor does it
constitute a recommendation to any holder of First Liberty common stock as to
how such holder should vote at the First Liberty special meeting.

The foregoing provides only a summary of the Proxy Opinion of Berwind
Financial and is qualified in its entirety by reference to the full text of
that opinion, which is set forth in Annex C to this document.

Stock Option Agreement

The stock option agreement is attached as Annex B to this document. The
following discussion describes the material terms of the stock option
agreement. These descriptions are only a summary and thus must be qualified by
reference to the stock option agreement. We urge you to read the stock option
agreement.

Pursuant to the stock option agreement, First Liberty granted to Community
Bank System an unconditional, irrevocable option to purchase up to 1,267,359
shares of First Liberty common stock, at an exercise price of $13.25 per share.
The number of shares, and the type of securities, purchasable under the option
are subject to adjustment upon changes in capitalization or in certain other
circumstances. In addition, if First Liberty issues or agrees to issue any
shares of First Liberty common stock at a price less than the exercise price
then in effect (other than pursuant to exercise of existing employee stock
options), then the exercise price shall be adjusted to equal the lesser price.

The purpose of the option is to increase the likelihood that the merger will
be completed by making it more difficult and more expensive for a third party
to gain control of First Liberty. Accordingly, the option is exercisable only
on the occurrence of certain events that generally involve the acquisition by a
third party of First Liberty, a significant portion of the then issued and
outstanding shares of First Liberty common stock or all or a significant
portion of First Liberty's assets. However, the option cannot be exercised
unless either:

. a third party acquires beneficial ownership of 20% or more of the then
outstanding shares of First Liberty common stock; or

. First Liberty or any of its subsidiaries enters into a letter of intent
or a definitive agreement concerning the acquisition by a third party of
First Liberty, its material subsidiary, all or substantially all of its
assets, or 20% or more of First Liberty's or its material subsidiary's
outstanding common stock.

Generally, even if it becomes exercisable, the option will expire and no
longer be exercisable if the merger agreement is terminated in accordance with
its provisions, provided that the termination occurs prior to the occurrence of
certain triggering events, or twelve months passes after termination of the
merger agreement.

While the option is exercisable, Community Bank System can compel First
Liberty to repurchase the option, or any shares purchased upon exercise of the
option, for a cash payment determined under the stock option agreement. This
cash payment could include any reasonable out-of-pocket expenses incurred by
Community Bank System in connection with the merger which have not previously
been reimbursed by First Liberty. The payment of cash in accordance with the
stock option agreement could have the effect of disqualifying a competing
acquisition from the use of the pooling-of-interests method of accounting, even
if that method would otherwise have been available.

Although the shares issuable upon full exercise of the option represent
approximately 16.6% of the First Liberty common stock that would be outstanding
after the exercise (or 19.9% without giving effect to the exercise), Community
Bank System may not acquire more than 5% of the stock of First Liberty,
pursuant to the exercise of the option or otherwise, without prior approval of
the Federal Reserve. Community Bank System has not yet received this approval,
but may request the approval in its application to the Federal Reserve to
acquire control of First Liberty.

Voting Agreements with Directors and Executive Officers of First Liberty

Community Bank System has entered into an agreement with each director and
executive officer of First Liberty. Pursuant to the agreement, each director
and executive officer of First Liberty has agreed to vote in favor of the
merger agreement all of his shares of First Liberty common stock that he is
entitled to vote. The agreement also contains provisions ensuring compliance
with Rule 145 under the Securities Act and applicable SEC rules concerning the
pooling of interests accounting treatment. For further details on these
provisions, please see "Resales of Community Bank System Common Stock" on page
[ ] and "Accounting Treatment" starting on page [ ].

Financial Interests of Certain First Liberty Directors and Executive Officers
in the Merger

Certain members of management of First Liberty have financial interests in
the merger that are different from, and may conflict with, interests of First
Liberty shareholders. The First Liberty board of directors was aware of these
interests and considered them in approving the merger agreement.

Stock Options

As of the record date for the First Liberty special meeting, First Liberty
directors and executive officers beneficially owned approximately [ ] shares,
and held options to purchase [ ] shares of First Liberty common stock. On the
effective date of the merger, each outstanding First Liberty option will
convert into an option to acquire shares of Community Bank System common stock.
The number of shares of Community Bank System common stock issuable upon the
exercise of the converted option will equal the number of shares of First
Liberty common stock covered by the option multiplied by 0.56 and the exercise
price for each share of Community Bank System common stock will be the stated
exercise price of the option divided by 0.56. Shares issuable upon the exercise
of options to acquire Community Bank System common stock will be issuable in
accordance with the terms of the respective plans and grant agreements of First
Liberty under which First Liberty issued the options.

Indemnification; Directors' and Officers' Insurance

Community Bank System has agreed to indemnify all directors, officers, and
employees of First Liberty for a period of six years to the fullest extent
permitted by law against:

. all liabilities and expenses relating to claims, proceedings, or
investigations resulting from the person's status as a director,
officer, or employee of First Liberty or any First Liberty subsidiary,
whether pertaining to matters existing prior to the merger and whether
asserted prior to or after the merger; and

. all liabilities and expenses relating to claims, proceedings or
investigations arising out of the merger agreement or the merger.

Community Bank System has also agreed that all rights to indemnification and
all limitations on liability existing in favor of First Liberty's directors,
officers and employees provided in First Liberty's articles of incorporation,
by laws or similar governing documents with respect to matters occurring prior
to the merger will continue in full force and effect for a period of six years
after the merger. Community has agreed to honor those commitments as though it
were the indemnifying party.

Community Bank System will maintain First Liberty's existing directors' and
officers' liability insurance policy, or a policy providing comparable coverage
amounts on terms no less favorable, covering those persons for a period of
three years from the date of the merger, subject to certain maximum cost
limits.

Employment and Other Agreements

First Liberty Employment Agreements. Three officers of First Liberty,
William M. Davis, Steven R. Tokach, and Joseph R. Solfanelli, are parties to
employment agreements with First Liberty under which they are entitled to
receive a severance package as a result of the merger. Under his agreement, Mr.
Davis will receive a lump sum severance payment of $490,000 in cash, and, for
two years after completion of the merger, he will receive a continuation of
life, disability, and health insurance benefits. The agreements for Mr. Tokach
and Mr. Solfanelli provide for severance payments of $330,000 and $250,000,
respectively. Both Mr. Tokach and Mr. Solfanelli will enter into new employment
agreements with Community Bank System and Community Bank and, accordingly, have
agreed to defer receipt of their payments under their First Liberty Agreements
until their employment with Community Bank System and Community Bank
terminates. Mr. Tokach and Mr. Solfanelli will each receive his deferred
severance payment in all events upon termination of employment with

Community Bank System and Community Bank except in limited circumstances
involving a violation of the customer and employee non-solicitation provisions
included in their new employment agreements.

William M. Davis Consulting Agreement with Community Bank System. It is a
condition of the merger that Mr. Davis enter into a three-year consulting
agreement with Community Bank. The consulting agreement requires Mr. Davis to
perform services from 40 to 60 hours each month in connection with the
integration of the business of First Liberty Bank into Community Bank. Under
his consulting agreement, Mr. Davis will receive $100,000 cash compensation per
year during the period of his engagement. The consulting agreement contains
customary non-compete and non-solicitation provisions for a period of three
years following termination of his engagement.

Steven R. Tokach and Joseph R. Solfanelli Employment Agreements with
Community Bank System. It is a condition of the merger that Mr. Tokach and Mr.
Solfanelli enter into three-year employment agreements with Community Bank
System and Community Bank at the time of the merger. Mr. Tokach's agreement
provides that he will receive an annual base salary of $165,000 plus potential
incentive compensation and benefits as compensation for serving as President
and Chief Executive Officer of the division of Community Bank operating in the
market areas formerly served by First Liberty Bank. Under Mr. Solfanelli's
employment agreement, he will receive an annual base salary of $150,000 plus
potential incentive compensation and benefits for serving as Executive Vice
President and Chief Legal Officer of the division of the Bank operating in the
market areas formerly served by First Liberty Bank. The agreements also provide
Mr. Tokach and Mr. Solfanelli with severance payments and benefits in the event
that their employment terminates under specified circumstances, including a
"change in control" of Community Bank System.

Advisory Board

Community Bank System will establish an advisory board consisting of eight
former members of First Liberty's board of directors and the chief executive
officer of Community Bank System. The advisory board will advise Community Bank
on the deposit, lending and financial services activities in First Liberty's
former market area and generally work to ensure a smooth transition of business
relationships. The advisory board will include the following First Liberty
directors: William M. Davis, Joseph P. Coviello, Michael A. Barbetti, Thomas G.
Speicher, William K. Nasser, Jr., Fred J. Gentile, Norman E. Woodworth, and
Robert T. Kelly. The advisory board will be maintained for at least four years
after the merger and each member of the advisory board other than the chief
executive officer of Community Bank System will receive an annual retainer of
$12,000.

Continued Director Fees

Three current directors of First Liberty, Saul Kaplan, Peter A. Sabia and
Harold Kaplan, will become directors of Community Bank System and Community
Bank. As such, they will receive directors' fees in accordance with Community
Bank System's policies on compensation of non-employee directors from time to
time.

Material Federal Income Tax Consequences

Generally. The following discussion addresses the material Federal income
tax considerations of the merger that are generally applicable to First Liberty
shareholders. The following discussion does not deal with all Federal income
tax considerations that may be relevant to certain First Liberty shareholders
in light of their particular circumstances, such as shareholders who:

. are dealers in securities;

. are insurance companies or tax-exempt organizations;

. are subject to alternative minimum tax;

. hold their shares as part of a hedge, straddle or other risk reduction
transaction;

. are foreign persons;

. dissent from the merger (see "Federal Income Tax Treatment of
Dissenters" on page [ ]); or

. acquired their First Liberty common stock through stock options or
otherwise as compensation.

In addition, it does not address the tax consequences of the merger under
foreign, state, or local tax laws or the tax consequences of transactions
completed before or after the merger, such as the exercise of options or rights
to purchase First Liberty common stock in anticipation of the merger.

The following discussion is based on the Internal Revenue Code, applicable
Treasury Regulations, judicial decisions, and administrative rulings and
practice, all as of the date of this document, all of which are subject to
change. Any change could be applied to transactions that were completed before
the change, and could affect the accuracy of the statements and conclusions in
this discussion and the tax consequences of the merger to Community Bank
System, First Liberty and First Liberty shareholders.

Neither First Liberty nor Community Bank System has requested or will
request a ruling from the Internal Revenue Service with regard to any of the
tax consequences of the merger. PricewaterhouseCoopers, Community Bank System's
independent auditors, has rendered its opinion as of the date of this document
and, as a condition to the completion of the merger, will again render an
updated opinion at the closing of the merger, to First Liberty and Community
Bank System, to the effect that:

. the merger constitutes a tax-free "reorganization" within the meaning of
Section 368(a)(1)(A);

. the merger will not result in the recognition of gain or loss for
federal income tax purposes to First Liberty or Community Bank System;

. First Liberty shareholders will not recognize gain or loss with respect
to shares of Community Bank System common stock received by them in the
merger, but gain or loss will be recognized by First Liberty
shareholders with respect to cash received in lieu of fractional shares;

. each First Liberty shareholder's total tax basis in the Community Bank
System common stock received in the merger will be the same as the total
tax basis of the shares of First Liberty common stock exchanged in the
merger, decreased by any tax basis allocable to fractional shares, if
any, of Community Bank System common stock for which cash is received;
and

. each First Liberty shareholder's holding period in the Community Bank
System common stock issued in the merger will include the period during
which the First Liberty shareholder held the First Liberty common stock
exchanged in the merger, provided that he or she held the First Liberty
common stock as capital assets on the effective date of the merger.

The opinions that are to be rendered will be based upon the assumption that
the merger will take place in the manner described in the merger agreement. The
tax opinions will also assume the truth and accuracy of certain factual
representations that have been made by First Liberty and Community Bank System
which are customarily given in transactions of this kind.

Federal Income Tax Treatment of Dissenters. If a First Liberty shareholder
effectively dissents from the merger and receive cash for his or her shares,
the First Liberty shareholder will recognize a gain (or loss) for federal
income tax purposes equal to the amount by which the cash received for those
shares exceeds, or is less than, the tax basis for the shares. The amount of
that gain (or loss), if any, will be treated as ordinary income (or loss) or
long-term or short-term capital gain (or loss) depending on the length of time
a First Liberty shareholder held the shares, whether he or she held the shares
as a capital asset, and whether he or she actually owns Community Bank System
common stock or are deemed to own shares of First Liberty common stock or
Community Bank System common stock pursuant to the applicable constructive
ownership rules. In certain

circumstances, a First Liberty shareholder can be deemed for tax purposes to
own shares that are actually owned by a non-dissenter that is related to him or
her, or to own shares of Community Bank System common stock, with the possible
result that the cash received upon the exercise of dissenters' rights could be
treated as a dividend received pursuant to a corporate distribution rather than
as an amount received pursuant to a sale or exchange of First Liberty common
stock.

Caveat. First Liberty shareholders should recognize that opinions of
PricewaterhouseCoopers are not binding on the Internal Revenue Service or the
courts. If the Internal Revenue Service were to assert successfully that the
merger is not a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code, then each shareholder of First Liberty would be required
to recognize gain or loss equal to the difference between (1) the fair market
value of all Community Bank System common stock received in the merger and (2)
the tax basis in the First Liberty common stock surrendered in the merger. If
this were to occur, each First Liberty shareholder's total initial tax basis in
the Community Bank System common stock received would be equal to its fair
market value, and the holding period for the Community Bank System common stock
would begin the day after the merger. The gain or loss would be a long-term
capital gain or loss if the holding period for the First Liberty common stock
was more than one year and the First Liberty common stock was a capital asset
in the hands of a First Liberty shareholder.

The preceding discussion does not purport to be a complete analysis of all
potential tax consequences of the merger that may be relevant to a particular
First Liberty shareholder. First Liberty shareholders are urged to consult with
their own tax advisors regarding the specific tax consequences of the merger to
them, including the applicability and effect of foreign, state, local, and
other tax laws.

Accounting Treatment of the Merger

We expect the merger to be accounted for as a pooling of interests for
accounting and financial reporting purposes under generally accepted accounting
principles. Under this method of accounting, Community Bank System stockholders
and First Liberty shareholders will be deemed to have combined their existing
voting stock interest by virtue of the exchange of shares of First Liberty
common stock for shares of Community Bank System common stock in the merger.
Accordingly, the book value of the assets, liabilities and stockholders' equity
of each of Community Bank System and First Liberty, as reported on their
respective consolidated balance sheets, will be carried over to the
consolidated balance sheet of the combined company, and no goodwill will be
created. The combined company will be able to include in its consolidated net
income the combined net income of both companies for the entire fiscal year in
which the merger occurs. However, the combined company must treat certain
expenses incurred to effect the merger as current charges against income. In
addition, all historical consolidated balance sheets and consolidated
statements of operations will be restated as if the merger had been completed
as of the beginning of the earliest period presented.

The merger is conditioned upon First Liberty receiving a pooling letter from
KPMG, its independent auditors, that First Liberty is a poolable entity under
applicable accounting standards, and Community Bank System receiving a pooling
letter from PricewaterhouseCoopers, its independent auditors, that the merger
will qualify for the pooling of interests accounting treatment.

We have prepared the unaudited pro forma financial information included in
this document under "Selected Unaudited Pro Forma Financial Data" using the
pooling of interests accounting method to account for the merger.

SEC guidelines regarding the pooling of interests method of accounting limit
sales of shares of the acquiring and acquired company by affiliates of either
company in a business combination. SEC guidelines indicate that the pooling of
interests method of accounting generally will not be challenged on the basis of
sales by affiliates of the acquiring or acquired company if the affiliates do
not dispose of or otherwise reduce their risk with respect to any of the shares
of the company they own, or shares of a corporation they receive in connection
with a merger, during the period beginning 30 days before the merger is
consummated and ending

when financial results covering at least 30 days of post-merger operations of
the combined companies have been published. Each director and executive officer
of First Liberty has delivered to Community Bank System a written agreement to
refrain from taking any of those actions during that period. Each director and
executive officer of Community Bank System has also delivered to First Liberty
a similar written agreement. In addition, each company has agreed to use its
best reasonable efforts to cause any other person who is an affiliate of that
company under applicable accounting rules to deliver to the other company a
written agreement containing provisions intended to preserve the ability of the
merger to be accounted for as a pooling of interests.

Community Bank System has agreed in the merger agreement to use its
reasonable best efforts to publish its quarterly financial results as soon as
reasonably practicable after the end of the first fiscal quarter of Community
Bank System in which there are at least 30 days of post-merger combined
operations, as contemplated by applicable SEC accounting rules. This
publication would permit affiliates of First Liberty and Community Bank System
to thereafter dispose of or otherwise reduce risk with respect to their shares
without adversely affecting Community Bank System's ability to account for the
merger as a pooling of interests.

Resales of Community Bank System Common Stock

The shares of Community Bank System common stock to be issued to First
Liberty shareholders in the merger will be registered under the Securities Act.
These shares may be traded freely and without restrictions by a First Liberty
shareholder if he or she is not an "affiliate" of First Liberty at the time of
the First Liberty special meeting. As defined by the Securities Act, an
affiliate of First Liberty is any person or entity that directly or indirectly
controls, is controlled by or is under common control with First Liberty.
Affiliates generally include directors, executive officers and 10% or greater
shareholders of First Liberty. Under most circumstances, affiliates must comply
with Rule 145 under the Securities Act before selling any Community Bank System
common stock they receive in the merger.

Under Rule 145, during the one-year period after the completion of the
merger, affiliates of First Liberty may resell shares of Community Bank System
common stock received by them in the merger only through unsolicited "brokers
transactions" or in transactions directly with a "market maker," as those terms
are defined in Rule 144 under the Securities Act. In addition, during this one-
year period after the merger, the number of shares to be sold by an affiliate
(together with certain related persons) may not exceed the greater of:

. 1% of the total number of the outstanding shares of Community Bank
System common stock; or

. the average weekly trading volume of Community Bank System common stock
during the four calendar weeks preceding the proposed sale.

After the end of one year from the merger, an affiliate would be able to
sell Community Bank System common stock received in the merger without the
requirements or limitations described above, provided that Community Bank
System was current with its periodic filings with the SEC. Two years after the
merger, an affiliate would be able to sell the shares of Community Bank System
common stock received in the merger without any restrictions.

In addition, persons who become affiliates of Community Bank System may
resell shares of Community Bank System common stock issued in the merger,
subject to similar limitations and certain filing obligations specified in Rule
144.

Each director and executive officer of First Liberty has signed an agreement
which contains provisions intended to ensure compliance with the Securities Act
and Rule 145. In addition, First Liberty agreed to use its reasonable best
efforts to cause any other person who is identified by us as an affiliate of
First Liberty for purposes of Rule 145 to deliver to Community Bank System,
within 30 days of the date of the merger agreement, an agreement to comply with
the Securities Act and Rule 145.

New York Stock Exchange Listing

Community Bank System has agreed to make an application to list the shares
of its common stock to be issued in the merger on the New York Stock Exchange.
The stock must be authorized for listing on the New York Stock Exchange for the
merger to be completed.

Regulatory Approvals and Notices for the Merger

Under the merger agreement, First Liberty and Community Bank System have
agreed to submit applications for all necessary regulatory approvals and to
give all requisite notices to governmental agencies regarding both the merger
of First Liberty and Community Bank System and the merger of First Liberty Bank
and Community Bank. These include approvals of and notices to the Comptroller
of the Currency, the Federal Reserve Board, and the Pennsylvania Department of
Banking.

The closing of the merger of First Liberty and Community Bank System is
conditioned upon the receipt of all approvals of regulatory authorities
required for both mergers, the expiration of all notice periods and waiting
periods after the grant of regulatory approvals, and the satisfaction of all
conditions contained in any regulatory approvals.

The Comptroller of the Currency. The merger of First Liberty Bank and
Community Bank is subject to approval by the Comptroller of the Currency.
Community Bank filed this application on [ ], 2001 and expects the processing
of the application to be completed by [ ], 2001.

The merger may not be completed until the 15th day following the date of the
approval by the Comptroller of the Currency. During this 15-day period, the
United States Department of Justice may comment adversely on the merger or
challenge the merger on antitrust grounds. The commencement of an antitrust
action would stay the effectiveness of the Comptroller of the Currency approval
unless a court specifically orders otherwise.

You should be aware that the approval by Comptroller of Currency:

. reflects only its views that the merger does not contravene applicable
competitive standards imposed by law and is consistent with regulatory
policies relating to safety and soundness;

. is not an opinion of the Comptroller of currency that the merger is
financially favorable to the shareholders of First Liberty or that the
Comptroller of Currency has considered the adequacy of the terms of the
merger; and

. is not an endorsement of or recommendation for the merger.

Federal Reserve Board. Under federal regulations, the merger of First
Liberty and Community Bank System is eligible for an expedited review process
which requires Community Bank System to file certain information with the
Federal Reserve Board at least 10 days prior to the consummation of the merger
during which time the Federal Reserve Board determines if a full application is
required. Community Bank System intends to make the filing with the Federal
Reserve Board by [ ] 2001.

Pennsylvania Department of Banking. Under the Pennsylvania Banking Code of
1965, the merger of Community Bank System and First Liberty is subject to the
prior approval of the Pennsylvania Department of Banking. It is expected that
the application for approval will be filed by [ ], 2001. Further, under
the Pennsylvania Banking Code, notice of the merger of Community Bank and First
Liberty Bank needs to be given to the Pennsylvania Department of Banking. It is
expected that this notice will be given by [ ], 2001.

THE MERGER AGREEMENT

Exchange of Certificates

Community Bank System will deposit with American Stock Transfer & Trust
Company, the transfer agent for its common stock and the exchange agent for the
merger, certificates representing the shares of Community Bank System common
stock to be issued in the merger and cash payable in lieu of fractional shares.

As soon as practicable but no later than five business days after the date
on which the merger becomes effective, Community Bank System will use its best
reasonable efforts to cause the exchange agent to mail to each record holder of
a certificate formerly representing First Liberty common stock (other than
those who exercised their dissenters' rights) a letter of transmittal to be
used for the exchange of the stock certificates. The letter of transmittal and
the accompanying materials will explain the procedures to be followed for the
exchange. After a First Liberty shareholder surrenders to the exchange agent
for exchange and cancellation his or her First Liberty certificate(s), together
with a duly executed letter of transmittal, the exchange agent will mail back a
certificate representing the number of shares of Community Bank System common
stock the shareholder is entitled to receive in the merger and a check for cash
in lieu of fractional shares, if any. Community Bank System agreed to use its
best reasonable efforts to cause the exchange agent to complete the exchange of
certificates within 15 days of receipt of surrendered First Liberty
certificates by the exchange agent. No interest will be paid to former
shareholders of First Liberty in connection with the exchange of certificates.

If any certificate formerly representing First Liberty common stock is lost,
stolen or destroyed, Community Bank System can require its holder to give an
affidavit to that effect and to deliver an indemnity agreement and/or post a
bond in an amount that Community Bank System may reasonably direct as indemnity
against any claim that may be made with respect to the certificate. Once these
requirements have been satisfied, the exchange agent will issue a certificate
representing an appropriate number of shares of Community Bank System.

First Liberty shareholders should not return their certificates representing
shares of First Liberty common stock with the enclosed proxy. The stock
certificates should only be forwarded to the exchange agent with the letter of
transmittal and election form, which First Liberty shareholders will receive
after the completion of the merger. Community Bank System stockholders will not
be required to surrender or exchange the certificates representing their shares
of Community Bank System common stock in connection with the merger.

Declaration of dividends by Community Bank System after the merger will
include dividends on all Community Bank System common stock issued in the
merger. However, no dividend or other distribution payable to the holders of
record of Community Bank System common stock at or as of any time after the
completion of the merger will be paid to the former First Liberty shareholders
until they physically surrender their certificates as described above, and no
interest will be paid on any dividend or distribution. After the completion of
the merger, the stock transfer books of First Liberty will close and there will
be no more transfers on the transfer books of First Liberty. If any
certificates formerly representing shares of First Liberty common stock are
presented for transfer after the merger, those certificates will be cancelled
and exchanged for certificates representing Community Bank System common stock
and cash in lieu of fractional shares, if any, as provided in the merger
agreement.

Representations and Warranties

In the merger agreement, we each make customary representations and
warranties about ourselves concerning various business, legal, financial,
regulatory and other pertinent matters. These representations and warranties
will not survive after the merger. Under certain circumstances, each of us may
decline to complete the merger if the inaccuracy of the other party's
representations and warranties has a material adverse effect on the other
party.

Conditions to the Merger

Mutual Conditions. Before either of us will be obligated to complete the
merger, the following conditions must have been satisfied:

. Community Bank System stockholders and First Liberty shareholders
approve the merger agreement, and all other corporate action necessary
on the part of each party to authorize the merger are taken;

. we receive all approvals or consents required by law or mutually deemed
necessary from any applicable governmental agency, all applicable notice
or waiting periods under all laws expire, and all conditions contained
in the approvals or consents, if any, are satisfied;

. the SEC declares effective the registration statement covering the
Community Bank System common stock to be issued in the merger, and the
registration statement is not the subject of any stop order or any
actual or threatened proceeding seeking a stop order;

. Community Bank System receives all necessary authorizations and permits
from state securities agencies or commissions for the issuance of its
common stock in the merger, or confirms that no authorizations or
permits are required;

. there is no order, decree or injunction in effect which prohibits the
completion of the merger, and there is no actual or threatened
governmental action or proceeding that prevents the completion of the
merger;

. the New York Stock Exchange lists the Community Bank System common stock
to be issued to the First Liberty shareholders in the merger, subject to
official notice of issuance;

. PricewaterhouseCoopers, Community Bank System's independent auditors,
delivers an opinion to First Liberty and Community Bank System to the
effect that the merger will qualify as a tax-free reorganization under
Section 368 of the Internal Revenue Code, and as to certain other
related matters;

. Community Bank enters into a consulting agreement with William M. Davis,
President of First Liberty, on terms specified in the merger agreement.
Please see "Financial Interests of Certain First Liberty Directors and
Executive Officers in the Merger" on page [ ] for more details of this
consulting agreement;

. Community Bank System and Community Bank enter into an employment
agreement with each of Steven R. Tokach and Joseph R. Solfanelli,
executive officers of First Liberty, on terms specified in the merger
agreement. Please see "Financial Interests of Certain First Liberty
Directors and Executive Officers in the Merger" on page [ ] for more
details of these employment agreements; and

. First Liberty receives a pooling letter from KPMG, its independent
auditors, that First Liberty is a poolable entity, and Community Bank
System receives a pooling letter from PricewaterhouseCoopers, its
independent auditors, that merger would qualify for the pooling of
interests method of accounting.

Conditions to Obligations of First Liberty. Before First Liberty will be
obligated to complete the merger, the following additional conditions must have
been satisfied:

. the representations and warranties of Community Bank System contained in
the merger agreement are true in all material respects on the date of
the merger agreement and on the closing date. The representations and
warranties may contain inaccuracies if, taken together, they would not
have a material adverse effect on Community Bank System;

. Community Bank System has materially performed its obligations under the
merger agreement which are intended to be performed before the closing;

. Community Bank System has delivered a customary closing certificates as
to the above two matters;

. First Liberty receives from each person deemed an "affiliate" of
Community Bank System under applicable accounting rules an agreement
designed to ensure that the merger will be accounted for as a pooling of
interests; and

. First Liberty receives a written fairness opinion from Berwind
Financial, its financial advisors, dated within five days of the mailing
of this document.

Conditions to Obligations of Community Bank System. Before Community Bank
System will be obligated to complete the merger, the following additional
conditions must have been satisfied:

. the representations and warranties of First Liberty contained in the
merger agreement are true in all material respects on the date of the
merger agreement and on the closing date. The representations and
warranties may contain inaccuracies if, taken together, they would not
have a material adverse effect on First Liberty;

. First Liberty has materially performed its obligations under the merger
agreement which are intended to be performed before the closing;

. First Liberty has delivered a customary closing certificates as to the
above two matters;

. Community Bank System receives from each person deemed an "affiliate" of
First Liberty under applicable accounting rules an agreement designed to
ensure that the merger will be accounted for as a pooling of interests;

. First Liberty shareholders have not exercised their dissenter's rights
with respect to more than 7% of the outstanding shares of First Liberty
common stock; and

. to the extent that any contract or agreement of First Liberty requires
the consent of or waiver from any other party because of the merger,
First Liberty receives the consent or waiver unless the failure to
receive the same will not have a material adverse effect on First
Liberty.

Unless prohibited by law, any of the conditions to the merger may be waived
by the applicable party. As described below, if these conditions are not
satisfied or waived, each of us may have a right to terminate the merger
agreement under certain circumstances. Although it was not a condition to
Community Bank System's obligation to complete the merger under the merger
agreement, Janney Montgomery Scott, Community Bank System's financial advisors,
has rendered a written fairness opinion dated as of the date of this document.

Termination

The merger agreement may be terminated by either of us at any time before
the completion of the merger if:

. we both consent in writing to the termination;

. the other party materially breaches, and does not cure within 30 days,
any of the representations or warranties or any covenant or agreement it
has made under the merger agreement and the breach entitles the party
seeking to terminate to not complete the merger.

. we are not able to obtain required governmental approvals, and all
appeals and requests for reconsideration have been exhausted;

. any governmental entity issued a final and non-appealable order to
prohibit the completion of the merger;

. either Community Bank stockholders or First Liberty shareholders do not
approve the merger agreement at a special meeting called for that
purpose; or

We can terminate the merger agreement without completing the merger, even if
Community Bank System stockholders and/or First Liberty shareholders have
already voted to approve the merger agreement. If the merger agreement is
terminated pursuant to its terms, the merger agreement will become void and
have no effect, except with respect to our respective obligations regarding
confidential information and expenses as set forth in the merger agreement. A
termination of the merger agreement will not relieve the breaching party from
liability for its uncured, willful breach.

Conduct of Business prior to Completion of the Merger; Covenants

The merger agreement provides that, during the period from the date of the
merger agreement (November 29, 2000) to the completion of the merger, we will
each use our reasonable best efforts to maintain our respective properties,
businesses and relationships with customers, employees and others, and will
cause our respective subsidiaries to do the same. During the same period, other
than as set forth in the merger agreement, neither First Liberty nor any of its
subsidiaries may take any of the following actions, among others, without the
prior written consent of Community Bank System (which consent may not be
unreasonably withheld):

. conduct its business other than in the ordinary course, substantially
consistent with past practice, or become responsible for obligations of
more than $25,000 or which requires performance over one year or longer
(other than loans and investments booked in ordinary course);

. declare, set aside or pay any dividend or make any distribution on any
of its stock, other than regular quarterly dividends of $0.11 per share
or less;

. issue any of its stock or cause any of its treasury shares to become
outstanding, other than upon exercise of stock options outstanding on
November 29, 2000;

. issue, authorize or amend any rights to acquire its stock or any rights
related to its stock;

. repurchase or reacquire any of its stock or any securities convertible
into its stock;

. incur additional debt or other obligation for borrowed money, except in
the ordinary course of business consistent with past practice;

. effect any recapitalization, reclassification, stock dividend, stock
split or similar transaction;

. amend its articles of incorporation or bylaws;

. create or permit any lien or encumbrance on its stock;

. merge or consolidate with any other entity, or acquire control of any
other entity or create a subsidiary;

. waive, cancel or compromise any material right, debt or claim other than
in the ordinary course of business consistent with past practice and
with prior notice to Community Bank System;

. sell or dispose of, or acquire, any assets with a value of more than
$25,000, other than in foreclosure or in similar proceedings or
transactions in investment portfolio securities in ordinary course of
business consistent with past practice;

. make total capital expenditures of more than $25,000;

. open or close branches or facilities, or enter into or modify any leases
or contracts relating to its branches or facilities;

. increase compensation of, or pay or provide bonus or other benefits to,
its employees or directors, except in a manner consistent with past
practice or as required by law or existing contracts;

. adopt, modify or commit itself to any employee benefits plan or any
employment agreement, except in the ordinary course of business
consistent with past practice or as required by existing plans or
contracts;

. change its material banking policies in a material way, except as
required by law;

. change its accounting methods or tax reporting methods, unless required
by generally accepted accounting principles or by law;

. except as may be required by law, take any action that would cause its
representations and warranties in the merger agreement to become untrue
in any material manner, or cause any conditions to the merger to be
unsatisfied; or

. take or agree to take any other action which would interfere with or
delay the merger or make the merger more costly.

Until the merger is completed, except as set forth in the merger agreement
or as consented to in writing by First Liberty (which consent may not be
unreasonably withheld), Community Bank System has agreed to conduct its
business in the ordinary course and substantially consistent with past
practice. Community Bank System is permitted to acquire or agree to acquire any
entity or its assets while the merger is pending, so long as the acquisition
would not materially delay or prevent the completion of the merger. Without
First Liberty's prior consent, however, Community Bank System may not enter
into a definitive agreement to acquire or merge or consolidate with a third
party if:

. under applicable regulations, Community Bank System would be required to
present pro forma financial information relating to that transaction in
the registration statement for our merger; or

. in that transaction, Community Bank System would issue more than 20% of
the total number of shares of its common stock outstanding on November
29, 2000.

The merger agreement also contains certain other agreements relating to our
conduct pending the merger, including among others those requiring us to:

. cooperate with each other to prepare and file with the SEC a
registration statement for the merger, and as promptly as practicable
after the effectiveness of the registration statement, call and hold a
special meeting of our respective shareholders to vote on the approval
of the merger agreement;

. recommend that our respective shareholders vote in favor of the merger
agreement and solicit proxies in favor of the merger agreement (but, in
the case of First Liberty, subject to fiduciary duties of its board of
directors);

. hold a special meeting of shareholders to vote on the approval of the
merger agreement even if the applicable party's board of directors
withdraws or modifies its recommendation;

. cooperate with each other to take all actions required to comply with
all legal requirements and any rules of the New York Stock Exchange to
complete the merger, and to apply for and obtain all regulatory and
third party consents and approvals required to complete the merger;

. consult and agree with each other regarding the content of any press
release or other public disclosure relating to the merger, but we may
each make any disclosure mandated by law or rules of the New York Stock
Exchange after notifying the other party;

. refrain from taking any action that would adversely affect the
qualification of the merger as a tax-free reorganization within the
meaning of Section 368(a) of the Internal Revenue Code or as a pooling
of interests under applicable accounting rules;

. keep each other advised of all material developments on our respective
businesses, and furnish the other party such financial data and other
information concerning the furnishing party as may be reasonably
requested from time to time;

. refrain from taking any actions that would cause the merger to be
subject to any "Takeover Laws," and if the merger is or becomes subject
to any Takeover Laws, to take all actions within its control to exempt
the merger from Takeover Law. "Takeover Law" means any legal requirement
pertaining to mergers, business combinations, sale of control, affiliate
transactions or antitrust laws or regulations; and

. use our reasonable best efforts in good faith to take or cause to be
taken actions necessary or desirable to complete the merger on the
earliest possible date.

To the extent permitted by law, First Liberty agreed to cause First Liberty
Bank to assist Community Bank in preparing for the integration of First Liberty
Bank's business and operations with those of Community Bank after the merger.
We agreed, however, that the confidentiality of customer information will be
maintained until the completion of the merger.

Use of First Liberty Bank Name

Community Bank System currently intends to continue to use the First Liberty
Bank name in connection with the operation of the First Liberty Bank branches
for a period of at least three years after the completion of the merger,
subject to regulatory approvals and compliance with applicable laws and
regulations. The continued use of the name is also subject to the absence of
any changed circumstances in the operation of Community Bank or First Liberty
Bank (or First Liberty Bank's current branches), such as mergers and
acquisitions, reorganizations, restructurings and the like, which make it
appropriate or advisable to use another name from an operational or marketing
point of view.

No Solicitation of Takeover Proposals

Under the terms of the merger agreement, First Liberty has agreed not to
directly or indirectly solicit, initiate or encourage any "Takeover Proposals."
A "Takeover Proposal" is any proposal or offer to acquire First Liberty
(through a tender offer, merger, consolidation or other business combination)
or a substantial equity interest in First Liberty, or a substantial portion of
First Liberty's assets. First Liberty also agreed to immediately terminate all
existing negotiations and discussions concerning a Takeover Proposal, other
than with Community Bank System.

In addition, First Liberty has agreed not to negotiate, discuss or furnish
nonpublic information with or to any third party in connection with a Takeover
Proposal or otherwise facilitate the efforts of any third party with respect to
a Takeover Proposal, or recommend or endorse any Takeover Proposal, unless
required to discharge the fiduciary duties of First Liberty's board of
directors. However, First Liberty may communicate with its shareholders about a
Takeover Proposal to the extent necessary to comply with the fiduciary duties
of its board of directors. If First Liberty becomes aware of or receives a
Takeover Proposal, it must immediately notify Community Bank System of that
fact and the details of the Takeover Proposal. First Liberty must also inform
the person making a Takeover Proposal of First Liberty's obligations under the
merger agreement with respect to Takeover Proposals.

Before First Liberty provides nonpublic information to a third party (other
than a regulatory agency) as permitted by the merger agreement, First Liberty
must require the third party to deliver a confidentiality agreement that is at
least as restrictive as the one executed by Community Bank System, and must
furnish the same information to Community Bank System, if not previously
disclosed.

Fees and Expenses; Reimbursement of Expenses

We will each pay our own expenses in connection with the merger, except that
we will share equally all filing fees due the SEC in connection with the merger
and all costs associated with the printing and mailing of this document. If,
however, the merger agreement is terminated after an "initial triggering event"
occurs under

the stock option agreement, First Liberty is required to reimburse Community
Bank System for its expenses. In addition, if Community Bank System causes
First Liberty to repurchase the stock option (or shares of First Liberty common
stock issued upon exercise of the stock option) pursuant to the stock option
agreement, then First Liberty must also reimburse Community Bank System for its
expenses which have not previously been reimbursed by First Liberty. For
details, please see "Stock Option Agreement" on page [ ].

Directors, Employees and Employee Benefits

Directors

Community Bank System has agreed to appoint three of First Liberty's
directors, Saul Kaplan, Peter A. Sabia and Harold Kaplan, to serve as members
of Community Bank System's board of directors, in addition to nine current
directors of Community Bank System. The initial terms of Saul Kaplan, Peter A.
Sabia and Harold Kaplan will expire at the 2001, 2002 and 2003 annual meetings
of stockholders of Community Bank System, respectively. However, if the merger
is completed after the 2001 annual meeting of stockholders of Community Bank
System, the initial terms of Saul Kaplan, Peter A. Sabia and Harold Kaplan will
instead expire at the 2002, 2003 and 2004 annual meetings of stockholders of
Community Bank System, respectively.

If any of these First Liberty designees resigns or becomes ineligible to
serve on the board of directors of Community Bank System (other than as a
result of not being reelected by the stockholders of Community Bank System),
then a majority of the members of the advisory board, consisting of eight
current members of the First Liberty board and President and Chief Executive
Officer of Community Bank System, will be entitled to select an individual to
replace that First Liberty designee.

These three new directors of Community Bank System designated by First
Liberty (or their replacements) will also be appointed to serve on the board of
directors of Community Bank for so long as they serve on the board of directors
of Community Bank System.

Subject to the Community Bank System board's fiduciary duty, Community Bank
System has also agreed to re-nominate the three designees of First Liberty on
the board of directors of Community Bank System for at least one additional
three-year term after their respective initial terms expire, and to recommend
that Community Bank System stockholders vote in favor of their reelection, so
long as the designees remain qualified to serve under applicable law and
regulations and Community Bank System's bylaws (as modified as described
below).

Currently under Community Bank System's bylaws, the term of a director will
terminate at December 31 of the year in which the director reaches age 70. In
the merger agreement, however, Community Bank System has agreed to amend its
bylaws to waive this mandatory retirement provision for the three designees of
First Liberty.

Employees and Employee Benefits

For the purposes of the discussion in this section, references to employees
of First Liberty or Community Bank System include employees of their respective
subsidiaries.

Employees of First Liberty who continue as employees of Community Bank
System after the merger will be entitled to employee benefits that are in the
aggregate no less favorable than those generally provided to other similarly
situated employees of Community Bank System. However, Community Bank System may
grant any deferred or incentive compensation, bonus payments and other similar
compensation or payments on a case-by-case basis in its sole discretion.

In determining eligibility and vesting for employee benefits programs
maintained by Community Bank System, it has agreed to credit the continuing
employees for past service with First Liberty. First Liberty agreed

to cooperate with Community Bank System to coordinate the post-merger
integration or transition of employee benefit programs maintained by each of
them before the effectiveness of the merger. Community Bank System expects to
periodically review its employee benefit programs after the merger, and the
merger agreement does not limit Community Bank System's ability to make changes
to the programs as it deems appropriate.

Community Bank System also agreed to pay severance, if any, to each employee
of First Liberty who becomes an employee of Community Bank System as a result
of the merger but is subsequently terminated, in accordance with a severance
policy that is no less favorable than the existing severance policy of
Community Bank System. In addition, we agreed to coordinate with each other any
reductions of employees of First Liberty occurring before the merger, and the
payment of severance associated with the reductions.

Community Bank System agreed to establish before the completion of the
merger an incentive plan or policy for certain key employees of First Liberty
who become its employees as a result of the merger. We also agreed to
coordinate with each other if First Liberty proposes to adopt any retention
plan or policy for employees of First Liberty that covers the period before the
completion of the merger.

Indemnification

Community Bank System agreed to provide, for at least six years following
the merger, indemnification to the current or former directors, officers and
employees of First Liberty. Community Bank System also agreed to provide
directors' and officers' liability insurance for the directors and officers of
First Liberty for at least three years after the completion of the merger, as
long as the premiums for the insurance do not exceed 150% of the current
premiums expended by First Liberty for similar coverage. If the premiums would
exceed this amount, Community Bank System agreed to use its reasonable best
efforts in its good faith discretion to maintain the most advantageous policy
that can be purchased with the amount. For a period of six years after the
merger, Community Bank System agreed to honor the indemnification rights
currently provided under the applicable charter documents of First Liberty and
its subsidiaries to their directors, officers and employees with respect to
matters occurring before the completion of the merger.

Dividends

We agreed to coordinate the declaration and payment of cash dividends on our
respective common stock, to ensure that First Liberty shareholders will receive
a cash dividend for each calendar quarter from either Community Bank System or
First Liberty, but not from both.

Amendment and Waiver

We may agree to amend or supplement the merger agreement at any time before
completion of the merger, if approved by our respective boards of directors.
However, after the approval of the merger agreement by our respective
shareholders, no amendment or supplement which by law requires further
shareholder approval may be effected without first obtaining the further
approval. Before completion of the merger, except as prohibited by law, any
provision of the merger agreement may be waived by the party for whose benefit
the provision was intended. The merger agreement provides that any amendment or
supplement must be in writing, and that any waiver must be signed by an
executive officer of the party giving the waiver.

DISSENTING SHAREHOLDERS' RIGHTS

General

Under Pennsylvania law, shareholders of First Liberty have the right to
dissent from the merger and to obtain payment of the "fair value" of their
shares in the event we complete the merger.

If you are a First Liberty shareholder and are contemplating exercising your
right to dissent, we urge you to read carefully the provisions of Subchapter D
of Chapter 15 of the Pennsylvania Business Corporation Law of 1988, which is
attached to this document as Annex E. A discussion describes the steps that you
must take if you want to exercise your right to dissent. You should read this
summary and the full text of the law.

Before the day of the merger, send any written notice or demand required
concerning your exercise of dissenters rights to First Liberty Bank Corp., 645
Washington Avenue, Jermyn, Pennsylvania 18433 (Attn: Secretary). After the day
of the merger, send correspondence to Community Bank System Inc., 5790
Widewaters Parkway, DeWitt, New York 13214 (Attn: Secretary).

The term "fair value" means the value of a share of First Liberty common
stock immediately before the day of the merger taking into account all relevant
factors, but excluding any appreciation or depreciation in anticipation of the
merger.

Notice of Intention to Dissent

If you wish to dissent, you must:

. prior to the vote of stockholders on the merger at the special meeting,
file a written notice of intention to demand payment of the fair value
of your shares of First Liberty common stock if the merger is effected
with Community Bank System;

. make no change in your beneficial ownership of First Liberty common
stock from the date you give notice through the day of the merger; and

. not vote your First Liberty common stock for approval of the agreement.

Neither a proxy nor a vote against approval of the merger is the necessary
written notice of intention to dissent.

Notice to Demand Payment

If the merger is approved by the required vote of shareholders, First
Liberty or Community Bank System, as the case may be, will mail a notice to all
dissenters who gave due notice of intention to demand payment and who did not
vote for approval of the merger agreement. The notice will state where and when
you must deliver a written demand for payment and where you must deposit
certificates for First Liberty common stock in order to obtain payment. The
notice will include a form for demanding payment and a copy of the law. The
time set for receipt of the demand for payment and deposit of stock
certificates will be not less than 30 days from the date of mailing of the
notice.

Failure to Comply with Notice to Demand Payment, etc.

You must take each step in the indicated order and in strict compliance with
the statute to keep your dissenters rights. If you fail to follow the steps,
you will lose the right to dissent and you will receive the same number of
shares of Community Bank System common stock per share of First Liberty stock
that you hold as the non-dissenting stockholders.

Payment of Fair Value of Shares

Promptly after the merger, or upon timely receipt of demand for payment if
the merger already has taken place, Community Bank System will send dissenting
shareholders, who have deposited their stock certificates, the amount that
Community Bank System estimates to be the fair value of the First Liberty
common stock. The remittance or notice will be accompanied by:

. a closing balance sheet and statement of income of First Liberty for a
fiscal year ending not more than 16 months before the date of remittance
or notice, together with the latest available interim financial
statements;

. a statement of Community Bank System's estimate of the fair value of
First Liberty common stock; and

. a notice of the right of the dissenting shareholder to demand
supplemental payment, accompanied by a copy of the law.

Estimate by Dissenting Shareholder of Fair Value of Shares

If a dissenting shareholder believes that the amount stated or remitted by
Community Bank System is less than the fair value of the Community Bank System
common stock, the dissenting shareholder may send an estimate of the fair value
of the First Liberty common stock to Community Bank System. If Community Bank
System remits payment of estimated value of a dissenting shareholder's First
Liberty common stock and the dissenting shareholder does not file his or her
own estimate within 30 days after the mailing by Community Bank System of its
remittance, the dissenting shareholder will be entitled to no more than the
amount remitted by Community Bank System.

Valuation Proceedings

If any demands for payment remain unsettled within 60 days after the latest
to occur of:

. the merger;

. timely receipt by First Liberty or Community Bank System, as the case
may be, of any demands for payment; or

. timely receipt by First Liberty or Community Bank System, as the case
may be, of any estimates by dissenters of the fair value,

then, Community Bank System may file an application, in the Court of Common
Pleas of Lackawanna County, requesting that the court determine the fair value
of the First Liberty common stock. If this happens, all dissenting
shareholders, no matter where they reside, whose demands have not been settled,
will become parties to the proceeding. In addition, a copy of the application
will be delivered to each dissenting shareholder.

If Community Bank System were to fail to file the application, then any
dissenting shareholder, on behalf of all dissenting shareholders who have made
a demand and who have not settled their claim against Community Bank System,
may file an application in the name of Community Bank System at any time within
the 30-day period after the expiration of the 60-day period and request that
the Lackawanna County Court determine the fair value of the shares.

The fair value determined by the Lackawanna County Court may, but need not,
equal the dissenting shareholder's estimates of fair value. If no dissenter
files an application, then each dissenting shareholder entitled to do so shall
be paid Community Bank System's estimates of the fair value of the First
Liberty common stock and no more, and may bring an action to recover any amount
not previously remitted, plus interest at a rate the Lackawanna County Court
finds fair and equitable.

Community Bank System intends to negotiate in good faith with any dissenting
shareholders. If, after negotiation, a claim cannot be settled, then Community
Bank System intends to file an application requesting that the fair value of
the First Liberty common stock be determined by the Lackawanna County Court.

Cost and Expenses

The costs and expenses of any valuation proceedings in the Lackawanna County
Court including the reasonable compensation and expenses of any appraiser
appointed by the Court to recommend a decision on the issue of fair value, will
be determined by the Court and assessed against Community Bank System except
that any part of the costs and expenses may be apportioned and assessed by the
Court against all or any of the dissenting shareholders who are parties and
whose action in demanding supplemental payment the Court finds to be dilatory,
obdurate, arbitrary, vexatious or in bad faith.

MARKET PRICE AND DIVIDEND INFORMATION

Community Bank System. Community Bank System common stock is listed on the
New York Stock Exchange under the symbol CBU. The following table contains for
each of the indicated calendar quarters the high and low sales prices of
Community Bank System common stock as reported on the New York Stock Exchange
Composite Tape, and the dividends declared per share of Community Bank System
common stock.

Cash
Dividends
Declared
High Low Per Share
-------- -------- ---------

Year Ending December 31, 2001
Quarter Ending March 31, 2001 (through [ ],
2001)............................................ $ [ ] $ [ ] $[ ]
Year Ended December 31, 2000
Quarter Ended December 31, 2000................... $25.9063 $22.0000 $0.27
Quarter Ended September 30, 2000.................. 26.2500 21.8750 0.27
Quarter Ended June 30, 2000....................... 24.3750 21.8750 0.25
Quarter Ended March 31, 2000...................... 23.5000 20.0000 0.25
Year Ended December 31, 1999
Quarter Ended December 31, 1999................... $27.2500 $22.6875 $0.25
Quarter Ended September 30, 1999.................. 29.0000 24.3750 0.25
Quarter Ended June 30, 1999....................... 30.4375 22.6250 0.23
Quarter Ended March 31, 1999...................... 33.6250 23.6875 0.23

On the record date for the Community Bank System special meeting, there were
issued and outstanding approximately [ ] shares of Community Bank System
common stock, held of record by approximately [ ] holders. On [ ], 2001,
the closing price of Community Bank System common stock reported on the New
York Stock Exchange Composite Tape was $[ ].

Community Bank System has historically paid regular quarterly cash dividends
on its common stock, and the board of directors of Community Bank System
presently intends to continue the payment of regular quarterly cash dividends,
subject to the need for those funds for other purposes. However, because
substantially all of the funds available for the payment of dividends by
Community Bank System are derived from Community Bank, future dividends will
depend upon the earnings of Community Bank, its financial condition, its need
for funds and applicable governmental policies and regulations.

First Liberty. First Liberty common stock is traded in the over-the-counter
market and is quoted under the symbol FLIB on the OTC Bulletin Board, an
electronic quotation medium for non-Nasdaq over-the-counter securities. The
following table contains for each of the indicated calendar quarters the high
and low sales prices of First Liberty common stock as reported on the OTC
Bulletin Board, and the dividends declared per share of First Liberty common
stock. The information below reflects a four-for-one stock split effected by
First Liberty on October 15, 1999, but does not necessarily reflect retail
mark-ups, mark-downs or commissions and may not represent actual transactions.

Cash
Dividends
Declared
High Low Per Share
------ ------ ---------

Year Ending December 31, 2001
Quarter Ending March 31, 2001 (through [ ], 2001).... $[ ] $[ ] $[ ]

Year Ended December 31, 2000
Quarter Ended December 31, 2000........................ $13.25 $10.50 $ 0.11
Quarter Ended September 30, 2000....................... 11.88 11.13 0.11
Quarter Ended June 30, 2000............................ 13.25 11.00 0.11
Quarter Ended March 31, 2000........................... 16.50 13.00 0.11

Year Ended December 31, 1999
Quarter Ended December 31, 1999........................ $18.25 $16.75 $ 0.22
Quarter Ended September 30, 1999....................... 18.38 16.75 0.00
Quarter Ended June 30, 1999............................ 18.75 17.75 0.20
Quarter Ended March 31, 1999........................... 18.94 18.38 0.00

On the record date for the First Liberty special meeting, there were issued
and outstanding approximately [ ] shares of First Liberty common stock, held
of record by approximately [ ] holders. On [ ], 2001, the last sale price
of First Liberty common stock reported on the OTC Bulletin Board was $[ ].

First Liberty has historically paid either regular quarterly or semi-annual
cash dividends on its common stock, and the board of directors of First Liberty
presently intends to continue the payment of regular quarterly cash dividends,
subject to the need for those funds for other purposes. However, because
substantially all of the funds available for the payment of dividends by First
Liberty are derived from First Liberty Bank, future dividends will depend upon
the earnings of First Liberty Bank, its financial condition, its need for funds
and applicable governmental policies and regulations. Under the terms of the
merger agreement, while the merger is pending, First Liberty is not permitted
to declare, set aside or pay any cash dividends, other than regular quarterly
dividends not in excess of $0.11 per share.

DESCRIPTION OF CAPITAL STOCK OF COMMUNITY BANK SYSTEM

In the merger, shareholders of First Liberty will receive Community Bank
System common stock and become stockholders of Community Bank System. Community
Bank System is a Delaware corporation subject to the provisions of Delaware
law. Given below is a summary of the material features of the Community Bank
System common stock. This summary is not a complete discussion of the charter
documents and other instruments of Community Bank System that create the rights
of the shareholders. You are urged to read carefully those documents and
instruments, which have been incorporated by reference as exhibits to the
registration statement of which this document is a part. Please see "Where You
Can Find More Information" on page [ ] for information on how to obtain copies
of those documents and instruments.

General

Community Bank System is authorized to issue 20,000,000 shares of common
stock, no par value per share. As of [ ], 2001, [ ] shares of common stock
were issued and outstanding. In addition, if and when the pending merger
between Community Bank and Citizens National Bank is completed, Community Bank
System will issue a total of approximately 952,000 shares of its common stock
to the former shareholders of Citizens National Bank.

Community Bank System's certificate of incorporation also authorizes the
board of directors, without stockholder approval (subject to the rules of the
New York Stock Exchange, if applicable), to issue up to 500,000 shares of
preferred stock, par value $1.00 per share, and to establish the relative
rights, designations, preferences and limitations or restrictions of the
preferred stock. As of the date of this document, there were no shares of
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 stockholders. No stockholders have
cumulative voting rights in the election of directors.

Dividends. Community Bank System may pay dividends as declared from time to
time by the board of directors out of funds legally available for dividends,
subject to certain restrictions. The holders of Community Bank System common
stock will be entitled to receive any dividends on the common stock in
proportion to their holdings.

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

No Preemptive Rights; No Redemption. Holders of shares of Community Bank
System common stock are not entitled to preemptive rights with respect to any
shares of any capital stock of Community Bank System that may be issued.
Community Bank System common stock is not subject to call or redemption.

Certain Certificate of Incorporation and Bylaws Provisions

There are provisions in Community Bank System'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 Community Bank System's exposure to
coercive takeover attempts at an unfair price, and are designed to maximize
shareholder value in connection with unsolicited offer takeover attempts. These
provisions, however, could reduce the premium that potential acquirors might be
willing to pay in an acquisition, which may in turn reduce the market price
that investors might be willing to pay in the future for shares of Community
Bank System common stock.

Community Bank System's certificate of incorporation authorizes the board of
directors to issue, without further stockholder approval, up to 500,000 shares
of preferred stock with rights senior to those of its common stock, except as
may be required with respect to a particular transaction by applicable law or
by regulatory agencies having jurisdiction over the Community Bank System. The
board of directors of Community Bank System is permitted to establish from time
to time the relative rights, designations, preferences and limitations or
restrictions of the preferred stock. The preferred stock could be used to deter
future attempts to gain control of the Community Bank System.

Community Bank System 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 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.

In addition, Community Bank System's certificate of incorporation contains a
provision which requires that certain business combinations be approved by the
affirmative vote of either (a) the holders of three-fourths of the outstanding
shares of Community Bank System common stock and a majority of the board of
directors; or (b) the holders of two-thirds of the outstanding shares of
Community Bank System common stock and two-thirds of the continuing directors.
These "supermajority" requirements could result in Community Bank System's
board exercising a stronger influence over any proposed takeover (subject to
its fiduciary duties) 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.

Community Bank System's certificate of incorporation also provides that the
above described provisions designed to protect Community Bank System from
unfriendly takeover attempts can only be amended by the affirmative vote of (a)
holders of at least three-fourths of the outstanding shares of Community Bank
System common stock and a majority of the board of directors, or (b) holders of
at least two-thirds of the outstanding shares of Community Bank System common
stock and two-thirds of the continuing directors.

Under the certificate of incorporation of Community Bank System, the
stockholders of the company are prohibited from approving corporate actions by
a written consent in lieu of a meeting. Instead, any corporate action to be
approved by Community Bank System stockholders of must be so approved at a
stockholders' meeting.

Rights Plan

On February 21, 1995, Community Bank System's board of directors adopted a
stockholder protection rights plan and declared a distribution on February 24,
1995 to stockholders of record as of February 21, 1995 of one share purchase
right, or a Right, for each outstanding share of Community Bank System common
stock. One Right will attach to each share of Community Bank System common
stock to be issued in the merger.

The Rights become exercisable in the event that a person, entity or group
acquires, or commences a tender offer which, if successful, would enable him or
it to acquire, 15% or more of the outstanding shares of Community Bank System
common stock. Each Right initially entitles stockholders to purchase one share
of Community Bank System common stock at an exercise price of $85.00 per share,
subject to adjustments. If, after the Rights become exercisable, any person,
entity or group acquires 15% or more of the outstanding shares of Community
Bank System common stock, the holder of each Right (other than the acquiring
person) 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, Community Bank System merges or
consolidates with, sells or transfers 50% of 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, entity or

group, Community Bank System shall take such steps as are necessary to ensure,
and shall not consummate or permit the transaction to occur until it shall have
entered into an agreement with the other party 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 Community Bank System common stock of the other party having a market
value equal to twice the exercise price, and further providing that the other
party shall assume all of Community Bank System's obligations under the
stockholder protection rights plan.

The Rights may be redeemed by Community Bank System 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 Community Bank System 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 Community Bank System having
an equivalent value upon exercise of the Rights.

DESCRIPTION OF CAPITAL STOCK OF FIRST LIBERTY

Given below is a summary of the material features of the First Liberty
common stock. This summary is not a complete discussion of the charter
documents of First Liberty that create the rights of the shareholders. You are
urged to read carefully those charter documents, which have been filed as
exhibits to SEC reports filed by First Liberty. Please see "Where You Can Find
More Information" on page [ ] for information on how to obtain copies of those
reports.

General

Authorized Capital. The aggregate number of shares of authorized capital of
First Liberty consists of 40,000,000 shares of common stock, $.3125 par value
per share. Authorized shares of common stock can only be issued for cash by a
vote of 80% of the total number of directors then in office, except for shares
issued under employee benefit plans. No shares of preferred stock are
authorized.

Board of Directors. First Liberty's articles of incorporation vest
management of the corporation in a board of directors consisting of not less
than five or more than 25 persons, as fixed by the board of directors from time
to time. The board of directors will be divided into three classes, each class
serving staggered three-year terms. Once the number of directors in a class is
fixed for any term of office, it cannot be increased except by a vote of 80% of
the total number of directors in office (66 2/3% of the directors in office
after January 1, 2004). Shareholders are not entitled to cumulate votes in
elections of directors. Classification of the First Liberty board of directors
has the effect of decreasing the number of directors that could be elected in a
single year by any person who seeks to elect its designees to a majority of the
seats on the First Liberty board of directors and thereby could impede a change
in control of First Liberty.

Supermajority Voting Requirements for Fundamental Transactions. First
Liberty's articles of incorporation require, until January 1, 2004, an 80% vote
of directors and the affirmative vote of holders of 80% of outstanding shares
of First Liberty common stock to approve a merger or consolidation of First
Liberty with another corporation or any division involving the corporation, a
share exchange involving an exchange of shares of First Liberty capital stock,
a sale, lease, exchange or other transfer of all or substantially all of the
assets of First Liberty, a liquidation or dissolution involving First Liberty,
or any similar transaction. We will refer to each of the foregoing transactions
as a "Fundamental Transaction." In any Fundamental Transaction occurring prior
to January 1, 2004 in which former First Liberty directors continue to
constitute at least a majority of the board of directors immediately after the
Fundamental Transaction and First Liberty shareholders continue to own at least
a majority of the outstanding voting securities of the entity resulting from
the Fundamental Transaction, the shareholder voting requirement decreases from
80% to 66 2/3% of outstanding shares. On and after January 1, 2004, approval of
a Fundamental Transaction requires a 66 2/3% vote of directors and the
affirmative vote of holders of 66 2/3% of outstanding shares of First Liberty
common stock. The supermajority shareholder voting requirements do not apply to
any Fundamental Transaction approved in advance unanimously by the board of
directors.

Action by Written Consent of Shareholders. First Liberty's articles of
incorporation eliminate the ability of shareholders to act without a meeting by
written consent.

Amendment of Bylaws. First Liberty's articles of incorporation vest the
ability to amend the bylaws in the board of directors by a 66 2/3% vote of
directors then in office, subject to the ability of shareholders to amend the
bylaws by the affirmative vote of 80% of the total votes which all shareholders
are entitled to cast until January 1, 2004, and by a vote of 66 2/3% of the
total votes which all shareholders are entitled to cast thereafter.

Mandatory Tender Offer Provision. First Liberty's articles of incorporation
include a provision requiring any person or group that becomes the beneficial
owner, directly or indirectly, of capital stock having the right

to cast 25% or more of all votes entitled to be cast by all outstanding shares
of capital stock to offer to purchase for cash all shares of capital stock of
the corporation at a price equal to the higher of (i) the highest price paid by
such person or group for any shares of the corporation's capital stock during
the preceding twelve months or (ii) if the board of directors so elects, the
fair market value of a share of the corporation's capital stock determined in
writing by an investment firm selected by the board and experienced in the
valuation of financial institutions. These provisions do not apply in the event
that 80% of the total number of directors then in office approve in advance the
acquisition of beneficial ownership by such person or group.

Amendment of Articles of Incorporation. First Liberty's articles of
incorporation can generally be amended in the manner specified by Pennsylvania
law, except that provisions set forth in Articles Sixth, Seventh and Eighth
(relating to the classification of directors, the number of directors, and the
absence of cumulative voting for directors) cannot be amended unless the
amendment is approved by either (i) the affirmative vote of shareholders
entitled to cast at least 66 2/3% of all votes which all shareholders are then
entitled to cast or (ii) the affirmative vote of 66 2/3% of the total number of
directors then in office and the affirmative vote of shareholders entitled to
cast at least a majority of all votes which shareholders are entitled to cast.
In addition, the provisions of Articles Ninth, Tenth, Eleventh, Twelfth, and
Thirteenth (relating to supermajority voting requirements for fundamental
transactions, prohibition on shareholder actions without a meeting, bylaw
amendments, mandatory tender offer provisions and amendments to articles of
incorporation) cannot be amended prior to January 1, 2004, unless the amendment
is approved by the affirmative vote of 80% of the total number of directors
then in office and the affirmative vote of shareholders entitled to cast at
least 80% of all votes which all shareholders are then entitled to cast. After
January 1, 2004, amendments to these sections require the affirmative vote of
66 2/3% of all directors then in office and the affirmative vote of
shareholders entitled to cast at least 66 2/3% of all votes which all
shareholders are then entitled to cast.

Common Stock

Voting Rights. Each holder of shares of First Liberty common stock is
entitled to one vote for each share held on matters upon which shareholders
have the right to vote. First Liberty shareholders are not entitled to cumulate
votes in the election of directors.

Dividends. The holders of First Liberty common stock are entitled to share
ratably in dividends when and if declared by the board of directors from funds
legally available therefor. Declaration and payment of cash dividends by First
Liberty depends upon dividend payments by First Liberty Bank, which is First
Liberty's primary source of revenue and cash flow. First Liberty is a legal
entity separate and distinct from its subsidiaries. Accordingly, the right of
First Liberty, and consequently the right of creditors and shareholders of
First Liberty, to participate in any distribution of the assets of earnings of
any subsidiary is necessarily subject to the prior claims of creditors of the
subsidiary, except to the extent that claims of First Liberty in its capacity
as a creditor may be recognized. First Liberty Bank will be permitted to pay
cash dividends sufficient to fund any dividend by First Liberty subject to
applicable regulatory restrictions.

For certain limitations on the ability of First Liberty Bank to pay
dividends to First Liberty, see First Liberty's Annual Report on Form 10-K for
the year ended December 31, 1999. See "Where You Can Find More Information" on
page [ ] for information on how to obtain a copy of this report.

Rights in Liquidation. In the event of liquidation, dissolution, or winding-
up of First Liberty, whether voluntary or involuntary, holders of First Liberty
common stock are entitled to share ratably in any of its assets or funds that
are available for distribution to its shareholders after the satisfaction of
its liabilities (or after adequate provision is made therefor).

No Preemptive Rights; No Redemption. The holders of First Liberty common
stock have no preemptive rights to acquire any additional shares of First
Liberty. In addition, the First Liberty common stock is not subject to
redemption.

Certain Charter and Pennsylvania Corporate Law Provisions

First Liberty's articles of incorporation and bylaws, contain certain
provisions which may have the effect of deterring or discouraging, among other
things, a non-negotiated tender or exchange offer for First Liberty stock, a
proxy contest for control of First Liberty, the assumption of control of First
Liberty by a holder of a large block of First Liberty stock and the removal of
First Liberty management.

Pennsylvania law also contains certain provisions applicable to First
Liberty that may have the effect of impeding a change in control of First
Liberty. These provisions, among other things: (i) prohibit for five years,
subject to certain exceptions, a "business combination" (which includes a
merger or consolidation of the corporation or a sale, lease, or exchange of
assets) with a shareholder or group of shareholders beneficially owning 20% or
more of a public corporation's voting power; (ii) require disgorgement by any
person or group who or which has acquired or publicly disclosed an intent to
acquire 20% or more of a public corporation's voting power of any profit
realized from the sale of any shares acquired within specified time periods of
such acquisition or disclosure if the shares are sold within eighteen months
thereafter; and (iii) generally prohibit a person or group who or which exceeds
certain stock ownership thresholds (20%, 33 1/3%, and 50%) for the first time
from voting the "control shares" (i.e., the shares owned in excess of the
applicable threshold) unless voting rights are restored by a vote of
disinterested shareholders.

Pennsylvania law presently applicable to actions by First Liberty's board of
directors (i) expands the factors and groups (including shareholders) which the
First Liberty board of directors can consider in determining whether a certain
action is in the best interests of the corporation; (ii) provides that the
First Liberty board of directors need not consider the interests of any
particular group as dominant or controlling; (iii) provides that First
Liberty's directors, in order to satisfy the presumption that they have acted
in the best interests of the corporation, need not satisfy any greater
obligation or higher burden of proof with respect to actions relating to an
acquisition or potential acquisition of control; (iv) provides that actions
relating to acquisitions of control that are approved by a majority of
"disinterested directors" are presumed to satisfy the directors' standard,
unless it is proven by clear and convincing evidence that the directors did not
assent to such action in good faith after reasonable investigation; and (v)
provides that the fiduciary duty of First Liberty's directors is solely to the
corporation and may be enforced by the corporation or by a shareholder in a
derivative action, but not by a shareholder directly.

Pennsylvania law presently applicable to First Liberty provides that the
fiduciary duty of directors shall not be deemed to require directors (i) to
redeem any rights under, or to modify or render inapplicable, any shareholder
rights plan; (ii) to render inapplicable, or make determinations under,
provisions of Pennsylvania law relating to control transactions, business
combinations, control-share acquisitions, or disgorgement by certain
controlling shareholders following attempts to acquire control; or (iii) to act
as the board of directors, a committee of the board or an individual director
solely because of the effect such action might have on an acquisition or
potential or proposed acquisition of control of the corporation or the
consideration that might be offered or paid to shareholders in such an
acquisition. One of the effects of Pennsylvania's statutory provisions dealing
with director's fiduciary duties may be to make it more difficult for a
shareholder to successfully challenge the actions of the First Liberty board of
directors in a potential change in control context. Pennsylvania case law
appears to provide that the fiduciary duty standard under Pennsylvania law
grants directors broad statutory authority to reject or refuse to consider any
potential or proposed action of the corporation.

COMPARISON OF RIGHTS OF HOLDERS OF FIRST LIBERTY COMMON STOCK AND COMMUNITY
BANK SYSTEM COMMON STOCK

In the merger, First Liberty common stock will be converted into Community
Bank System common stock and shareholders of First Liberty will become a
stockholder of Community Bank System.

First Liberty is a Pennsylvania corporation. The rights of its shareholders
as a holder of First Liberty common stock derive from First Liberty's articles
of incorporation and bylaws and from the Pennsylvania Business Corporation Law.

Community Bank System is a Delaware corporation and the rights of Community
Bank System stockholders derive from the Community Bank System certificate of
incorporation and bylaws and from the Delaware General Corporation Law.

Certain differences between the rights as a holder of First Liberty common
stock and the rights as a Community Bank System stockholder are summarized
below. Only the material differences are summarized below and the summary does
not purport to be a complete statement of the rights of First Liberty and
Community Bank System stockholders. For a more complete understanding of all
rights of First Liberty and Community Bank System stockholders, we recommend
that you read the complete text of the governing corporate instruments of both
First Liberty and Community Bank System, as well as the applicable law.

Authorized Capital Stock

Community Bank System. Under its certificate of incorporation, Community
Bank System is authorized to issue 20,000,000 shares of common stock, no par
value, and 500,000 shares of preferred stock, par value $1.00 per share.
Although no shares of preferred stock are currently outstanding, the board of
directors may, without stockholder approval (subject to the rules of the New
York Stock Exchange, if applicable), issue shares of preferred stock with the
relative rights, designations, preferences and limitations or restrictions
established by the board. The ability of Community Bank System to issue shares
of preferred stock could have an anti-takeover effect.

First Liberty. First Liberty's articles of incorporation authorizes the
issuance of up to 40,000,000 shares of common stock, par value $0.3125 per
share. First Liberty is not authorized to issue any shares of preferred stock.

Quorum of Stockholders

Community Bank System. In order to have a quorum for the transaction of
business at any stockholders' meeting, the holders of at least one-third of the
shares entitled to vote at the meeting must be present in person or represented
by proxy, unless a greater number is required by the Delaware General
Corporation Law.

First Liberty. First Liberty's bylaws are silent as to what constitutes a
quorum of shareholders. Pennsylvania law provides that, in the absence of such
a provision, the presence, in person or by proxy, of shareholders entitled to
cast at least a majority of all the votes entitled to be cast on a particular
matter constitutes a quorum at any shareholders' meeting.

Election of Directors

Community Bank System. Community Bank System's bylaws provide that
nominations of persons for election to the board of directors may be made at a
meeting of stockholders by or at the direction of the board of directors, or by
any stockholder entitled to vote at the election who gives an advanced written
notice to the Secretary not less than 60 days or more than 90 days prior to the
meeting (provided that if Community Bank System gives less than 60 days' notice
of the meeting date, the nominating stockholder's notice must be given

within 10 days following the mailing date of the Community Bank System notice).
Community Bank System's bylaws further provide that directors shall be elected
by a plurality of the votes cast at a meeting of stockholders.

First Liberty. First Liberty's bylaws provide that nominations for election
to the board of directors may be made in writing by any shareholder and
submitted to the Secretary not less than 20 days prior to the shareholders'
meeting called for the election of directors. Under Pennsylvania law, directors
are elected by a plurality of the votes cast at a meeting of shareholders.

Qualification of Directors

Community Bank System. Delaware law provides that a director need not be a
stockholder. The Community Bank System certificate of incorporation and the
Community Bank System bylaws do not contain further qualifications for
directors. Currently, all of the directors of Community Bank System also serve
as a director of Community Bank, which is a national banking association. The
National Bank Act and the related regulations require that a director of a
national banking association must be a citizen of the United States and must
own shares of capital stock of the association or its parent company, the
aggregate par value, shareholders' equity or fair market value of which shares
is not less than $1,000. Generally, at least a majority of the directors of a
national banking association must have resided in the state in which the
association is located, or within 100 miles of the location of the office of
the association, for at least one year immediately before the election as a
director and must continue to reside within those areas during the term of
office.

First Liberty. First Liberty's bylaws provide that each director of First
Liberty must be a shareholder of First Liberty and that a director will cease
to be a director when he or she no longer owns shares of First Liberty common
stock. Under Pennsylvania law, a director must be a natural person of full age,
but need not reside in Pennsylvania.

Removal of Directors; Retirement

Community Bank System. Under Delaware law, the holders of a majority of the
shares entitled to vote on the election of directors can remove directors only
for cause because Community Bank System has a classified board and its
certificate of incorporation does not provide to the contrary. Under the
Community Bank System bylaws, the term of a director will terminate at December
31 of the year in which the director reaches age 70. However, Community Bank
System has agreed to amend its bylaws to waive this mandatory retirement
provision with respect to the three designees of First Liberty who will serve
on the board of directors of Community Bank System after the merger.

First Liberty. Under Pennsylvania law, First Liberty shareholders can remove
directors by a vote of a majority of those entitled to vote only for cause
because First Liberty has a classified board and its articles of incorporation
do not provide to the contrary. First Liberty's bylaws provide that no person
is eligible for election to the board of directors after the person reaches age
75. This provision, however, does not apply to any person serving as director
of First Liberty on July 1, 1998, and any person elected to the board before
they reach age 75 is not required to resign from the board upon attaining age
75.

Filling Vacancies on the Board of Directors

Community Bank System. The Community Bank System bylaws provide that
vacancies and newly created directorships may be filled by a majority vote of
the directors then in office, even if less than a quorum, or by a sole
remaining director, or may be elected by a plurality of stockholders.

First Liberty. First Liberty's articles of incorporation and bylaws do not
directly address filling vacancies on the board of directors. Under
Pennsylvania law, however, vacancies may be filled by a majority vote of the
remaining directors.

Payment of Dividends

Community Bank System. Delaware law provides that dividends may be paid
either out of a corporation's surplus or, in the event that no surplus exists,
from its net profits, if any, from either the year the dividends were declared
or the prior year. Capital surplus is the excess of the net assets of the
corporation over the stated capital of the corporation.

First Liberty. Under Pennsylvania law, a corporation may pay dividends
unless, after giving effect to the payment, either:

. the corporation would be unable to pay its debts as they become due in
the usual course of its business; or

. the total assets of the corporation would be less than the sum of its
total liabilities plus any amount necessary to satisfy any preferential
rights of shareholders upon dissolution of the corporation.

This provision, in effect, permits First Liberty to pay dividends to the
extent of its shareholders' equity.

Special Meeting of Stockholders

Community Bank System. Community Bank System's bylaws provide that a
special meeting may be called by the board, the Chairman of the board or the
executive committee of the board.

First Liberty. First Liberty's bylaws provide that special meetings of
shareholders may be called by and only by the board of directors.

Rights of Stockholders to Dissent

Community Bank System. Under Delaware law, appraisal rights are generally
available for the shares of any class or series of stock of a corporation
involved in a merger or consolidation. However, no appraisal rights are
available for any stock, which on the record date of the stockholder meeting
to approve the transaction, is listed on a national securities exchange or the
Nasdaq National Market System, or held of record by more than 2,000
stockholders. Also no appraisal rights are available to stockholders of the
surviving corporation in a merger if their approval is not required.
Notwithstanding the foregoing, appraisal rights are available for such class
or series if the holders thereof receive in the merger or consolidation
anything except: (1) shares of stock of the corporation surviving or resulting
from such merger or consolidation; (2) shares of stock of any other
corporation which at the effective date of the merger or consolidation is
either listed on a national securities exchange or the Nasdaq National Market
System, or held of record by more than 2,000 stockholders; (3) cash in lieu of
fractional shares; or (4) any combination of the foregoing.

First Liberty. The appraisal rights of the First Liberty shareholders are
described in detail in this document under "Dissenting Shareholders' Rights"
on page [ ].

Indemnification and Limitation of Liability

Community Bank System. The Community Bank System certificate of
incorporation provides that a director shall not be personally liable to
Community Bank System or its stockholders for monetary damages for a breach of
fiduciary duty, except for liability:

. for a breach of the duty of loyalty;

. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;

. under Section 174 of the Delaware General Corporation Law; or

. for any transaction from which the director derived an improper personal
benefit.

Community Bank System will indemnify to the fullest extent permitted by
Delaware law any person against liabilities and expenses incurred by reason of
the fact that he or she was acting as a director or officer of Community Bank
System. Community Bank System may also provide indemnification to its employees
and agents. However, indemnification is only available if a person acted in
good faith and in a manner he or she reasonably believed to be in or not
opposed to the best interests of the corporation. To receive indemnification in
a criminal proceeding, the person must also have had no reasonable cause to
believe his or her conduct was unlawful.

First Liberty. First Liberty's bylaws provide that First Liberty's directors
shall not be personally liable for monetary damages for any action taken or any
failure to take any action unless the director breached or failed to perform
his or her duties and the breach or failure constitutes self-dealing, willful
misconduct or recklessness.

First Liberty's bylaws provide for indemnification of directors, officers,
employees, or agents of First Liberty for certain litigation-related
liabilities and expenses to the maximum extent provided by Pennsylvania law.
Those persons are generally entitled to indemnification in both third party
actions and derivative actions unless the act or failure to act giving rise to
the claim for indemnification is determined by a court to have constituted
willful misconduct or recklessness.

First Liberty's elimination of director liability and indemnification
provisions may be amended or repealed by the affirmative vote of 80% of the
directors or by the affirmative vote of shareholders entitled to cast at least
80% of all votes which shareholders are entitled to cast.

Certain Voting Rights and Restrictions with Respect to Mergers

Community Bank System. Under Delaware law, any merger, consolidation or sale
of all or substantially all of the assets of a corporation requires approval by
a majority of the outstanding shares, unless the corporation's certificate of
incorporation requires a higher percentage. Whether approval of stockholders is
required by Delaware law, the Community Bank System certificate of
incorporation requires a higher percentage with respect to "business
combinations" with "interested shareholders" as discussed below.

An interested shareholder is the beneficial owner of common stock
representing three percent or more of the votes entitled to be cast, an
affiliate or associate of Community Bank System who was an interested
shareholder at any time during the preceding two years, or an assignee or
successor in interest of shares which were owned at any time during the
preceding two years by an interested shareholder.

A business combination between Community Bank System and an interested
shareholder requires the approval of a majority of the board of directors and
at least three-fourths of the votes entitled to be cast, or at least two-thirds
of the votes entitled to be cast and two-thirds of the continuing directors. A
"business combination" includes:

. a merger or consolidation with Community Bank System or any of its
subsidiaries;

. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition involving any assets or securities of Community Bank System
or any of its subsidiaries having an aggregate fair market value of
$3,000,000 or more;

. the adoption of any plan or proposal for the liquidation or dissolution
of the Corporation;

. any reclassification of securities, recapitalization, any merger or
consolidation of Community Bank System with one of its subsidiaries, or
any other transaction which has the effect of increasing the proportion
of the outstanding shares of any class of equity or convertible
securities which is beneficially owned by an interested shareholder; and

. any agreement, contract, or other agreement providing for any one or
more of the actions specified in the foregoing.

In addition, Section 203 of the Delaware General Corporation Law applies to
Delaware corporations with a class of voting stock listed on a national
securities exchange, authorized for quotation on the Nasdaq Stock Market, or
held of record by 2,000 or more persons, and restricts transactions which may
be entered into by a corporation and certain of its shareholders. Community
Bank System has not elected to "opt out" of Section 203, as permitted by that
section. Section 203 provides, in essence, that an "interested stockholder,"
defined as a stockholder acquiring more than 15%, but less than 85%, of the
outstanding voting stock of a corporation subject to the statute and its
affiliates and associates, may not engage in certain "business combinations"
with the corporation for a period of three years subsequent to the date on
which the stockholder became an interested stockholder unless:

. prior to that date, the corporation's board of directors approved either
the business combination or the transaction in which the stockholder
became an interested person, or

. the business combination is approved by the corporation's board of
directors and authorized at a stockholders' meeting by a vote of at
least two-thirds of the outstanding voting stock of the corporation not
owned by the interested person.

Section 203 defines the term "business combination" to include a wide
variety of transactions with or caused by an interested person in which the
interested person receives or could receive a benefit on other than a pro rata
basis with other shareholders, including mergers, certain asset sales, certain
issuances of additional shares to the interested person, transactions with the
corporation which increase the proportionate interest of the interested person
or transactions in which the interested person receives certain other benefits.

First Liberty. First Liberty's articles of incorporation require, until
January 1, 2004, an 80% vote of directors and the affirmative vote of holders
of 80% of outstanding shares of First Liberty common stock to approve a merger
or consolidation of First Liberty with another corporation or any division
involving the corporation, a share exchange involving an exchange of shares of
First Liberty capital stock, a sale, lease, exchange or other transfer of all
or substantially all of the assets of First Liberty, a liquidation or
dissolution involving First Liberty, or any transaction similar to or having
similar effects as any of the foregoing (each, a "Fundamental Transaction"). In
any Fundamental Transaction occurring prior to January 1, 2004 in which former
First Liberty directors continue to constitute at least a majority of the board
of directors immediately after the Fundamental Transaction and First Liberty
shareholders continue to own at least a majority of the outstanding voting
securities of the entity resulting from the Fundamental Transaction, the
shareholder voting requirements decreases from 80% to 66 2/3% of outstanding
shares. On and after January 1, 2004, approval of a Fundamental Transaction
requires at 66 2/3% vote of directors and the affirmative vote of holders of 66
2/3% of the outstanding shares of First Liberty common stock. The supermajority
shareholder voting requirements do not apply to any Fundamental Transaction
approved in advance unanimously by the board of directors.

First Liberty is subject to some, but not all, of various provisions of
Pennsylvania law that are triggered, in general, when any person or group
acquires, or discloses an intent to acquire, 20% or more of the voting power of
a covered corporation, other than pursuant to a registered firm commitment
underwriting or, in certain cases, pursuant to the approving vote of board of
directors. The relevant provisions are contained in Subchapters 25E-H of the
Pennsylvania Business Corporation Law.

Subchapter 25E (relating to control transactions) provides that if any
person or group acquires 20% or more of the voting power of a covered
corporation, the remaining shareholders may demand from such person or group
the fair value of their shares, including a proportionate amount of any control
premium.

Subchapter 25F (relating to business combinations) delays for five years and
imposes conditions upon "business combinations" between an "interested
shareholder" and the corporation. The term "business combination" is defined
broadly to include various transactions utilizing a corporation's assets for
purchase price amortization or refinancing purposes. For this purpose, an
"interested shareholder" is defined generally as the beneficial owner of at
least 20% of a corporation's voting shares.

Subchapter 25G (relating to control share acquisitions) prevents a person
who has acquired 20% or more of the voting power of a covered corporation from
voting such shares unless the "disinterested" shareholders approve such voting
rights. Failure to obtain such approval exposes the owner to the risk of a
forced sale of the shares of the issuer. Even if shareholder approval is
obtained, the corporation is also subject to Subchapters 25I and J of the
Pennsylvania Business Corporation Law. Subchapter 25I provides for a minimum
severance payment to certain employees terminated within two years of the
approval.

Subchapter 25J prohibits the abrogation of certain labor contracts prior to
their stated date of expiration.

Subchapter 25H (relating to disgorgement) applies in the event that (i) any
person or group publicly discloses that the person or group may acquire
control of the corporation or (ii) a person or group acquires (or publicly
discloses an offer or intent to acquire) 20% or more of the voting power of
the corporation and, in either case, sells shares within 18 months thereafter.
Any profits from sales of equity securities of the corporation by the person
or group during the 18-month period belong to the corporation if the
securities that were sold were acquired during the 18-month period or within
24 months prior thereto.

Subchapters 25E-H contain a wide variety of transactional and status
exemptions and safe harbors. As permitted under Pennsylvania law, First
Liberty has opted out of the provisions of Subchapter 25E but is subject to
the provisions of Subchapters 25F, G and H. First Liberty's election to opt
out of the provisions of Subchapter 25E can be reversed under certain
circumstances.

Shareholder Rights Plan

Community Bank System. The board of directors of Community Bank System has
adopted a stockholder rights protection plan (commonly known as a "poison
pill"). For details on this plan, please see "Rights Plan" on page [ ].

First Liberty. First Liberty has no comparable shareholders rights plan.

Amendment to Certificate of Incorporation and Articles of Incorporation

Community Bank System. Under Delaware law, the Community Bank System
certificate of incorporation may be amended only if the amendment is first
proposed by the Community Bank System board of directors and is approved by a
majority of outstanding shares entitled to vote thereon. Where the rights of a
certain class of shares is affected by the amendment, a majority of that class
of shares must also approve the amendment, regardless if such class is
otherwise entitled to vote on the amendment. Under Community Bank System's
certificate of incorporation, amendments to provisions relating to the
election and classification of directors, the limitation of director's
liability, a business combination with interested shareholder or an amendment
to the certificate require the approval of a majority of the board of
directors and at least three-fourths of the votes entitled to be cast by the
holders of Community Bank System common stock, or at least two-thirds of the
votes entitled to be cast and two-thirds of the continuing directors.

First Liberty. Under Pennsylvania law, First Liberty's articles of
incorporation may be amended only if the amendment is first proposed by the
First Liberty board of directors by the adoption of a resolution and approved
by shareholders. Pennsylvania law also provides that amendments to articles of
incorporation may be adopted upon the affirmative vote of a majority of
shareholders unless otherwise provided in by Pennsylvania law (related to
changes in rights or preferences of the shares of a class of stock) or the
articles of incorporation. First Liberty's articles of incorporation provide
that amendments related to the classes and designation of directors, the
voting rights of shareholders, and the number of directors require a two-
thirds affirmative vote of shareholders or a two-thirds affirmative vote of
directors and an affirmative vote of a majority of shareholders. First
Liberty's articles of incorporation also provide that, until January 1, 2004,
amendments related to amending the articles or bylaws, the number of
directors, the votes required approve a fundamental change, the denial on the
power of shareholders to consent to action without a meeting, and provisions
related to control

transactions, require the affirmative vote of both 80% of the total number of
directors and the 80% of the total votes that all shareholders are entitled to
cast, and after January 1, 2004, the affirmative vote of both two-thirds of the
total number of directors and two-thirds of the total votes that all
shareholders are entitled to cast.

Amendment to Bylaws

Community Bank System. The board of directors of Community Bank System may
adopt, amend or repeal Community Bank System's bylaws by a majority vote,
provided that the bylaws may also be adopted, amended or repealed by the
stockholders of Community Bank System by the affirmative vote of a majority of
shares present in person or represented by proxy and entitled to vote on the
subject matter.

First Liberty. The authority to amend or repeal First Liberty's bylaws is
vested in First Liberty's board of directors, subject always to the power of
the shareholders of First Liberty to change such action by the affirmative vote
of shareholders holding at least two-thirds of First Liberty's total voting
power (except that any amendment to the indemnification and limitation of
director liability provisions set forth in the bylaws shall require the
affirmative vote of two-thirds of the entire board of directors or shareholders
holding 80% of the votes that all shareholders are entitled to cast).

EXPERTS

The consolidated financial statements of Community Bank System as of
December 31, 1999 and 1998, and for each of the years in the three-year period
ended December 31, 1999, have been incorporated by reference in this document
and in the registration statement of which this document is a part, in reliance
upon the report of PricewaterhouseCoopers LLP, independent auditors, which
report is incorporated by reference in this document, and upon the authority of
the firm as experts in accounting and auditing. The consolidated financial
statements of First Liberty as of December 31, 1999 and 1998, and for each of
the years in the three-year period ended December 31, 1999, have been included
in this document and in the registration statement of which this document is a
part, in reliance upon the report of KPMG LLP, independent auditors, which
report is also included in this document, and upon the authority of the firm as
experts in accounting and auditing.

The material U.S. federal income tax consequences of the merger are being
passed upon for First Liberty and Community Bank System by
PricewaterhouseCoopers LLP.

LEGAL MATTERS

The validity of the shares of Community Bank System common stock to be
issued pursuant to the terms of the merger agreement will be passed upon for
Community Bank System by Bond, Schoeneck & King, LLP, Syracuse, New York.

WHERE YOU CAN FIND MORE INFORMATION

Both Community Bank System and First Liberty file annual, quarterly and
current reports, proxy statements and other information with the SEC.

You may read and copy any reports, statements or other information that
Community Bank System or First Liberty files at the SEC's public reference
rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please
call the SEC at 1-800-SEC-0330 for further information on the public reference
rooms. Community Bank System's and First Liberty's public filings are also
available to the public from commercial document retrieval services and at the
Internet World Wide Web site maintained by the SEC at "http://www.sec.gov." You
can also inspect reports, proxy statements and other information about
Community Bank System at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.

Community Bank System's and First Liberty's public filings are also
available from Community Bank System and First Liberty, respectively, at the
address shown below.

Community Bank System has filed a registration statement to register with
the SEC the shares of Community Bank System common stock to be issued to First
Liberty shareholders in the merger. This document is a part of the registration
statement and constitutes a prospectus of Community Bank System and a joint
proxy statement of Community Bank System and First Liberty for their respective
special meetings.

As allowed by SEC rules, this document does not contain all the information
that shareholders can find in the registration statement or the exhibits to the
registration statement. The SEC allows Community Bank System to "incorporate by
reference" certain information into this document, which means that Community
Bank System can disclose important information to you by referring you to
another document filed separately with the SEC. The information incorporated by
reference is deemed to be a part of this document, except for any information
which contradicts information contained directly in this document. This
document incorporates by reference the documents set forth below that Community
Bank System has previously filed with the SEC.

Community Bank System
Commission Filings (File No. 0-11716)
-------------------------------------

Annual Report on Form 10-K.......................... Year ended December 31,
1999
Quarterly Reports on Form 10-Q...................... Quarterly Periods ended
March 31, 2000, June 30,
2000 and September 30,
2000
Proxy Statement for Annual Meeting of Stockholders.. 2000
Current Reports on Form 8-K......................... Filed February 25, 2000,
September 18, 2000,
September 29, 2000 and
December 6, 2000
Registration Statements on Form 8-A................. Filed December 9, 1997
and February 27, 1995

All documents that Community Bank System files with the SEC between the date
of this document and the completion of the merger are incorporated into this
document by reference and made a part of this document from the date of the
filing of the documents. These additional documents include periodic reports,
such as Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

Community Bank System has supplied all information contained or incorporated
by reference in this document relating to Community Bank System. First Liberty
has supplied all such information relating to First Liberty. Neither Community
Bank System nor First Liberty assumes any responsibility for the accuracy or
completeness of the information provided by the other party.

You may obtain documents incorporated by reference from Community Bank
System without charge, excluding all exhibits (unless specifically incorporated
by reference as an exhibit to this document), by requesting them in writing or
by telephone from Community Bank System at the following address:

Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, New York 13214
Attention: Donna J. Drengel, Corporate Secretary
Telephone: (315) 445-7313

100

You may obtain First Liberty's annual, quarterly and current reports, proxy
statements and other information filed with the SEC from First Liberty without
charge, excluding all exhibits, by requesting them in writing or by telephone
from First Liberty at the following address:

First Liberty Bank Corp.
645 Washington Avenue
P.O. Box 39
Jermyn, Pennsylvania
Attention: Donald J. Gibbs, Treasurer
Telephone: (570) 876-6545

If you would like to request documents from Community Bank System or First
Liberty, please do so at least five business days before the date of your
special meeting in order to receive timely delivery of the requested documents
prior to the special meeting.

You should rely only on the information contained or incorporated by
reference in this document to vote your shares at the special meeting held by
your company. Neither Community Bank System nor First Liberty has authorized
anyone to provide you with information that is different from what is contained
in this document. This document is dated [ ], 2001. You should not assume
that the information contained in this document is accurate after that date.

101

FINANCIAL STATEMENT INDEX

Page
----

FINANCIAL STATEMENTS OF FIRST LIBERTY BANK CORP.

Consolidated Balance Sheets as of September 30, 2000 (unaudited)......... F-2

Consolidated Statements of Income for the Nine Months Ended September 30,
2000 (unaudited)........................................................ F-3

Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2000 (unaudited).................................................... F-4

Notes to Unaudited Consolidated Financial Statements..................... F-5

Consolidated Balance Sheets as of December 31, 1999 and 1998............. F-7

Consolidated Statements of Operations for the Years Ended December 31,
1999, 1998 and 1997..................................................... F-8

Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1999, 1998 and 1997.................................. F-9

Consolidated Statements of Cash Flows for the Years Ended December 31,
1999, 1998 and 1997..................................................... F-10

Notes to Audited Consolidated Financial Statements....................... F-11

Independent Auditors' Report............................................. F-32

F-1

FIRST LIBERTY BANK CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share information)

September 30, December 31,
2000 1999
------------- ------------
(unaudited)

ASSETS
------

Cash and due from banks............................ $ 14,243 $ 26,023
Securities available for sale...................... 169,266 185,908
Loans, gross....................................... 435,112 417,249
Less: Unearned discount and origination fees....... (633) (699)
Allowance for loan losses........................ (5,493) (5,107)
-------- --------
Loans, net..................................... 428,986 411,443
Accrued interest receivable........................ 4,223 3,397
Bank premises, leasehold improvements and
equipment--net.................................... 14,326 14,431
Real estate owned other than bank premises,
repossessed assets................................ 465 558
Other assets....................................... 15,152 11,515
-------- --------
Total assets................................... $646,661 $653,275
======== ========

LIABILITIES
-----------

Deposits:
Noninterest-bearing demand....................... $ 54,641 $ 49,502
Interest-bearing................................. 442,321 434,944
-------- --------
Total deposits................................. 496,962 484,446
-------- --------
Other borrowed money............................... 10,491 75,567
Federal funds purchased............................ 75,890 32,450
Accrued interest payable........................... 2,595 2,040
Other liabilities.................................. 571 1,555
-------- --------
Total liabilities.............................. 586,509 596,058
-------- --------

SHAREHOLDERS' EQUITY
--------------------

Common stock, $.31 par value, authorized 10,000,000
shares; Issued 6,429,460 and 6,427,804 shares,
respectively...................................... 2,009 2,009
Surplus............................................ 6,121 6,107
Retained earnings.................................. 55,439 53,790
Accumulated other comprehensive income (loss)...... (3,221) (4,493)
Less treasury stock--at cost (60,820 shares)....... (196) (196)
-------- --------
Total shareholders' equity..................... 60,152 57,217
-------- --------
Total liabilities and shareholders' equity..... $646,661 $653,275
======== ========

F-2

FIRST LIBERTY BANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
(In thousands of dollars, except per share information)
(unaudited)

Three months Nine months
ended ended September
September 30 30
--------------- ----------------
2000 1999 2000 1999
------- ------- ------- -------

Interest income:
Interest and fees on loans................ $ 8,557 $ 7,782 $25,015 $22,704
Interest on interest bearing deposits..... 6 11 19 433
Interest and dividends on securities:
Taxable................................. 2,245 2,467 6,906 6,765
Exempt from Federal Taxes............... 376 504 1,174 1,705
Interest on federal funds sold............ -- -- -- 72
------- ------- ------- -------
Total interest income................. 11,184 10,764 33,114 31,679
------- ------- ------- -------
Interest expense:
Deposits.................................. 5,111 4,800 14,649 14,371
Fed Funds Purchased....................... 1,067 111 1,878 114
Capitalized lease obligations and borrowed
funds.................................... 265 709 2,238 2,108
------- ------- ------- -------
Total interest expense................ 6,443 5,620 18,765 16,593
------- ------- ------- -------
Net interest income......................... 4,741 5,144 14,349 15,086
Provision for loan losses................... 180 180 540 540
------- ------- ------- -------
Net interest income after provision
for loan losses...................... 4,561 4,964 13,809 14,546
------- ------- ------- -------
Noninterest income:
Service charges and fees.................. 188 169 516 513
Gains on sale of securities............... -- 138 53 225
Trust..................................... 178 155 522 492
Other..................................... 202 237 479 530
------- ------- ------- -------
Total noninterest income.............. 568 699 1,570 1,760
------- ------- ------- -------
Noninterest expense:
Salaries and benefits..................... 2,001 1,837 5,912 5,380
Net occupancy and furniture/equipment
expenses................................. 648 625 1,941 1,794
Data processing services.................. 83 66 156 262
Foreclosure and other real estate
expense.................................. 21 (6) 42 53
Other expenses............................ 875 1,019 2,521 2,788
------- ------- ------- -------
Total noninterest expense............. 3,628 3,541 10,572 10,277
------- ------- ------- -------
Income before federal income tax provision.. 1,501 2,122 4,807 6,029
Income tax provision........................ 331 430 1,056 1,280
------- ------- ------- -------
Net income............................ 1,170 1,692 3,751 4,749
------- ------- ------- -------
Other comprehensive income net of tax:
Unrealized gains on securities:
Unrealized holding (loss)/gain arising
during the period...................... 1,097 (870) 1,307 (3,887)
Reclassification adjustment for gains
included in net income................. -- (91) (35) (149)
Comprehensive income........................ $ 2,267 $ 731 $ 5,023 $ 713
======= ======= ======= =======
Per share information
Net income-basic.......................... .18 .27 .59 .75
Net income-diluted........................ .18 .26 .59 .74

F-3

FIRST LIBERTY BANK CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(unaudited)

Nine months ended
September 30
------------------
2000 1999
-------- --------

Operating activities:
Net income............................................... $ 3,751 $ 4,749
Adjustments to reconcile net income to net cash provided
by operating activities:
Gains on sales of securities........................... (53) (225)
Provision for loan losses.............................. 540 540
Depreciation and amortization of investment securities,
bank premises, leasehold improvements and equipment... 969 812
Increase in interest receivable and other assets......... (5,118) (1,387)
Decrease in interest payable and other liabilities..... (429) (182)
-------- --------
Net cash (used) provided by operating activities..... (340) 4,307
-------- --------
Investing activities:
Proceeds from maturities and paydowns of securities...... 13,278 50,979
Purchases of securities available for sale............... -- (72,540)
Proceeds from sales of securities available for sale..... 5,344 20,215
Net increase in loans.................................... (18,372) (36,959)
Purchases of bank premises, leasehold improvements and
equipment--net.......................................... (864) (3,423)
Sales of assets acquired through foreclosure, net........ 382 629
-------- --------
Net cash used by investing activities................ (232) (41,099)
-------- --------
Financing activities:
Net increase in deposits................................. 12,516 12,389
Net increase in Fed Funds Purchased...................... 43,440 21,500
Principal payments on capitalized lease obligation....... (76) (69)
Repay Borrowed funds..................................... (65,000) (5,000)
Proceeds of stock issued through exercise options........ 14 154
Dividends paid........................................... (2,102) (1,272)
-------- --------
Net cash (used) provided by financing activities..... (11,208) 27,702
-------- --------
Decrease in cash and cash equivalents...................... (11,780) (9,090)
Cash and cash equivalents at beginning of period........... 26,023 25,628
-------- --------
Cash and cash equivalents at end of period........... 14,243 16,538
======== ========
Cash paid during the period:
Interest................................................. 18,210 16,467
Federal Income Taxes..................................... 1,362 1,227
======== ========
Noncash transactions:
Net unrealized gain (loss) on securities available for
sale, net of tax........................................ 1,272 (4,036)
Transfers of loans to real estate owned other than bank
premise................................................. 289 712
======== ========

F-4

FIRST LIBERTY BANK CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2000

(unaudited)

(1) Summary of Significant Accounting Policies

Basis of Financial Statement Presentation

The accompanying consolidated financial statements of First Liberty Bank
Corp. and subsidiaries (the Company) were prepared in accordance with
instructions to Form 10-Q, and therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. However, all normal, recurring adjustments which, in the opinion of
management, are necessary for a fair presentation of the financial statements,
have been included. These financial statements should be read in conjunction
with the audited financial statements and the notes thereto included in the
Company's Annual Report for the period ended December 31, 1999. The results for
the nine months ended September 30, 2000 are not necessarily indicative of the
results that may be expected for the year ended December 31, 2000.

Business

The Company's principal subsidiary, First Liberty Bank & Trust (the Bank),
conducts business from its branch bank system located in Lackawanna and Luzerne
Counties, Pennsylvania. The Bank is subject to competition from other financial
institutions and other companies which provide financial services. The Bank is
subject to the regulations of certain federal and state agencies and undergoes
periodic examinations by those regulatory authorities.

Principles of Consolidation

On February 16, 1999, the Company merged its two principal subsidiaries, The
First National Bank of Jermyn and NBO National Bank, under the name First
Liberty Bank & Trust. Concurrent with this merger, the Company converted the
charter of the Bank to a State chartered commercial bank subject to regulation
by the Pennsylvania Department of Banking and the Federal Reserve Bank.

The consolidated financial statements include the accounts of all of the
Company's wholly-owned subsidiaries. All significant intercompany transactions
have been eliminated in consolidation. Additionally, certain reclassifications
have been made in order to conform with the current year's presentation. The
accompanying consolidated financial statements have been prepared on an accrual
basis.

(2) Earnings Per Share

Basic earnings per share were computed based on the weighted average number
of shares outstanding during each period. Diluted earnings per share include
the dilutive effect of the Company's weighted average stock options outstanding
using the Treasury Stock method.

F-5

FIRST LIBERTY BANK CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following table sets forth the computation of basic and diluted earnings
per share (in thousands):

Three months Nine months
ended ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
------ ------ ------ ------

Numerator:
Net Income.................................... $1,170 $1,692 $3,751 $4,749
Denominator:
Denominator for basic earnings per weighted
average shares............................... 6,369 6,364 6,368 6,360
Effect of dilutive securities:
Employee Stock options........................ 21 44 27 48
------ ------ ------ ------
Denominator for diluted earnings per share
adjusted weighted average shares and assumed
exercise of stock options...................... 6,390 6,408 6,395 6,408
------ ------ ------ ------
Basic earnings per share........................ .18 .27 .59 .75
Diluted earnings per share...................... .18 .26 .59 .74

F-6

FIRST LIBERTY BANK CORP.

CONSOLIDATED BALANCE SHEETS
(In thousands of dollars, except per share information)

December 31
------------------
1999 1998
-------- --------
ASSETS
------

Cash and due from banks.................................... $ 26,023 $ 20,628
Federal funds sold......................................... -- 5,000
-------- --------
Cash and cash equivalents............................ 26,023 25,628
-------- --------
Securities available for sale.............................. 185,908 196,563
Loans, gross............................................... 417,249 376,856
Less:
Unearned income........................................ (699) (941)
Allowance for loan losses.............................. (5,107) (4,618)
-------- --------
Loans, net........................................... 411,443 371,297
-------- --------
Accrued interest receivable................................ 3,397 3,914
Bank premises, leasehold improvements and furniture and
equipment--net............................................ 14,431 10,307
Real estate owned.......................................... 558 479
Other assets............................................... 11,515 7,182
-------- --------
Total assets......................................... $653,275 $615,370
======== ========

LIABILITIES
-----------

Deposits:
Noninterest-bearing demand............................... $ 49,502 $ 55,272
Interest-bearing......................................... 434,944 441,328
-------- --------
Total deposits....................................... 484,446 496,600
-------- --------
Federal funds purchased.................................... 32,450 5,000
Other borrowed money....................................... 75,567 50,660
Accrued interest payable................................... 2,040 2,218
Other liabilities.......................................... 1,555 1,984
-------- --------
Total liabilities.................................... 596,058 556,462
-------- --------

SHAREHOLDERS' EQUITY
--------------------

Common stock, $.31 par value; authorized, 10,000,000
shares; issued, 6,427,804 and 6,409,368 shares,
respectively.............................................. 2,009 2,003
Surplus.................................................... 6,107 5,905
Retained earnings.......................................... 53,790 50,435
Accumulated other comprehensive income (loss).............. (4,493) 761
Less: Treasury stock--at cost (60,820 shares).............. (196) (196)
-------- --------
Total shareholders' equity........................... 57,217 58,908
-------- --------
Total liabilities and shareholders' equity........... $653,275 $615,370
======== ========

See accompanying notes to consolidated financial statements.

F-7

FIRST LIBERTY BANK CORP.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share information)

For the year ended
December 31,
-------------------------
1999 1998 1997
------- ------- -------

Interest income:
Interest and fees on loans........................ $30,727 $30,305 $29,350
Interest on interest-bearing deposits............. 439 642 16
Interest and dividends on securities:
Taxable......................................... 9,163 8,453 9,465
Exempt from federal taxes....................... 2,157 2,359 1,767
Interest on federal funds sold.................... 73 606 718
------- ------- -------
Total interest income......................... 42,559 42,365 41,316
------- ------- -------
Interest expense:
Deposits.......................................... 19,128 19,834 19,294
Federal funds purchased........................... 306 1 2
Capitalized lease obligation and borrowed funds... 3,109 2,838 2,279
------- ------- -------
Total interest expense........................ 22,543 22,673 21,575
------- ------- -------
Net interest income................................. 20,016 19,692 19,741
Provision for loan losses........................... 720 540 600
------- ------- -------
Net interest income after provision for loan
losses............................................. 19,296 19,152 19,141
Non-interest income:
Service charges and fees.......................... 683 699 807
Gain/loss on sale of securities................... 225 47 (191)
Restructuring of deferred compensation plans...... -- -- 385
Trust............................................. 666 496 402
Other............................................. 670 536 641
------- ------- -------
Total noninterest income...................... 2,244 1,778 2,044
Non-interest expense:
Salaries and benefits............................. 7,212 7,080 7,460
Net occupancy and furniture/equipment expenses.... 2,462 2,426 2,198
Data processing services.......................... 352 650 627
Office expense.................................... 571 231 238
Foreclosures and other real estate expense........ 56 351 496
Merger related costs.............................. -- 1,098 --
Fidelity (recovery) loss.......................... -- -- (372)
Other expense..................................... 3,339 3,523 3,681
------- ------- -------
Total noninterest expense..................... 13,992 15,359 14,328
------- ------- -------
Income before income tax provision............ 7,548 5,571 6,857
Income tax provision................................ 1,521 1,570 1,737
------- ------- -------
Net income.......................................... $ 6,027 $ 4,001 $ 5,120
======= ======= =======
Net income.......................................... $ 6,027 $ 4,001 $ 5,120
Other comprehensive income, net of tax:
Unrealized gain on securities:
Unrealized holding (losses) gains arising during
period......................................... (5,105) 975 736
Reclassification adjustment for (gains) losses
included in net income......................... (149) (47) 191
------- ------- -------
Comprehensive income.......................... $ 773 $ 4,929 $ 6,047
======= ======= =======
Earnings per share (based on net income):
Basic............................................. $ 0.95 $ 0.63 $ 0.81
Diluted........................................... 0.94 0.63 0.80
======= ======= =======

See accompanying notes to consolidated financial statements.

F-8

FIRST LIBERTY BANK CORP.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands of dollars, except per share and par value amounts)

Common Accumulated
stock other
par value Retained comprehensive Treasury
$.31 Surplus earnings income stock Total
--------- ------- -------- ------------- -------- -------

Balance, January 1,
1997................... $1,986 $5,334 $45,612 $(1,094) $(196) $51,642
Net income.............. -- -- 5,120 5,120
Cash dividends ($.35 per
share)................. (2,119) (2,119)
Stock options
exercised.............. 1 13 14
Net unrealized gains on
securities available
for sale, net of tax... -- 927 927
------ ------ ------- ------- ----- -------
Balance, December 31,
1997................... 1,987 5,347 48,613 (167) (196) 55,584
Net income.............. 4,001 4,001
Cash dividends ($.35 per
share)................. (2,179) (2,179)
Stock options
exercised.............. 16 558 574
Net unrealized gains on
securities available
for sale, net of tax... 928 928
------ ------ ------- ------- ----- -------
Balance, December 31,
1998................... 2,003 5,905 50,435 761 (196) 58,908
Net income.............. 6,027 6,027
Cash dividends ($.42 per
share)................. (2,672) (2,672)
Stock options
exercised.............. 6 202 208
Net unrealized gains on
securities available
for sale, net of tax... (5,254) (5,254)
------ ------ ------- ------- ----- -------
Balance, December 31,
1999................... $2,009 $6,107 $53,790 $(4,493) $(196) $57,217
====== ====== ======= ======= ===== =======

See accompanying notes to consolidated financial statements.

F-9

FIRST LIBERTY BANK CORP.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)

For the year ended December 31
---------------------------------
1999 1998 1997
---------- ---------- ----------

Operating activities:
Net income................................. $ 6,027 $ 4,001 $ 5,120
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses................. 720 540 600
Depreciation, accretion and amortization.. 1,223 1,234 1,311
Deferred income taxes..................... 144 (255) 308
Gain on sales of loans--net............... (29) -- 171
(Gain) loss on sale of securities
available for sale....................... (225) (47) 191
Loss on disposition of real estate........ (12) 266 145
Loss or writedown of real estate.......... 10 -- --
Decrease (increase) in interest receivable
and other assets......................... (1,110) 1,083 (355)
(Decrease) increase in interest payable
and other liabilities.................... (607) 281 (619)
--------- ---------- ---------
Net cash provided by operating
activities............................. 6,141 7,103 6,872
--------- ---------- ---------
Investing activities:
Maturities and principal repayments of
securities available for sale............. 55,178 150,905 27,301
Maturities of investment securities........ -- -- 12,354
Purchases of securities available for
sale...................................... (72,540) (153,532) (67,896)
Purchases of investment securities......... -- (18,308) (6,795)
Proceeds from sale of securities available
for sale.................................. 20,518 10,095 41,727
Net increase in loans...................... (43,061) (15,932) (26,510)
Proceeds from sale of loans................ 1,034 -- 6,401
Purchases of bank premises, leasehold
improvements and furniture and equipment--
net....................................... (5,249) (2,047) (609)
Sales of assets acquired through
foreclosure, net.......................... 635 846 765
--------- ---------- ---------
Net cash used in investing activities... (43,485) (27,973) (13,262)
--------- ---------- ---------
Financing activities:
Net increase in noninterest-bearing demand
deposits and interest-bearing deposits.... (12,154) 11,798 (2,782)
Proceeds of stock issued................... 208 574 14
Proceeds from Federal funds
purchased/borrowed funds.................. (7,890) -- 20,000
Repayment of Federal funds
purchased/borrowed funds.................. 35,340 5,000 (12,000)
Principal payments on capitalized lease
obligation................................ (93) (84) (77)
Net increase in FHLB borrowings............ 25,000 10,000 --
Dividends paid............................. (2,672) (2,179) (2,119)
--------- ---------- ---------
Net cash provided by financing
activities............................. 37,739 25,109 3,036
--------- ---------- ---------
Increase (decrease) in cash and cash
equivalents............................ 395 4,239 (3,354)
Cash and cash equivalents at beginning of
year........................................ 25,628 21,389 24,743
--------- ---------- ---------
Cash and cash equivalents at end of year..... $ 26,023 $ 25,628 $ 21,389
========= ========== =========
Cash paid during the year:
Interest................................... $ 19,306 $ 22,742 $ 21,479
========= ========== =========
Federal income taxes....................... $ 1,302 $ 1,442 $ 1,577
========= ========== =========
Non cash transactions:
Change in unrealized (gains) losses on
securities available for sale, net of
tax....................................... $ 5,254 $ 928 $ 927
========= ========== =========
Transfers of loans to real estate owned
other than bank premises.................. $ 712 $ 378 $ 1,027
========= ========== =========
Transfer of securities from investment
securities to available for sale.......... $ -- $ 60,295 $ --
========= ========== =========

See accompanying notes to consolidated financial statements.

F-10

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

First Liberty Bank Corp. (the Company) is a bank holding company whose
principal subsidiary as of December 31, 1999, is First Liberty Bank and Trust
(the Bank) which operates branch bank systems located in Lackawanna County,
Pennsylvania. The Bank provides a range of banking services typically
associated with a community bank, the most important of which are the taking of
deposits and granting of loans to both individuals and corporations within its
market area. The Bank faces competition in its market from other depository
institutions, some of which are substantially larger than the Bank and from
other financial services companies, including mutual funds, mortgage companies,
finance companies, insurance companies, and others.

(a) Recent Acquisition

On June 30, 1998, the Company consummated its acquisition of Upper Valley
Bancorp, Inc. (Upper Valley) the holding company of NBO. As of December 31,
1998, NBO was a $263 million national-chartered bank with three branches in
Olyphant, Scranton, and Pittston, Pennsylvania. Upper Valley shareholders
received .689 shares of the Company's common stock for each Upper Valley share
owned. The transaction was accounted for as a pooling of interests and all
prior periods have been restated to reflect the acquisition. The total value of
the transaction was approximately $52.1 million based upon the Company's stock
price prior to finalization of the acquisition. This resulted in the issuance
of approximately 694,000 shares of the Company's stock. The transaction was
tax-free to the shareholders for federal income tax purposes. In connection
with the acquisition, the Company recognized $1,098,000 in merger-related costs
in the second quarter of 1998.

The results of operations previously reported by the separate enterprises
and the combined amounts presented in the accompanying consolidated financial
statements are summarized below.

Year ended
December 31,
1997
------------

Net interest income:
FNBJ........................................................ $11,312
NBO......................................................... 8,429
-------
Combined.................................................. $19,741
=======
Net income:
FNBJ........................................................ $ 3,483
NBO......................................................... 1,637
-------
Combined.................................................. $ 5,120
=======

The Company operated and managed FNBJ and NBO as separate subsidiaries and
segments until approximately the first quarter of 1999 when it merged the
entities under the name "First Liberty Bank & Trust."

(b) Name Change

On June 30, 1998, concurrent with its acquisition of Upper Valley, the bank
holding company changed its name from The First Jermyn Corp. to First Liberty
Bank Corp.

The accompanying consolidated financial statements of the Company and its
subsidiary include the accounts of First Liberty Bank Corp., First Liberty Bank
and Trust and First of Jermyn Realty Company, Inc.

F-11

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(inactive since inception). All significant intercompany balances and
transactions have been eliminated in consolidation. Prior period amounts are
reclassified when necessary to conform with the current year's presentation.

In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and revenues and expenses. The material estimates that are
particularly susceptible to significant change in the near-term relates to the
determination of the allowance for loan losses and the valuation of real estate
owned.

(d) Risks and Uncertainties

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

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

(e) Cash and Cash Equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash
due from banks and federal funds sold. Generally, federal funds are sold for
periods ranging up to thirty days.

(f) Securities

Securities include mortgage-backed securities, corporate bonds, and certain
equity securities.

Investments in securities that have a readily determinable fair value and
investments in debt securities are classified into categories and accounted for
as follows:

. Debt securities that the Company positively intends to hold to maturity
are classified as "held-to-maturity" and are reported at amortized cost.

. Debt and equity securities purchased with the intention of selling them
in the near future are classified as "trading securities" and are
reported at fair value, with unrealized gains and losses included in net
income.

. Debt and equity securities not classified in either of the above
categories are classified as "available-for-sale securities" and are
reported at fair value, with unrealized gains and losses excluded from
earnings and reported, net of tax, as a separate component of
shareholders' equity.

There were no securities classified as "trading" during 1999, 1998 or 1997.

F-12

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Premiums and discounts on debt securities are recognized in interest income
using the interest method over the period to maturity. Declines in the fair
value of individual held-to-maturity and available-for-sale securities below
their cost that are other than temporary result in write-downs of the
individual securities to their fair value. The related write-downs are included
in earnings as realized losses. The specific identification method is used to
determine realized gains and losses on sales of securities available for sale.

(g) Loans

Loans are stated net of unearned income (deferred fees and costs and
unearned discount). Loan interest income is accrued using various methods which
approximate a constant yield. Loan origination and commitment fees and direct
loan origination costs are deferred and recognized over the life of the related
loans.

Nonaccrual loans are those on which the accrual of interest has ceased.
Loans are placed on nonaccrual status if, in the opinion of management,
collection is doubtful, or when principal or interest is past due 90 days or
more, unless collateral is sufficient to cover principal and interest and the
loan is in the process of collection. Interest accrued, but not collected at
the date a loan is placed on nonaccrual status, is reversed and charged against
interest income. In addition, the amortization of net deferred loan fees is
suspended when a loan is placed on nonaccrual status. Subsequent cash receipts
are applied either to the outstanding principal or recorded as interest income,
depending on management's assessment of ultimate collectibility of principal
and interest. Loans are returned to an accrual status when the borrower's
ability to make periodic principal and interest payments has returned to normal
(i.e. brought current with respect to principal or interest or restructured)
and the paying capacity of the borrower and/or the underlying collateral is
deemed sufficient to cover contractual principal and interest.

The Company's lending activities are concentrated in Pennsylvania. The
largest concentration of the Company's loan portfolio is located in
Northeastern Pennsylvania. The ability of the Company's borrowers to repay
amounts owed is dependent on several factors, including the economic conditions
in the borrower's geographic region and the borrower's financial condition.

Loans are deemed to be "impaired" if in management's assessment of the
relevant facts and circumstances, it is probable that the Company will be
unable to collect all proceeds due according to the contractual terms of the
loan agreement.

The Company's policy for the recognition of interest income on impaired
loans is the same as for nonaccrual loans discussed previously. Impaired loans
are charged-off when the Company determines that foreclosure is probable and
the fair value of the collateral is less than the recorded investment of the
impaired loan.

(h) Allowance for Loan Losses

The allowance for loan losses is established through a provision for loan
losses charged to expense. Loans are charged against the allowance for loan
losses when management believes that the collectibility of the principal is in
doubt. The allowance is an amount that management believes will be adequate to
absorb known and inherent losses on existing loans, based on periodic
evaluations of the loan portfolio by management. These evaluations take into
consideration such factors as changes in the nature and volume of the loan
portfolio, overall portfolio quality, review of specific problem loans, current
economic conditions that may affect the borrowers' ability to pay, and other
relevant matters.

While management utilizes the latest available information to determine the
allowance for losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions as well as adverse

F-13

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

changes in the financial condition of borrowers. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance. Such agencies may require the Company to
recognize additions to the allowance based on their judgments of information
available to them at the time of their examination.

(i) Loans Held for Sale

Mortgage loans originated and intended for sale are carried at the lower of
cost or estimated fair value.

(j) Bank Premises, Leasehold Improvements and Furniture and Equipment

Premises and equipment are stated at cost less accumulated depreciation and
amortization. Costs of major replacements, improvements, and additions are
capitalized. Normal maintenance costs are expensed as incurred. Depreciation
expense is computed on the straight-line basis over the estimated useful lives
of the assets (ranging from 5 to 40 years), or for leasehold improvements,
over the life of the related lease if less than the estimated useful life.
Accelerated methods are used in depreciating certain assets for income tax
purposes.

(k) Real Estate Owned

Real estate owned is recorded at the lower of the recorded investment in
the loan or fair value less estimated selling costs. Costs subsequently
incurred to improve the assets are included in the carrying value provided
that the resultant carrying value does not exceed fair value less estimated
disposal costs. Costs relating to holding the assets are charged to expense in
the current period.

(l) Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the periods in which those
temporary differences are expected to be recovered or settled. First Liberty
Bank Corp. and its subsidiaries file a consolidated Federal income tax return
and the amount of income tax expense or benefit is computed and allocated on a
separate return basis.

(m) Customer List

An intangible asset representing a customer list purchased is stated at
cost less accumulated amortization and is included in other assets.
Amortization expense is computed on the straight-line basis over the estimated
useful life of the asset (seven years).

(n) Retirement Plans

The Bank has retirement plans that cover substantially all employees. The
provisions of SFAS No. 87, Employers' Accounting for Pensions, are utilized to
calculate net pension cost.

F-14

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

(o) Earnings per Common Share

The following table sets forth the computation of basic and diluted earnings
per share (in thousands, except per share data). All share related information
presented in the table below has been adjusted to reflect a four-for-one stock
split made effective on October 15, 1999 to shareholders of record as of
September 30, 1999.

Years ended December 31
-----------------------------
1999 1998 1997
--------- --------- ---------

Numerator:
Net income.................................. $ 6,027 $ 4,001 $ 5,120
========= ========= =========
Denominator:
Denominator for basic earnings per share-
weighted average shares.................... 6,361,013 6,318,560 6,295,348
Effect of dilutive securities:
Employee stock options...................... 46,499 59,992 66,060
--------- --------- ---------
Denominator for dilutive earnings per share-
adjusted weighted average shares and assumed
exercise..................................... 6,407,512 6,378,552 6,361,408
========= ========= =========
Basic earnings per share.................. $ .95 $ .63 $ .81
========= ========= =========
Diluted earnings per share................ $ .94 $ .63 $ .80
========= ========= =========

(p) Segment Reporting

In 1998, First Liberty Bank Corp. had two reportable segments: The First
National Bank of Jermyn and NBO National Bank. NBO was acquired by the Company
on June 30, 1998. The two segments were managed separately until February 16,
1999 when management integrated the two segments into one new segment called
First Liberty Bank and Trust.

(q) Reclassification

Certain prior period amounts have been reclassified to conform with the
current year's presentation. These reclassifications had no effect on net
income.

2. Restrictions on Cash and Due from Banks

The Bank is required to maintain average reserve balances with the
Federal Reserve Bank based on a percentage of deposits. The average amounts
of those reserve balances approximated $3,550,000 and $980,000 in 1999 and
1998, respectively.

F-15

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

3. Securities

The amortized cost and fair value of securities is shown below (in
thousands):

Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
--------- ---------- ---------- --------

Securities available for sale
December 31, 1999:
U.S. Treasuries................... $ 1,000 $ 1 $ -- $ 1,001
Municipal securities.............. 35,905 88 (1,776) 34,217
Mortgage-backed securities and
U.S. government agencies......... 68,566 71 (2,278) 66,359
Collateralized mortgage
obligations and U.S. government
agencies......................... 81,269 20 (2,934) 78,355
Marketable equity................. 5,726 -- -- 5,726
Corporate obligations............. 250 -- -- 250
-------- ------ -------- --------
$192,716 $ 180 $ (6,988) $185,908
======== ====== ======== ========
Securities available for sale
December 31, 1998:
U.S. Treasuries................... $ 22,105 $ 174 $ -- $ 22,279
Municipal securities.............. 47,435 1,167 (27) 48,575
Mortgage-backed securities and
U.S. government agencies......... 70,364 164 (219) 70,309
Collateralized mortgage
obligations and U.S. government
agencies......................... 49,554 166 (274) 49,446
Marketable equity................. 5,704 -- -- 5,704
Corporate obligations............. 250 -- -- 250
-------- ------ -------- --------
$195,412 $1,671 $ (520) $196,563
======== ====== ======== ========

Proceeds from sales of securities available for sale during the year ended
December 31, 1999 were $20,518,000 per cash flows, resulting in gross realized
gains of $285,000 and gross related losses of $60,000. Proceeds from sales of
securities available for sale during the year ended December 31, 1998 were
$10,095,000, resulting in gross realized gains of $192,000 and gross realized
losses of $145,000. Proceeds from sales of securities available for sale during
the year ended December 31, 1997 were $41,727,000, resulting in gross realized
gains of $72,000 and gross related losses of $263,000.

The amortized cost and fair value of securities at December 31, 1999 by
contractual maturity, are shown below (in thousands). Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without penalties.

Securities
available-for-sale
-------------------
Amortized Fair
cost value
--------- --------

Within one year......................................... $ 3,559 $ 3,552
After one year but within five years.................... 52,601 51,097
After five years but within ten years................... 22,803 22,231
After ten years......................................... 108,027 103,302
Marketable equity securities............................ 5,726 5,726
-------- --------
Total................................................. $192,716 $185,908
======== ========
Weighted average yield.................................. 5.89% 5.89%

F-16

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

At December 31, 1999 and 1998, securities with an amortized cost of
approximately $43,375,000 and $22,035,000 (fair value of approximately
$41,831,000 and $22,183,000), respectively, were pledged to secure public
deposits as required or permitted by law.

On October 1, 1998, the Bank transferred certain held-to-maturity securities
to the available-for-sale investment portfolio. The amortized cost of the
transferred securities was approximately $60,295,000 with an unrealized gain
net of taxes of approximately $725,000. This transfer was in accordance with a
special reassessment provision contained within Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities, which was adopted by the Company as of October 1, 1998. The Bank
did not sell any of the transferred securities, during the fourth quarter of
1998.

4. Loans and Real Estate Owned Other than Bank Premises

The following is a summary of the Company's loan portfolio on December 31,
1999 and 1998 (in thousands):

1999 1998
-------- --------

Real estate--commercial and residential mortgage.......... $270,866 $235,608
Commercial, financial, and agricultural................... 64,513 67,659
Installment loans......................................... 70,760 67,323
Real estate--construction................................. 11,110 6,266
-------- --------
Total loans--gross...................................... 417,249 376,856
Less unearned income...................................... 699 941
Allowance for loan losses................................. 5,107 4,618
-------- --------
Net loans................................................. $411,443 $371,297
======== ========

Accrued interest receivable on loans amounted to $1,740,000 and $1,863,000
at December 31, 1999 and 1998, respectively.

A significant portion of the Company's loans are collateralized by
residential and commercial real estate located in Northeastern Pennsylvania
with a primary concentration in Lackawanna County. The Company's primary
concentration of credit risk is related to the real estate market in the
aforementioned area. The ultimate collectibility of most of the Company's loan
portfolio is greatly affected by the economic conditions within Northeastern
Pennsylvania. Management is not aware of any other significant concentrations
of credit risk within its loan portfolio.

Presented below are total nonaccruing loans of the Company at December 31,
1999, 1998, and 1997. Also shown is the approximate related amount of interest
recorded as income and interest which would have been recorded as income had
the loans been performing at the contractual terms for the years ended December
31, 1999, 1998, and 1997 (in thousands):

1999 1998 1997
------ ------ ------

Nonaccrual loans........................................ $1,446 $1,740 $1,607
Interest income recorded................................ 94 68 43
Interest income not recorded............................ 154 147 137

At December 31, 1999 and 1998, the Company had impaired loans totaling
approximately $798,000 and $979,000, respectively, all of which had a related
allowance for impairment. At December 31, 1999 and 1998,

F-17

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

the allowance for losses on impaired loans totaled $311,000 and $202,000,
respectively. The average balance of impaired loans for 1999, 1998 and 1997 was
$889,000, $514,000 and $715,000, respectively. There were no charge-offs or
recoveries on impaired loans during either 1999, 1998, or 1997. The Bank
recognizes interest income on impaired loans on a cash basis method. There was
no interest income recognized on impaired loans for the years ended December
31, 1999, 1998 and 1997.

The following table presents 1999 activity in the amounts due to the Bank
from principal officers, directors and their related businesses in excess of
$60,000. The indebtedness was incurred in the ordinary course of business,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons (in thousands):

1999
-------

Balance, at beginning of year....................................... $ 7,136
Additions........................................................... 2,403
Repayments.......................................................... (4,337)
-------
Balance, at end of year............................................. $ 5,203
=======

At December 31, 1999, 1998, and 1997 the Bank serviced loans for others of
$6,399,000, $7,485,000 and $3,019,000, respectively.

An analysis of real estate owned other than bank premises for 1999 and 1998
follows (in thousands):

Year ended
------------
1999 1998
----- -----

Balance, at beginning of year................................ $ 479 $ 953
Transfers from real estate--commercial and real estate loans
category.................................................... 712 378
Real estate sales............................................ (635) (586)
Gain (loss) on disposition of real estate.................... 12 (266)
Writedown of real estate to fair value....................... (10) --
----- -----
Balance, at end of year...................................... $ 558 $ 479
===== =====

5. Allowance For Loan Losses

A summary of the transactions in the Bank's allowance for loan losses is as
follows (in thousands):

1999 1998 1997
------ ------ ------

Balance, January 1..................................... $4,618 $4,562 $5,017
Losses charged to allowance............................ 676 777 1,307
Recoveries credited to allowance....................... 445 293 252
------ ------ ------
Net charge-offs........................................ 231 484 1,055
Provision charged to operations........................ 720 540 600
------ ------ ------
Balance, December 31................................... $5,107 $4,618 $4,562
====== ====== ======

F-18

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

6. Bank Premises, Leasehold Improvements, and Furniture and Equipment

A summary of the Company's bank premises, leasehold improvements, and
furniture and equipment is as follows (in thousands):

December 31,
----------------
1999 1998
------- -------

Land and buildings....................................... $12,646 $ 8,447
Land under capitalized lease............................. 302 302
Bank premises and leasehold improvements under
capitalized lease....................................... 1,720 2,260
Furniture and equipment.................................. 7,260 6,471
------- -------
Total at cost.......................................... 21,928 17,480
Less: Accumulated depreciation and amortization.......... (7,497) (7,173)
------- -------
Net bank premises, leasehold improvements and furniture
and equipment......................................... $14,431 $10,307
======= =======

7. Deposits

Deposits consist of the following major classifications (in thousands):

At December 31,
---------------------------------------------------
1999 1998
------------------------- -------------------------
Weighted Percent Weighted Percent
average of average of
rate Amount total rate Amount total
-------- -------- ------- -------- -------- -------

NOW accounts............ 1.51% $ 23,274 4.8 1.51% $22,089 4.5
Savings deposits........ 2.02% 89,481 18.5 2.02% 93,726 18.9
Other time deposits..... 2.89% 1,989 .4 3.00% 2,022 .4
Money Market accounts... 2.28% 20,255 4.2 2.28% 28,979 5.8
Certificates of
deposit................ 5.25% 299,945 61.9 5.37% 294,512 59.3
Noninterest bearing
demand................. 49,502 10.2 55,272 11.1
-------- ---- -------- ----
Total deposits at end of
period................. $484,446 100% $496,600 100%
======== ==== ======== ====

While the certificates frequently are renewed at maturity rather than paid
out, a summary of certificates of deposit greater than $100,000 by contractual
maturity at December 31, 1999 and 1998 is as follows (in thousands):

1999 1998
------- -------

Three months or less........................................ $26,373 $17,909
Over three months through twelve months..................... 25,883 20,330
Over one year through three years........................... 7,982 12,057
Over three years............................................ 3,378 1,836
------- -------
Total..................................................... $63,616 $52,132
======= =======

Interest expense approximated $3,737,000, $3,305,000 and $2,839,000 for
certificates of deposit greater than $100,000 in the years ended December 31,
1999, 1998 and 1997, respectively.

F-19

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

8. Capitalized Lease Obligation

The Bank has capitalized a noncancelable lease for two office buildings that
expires in the year 2004. The lease requires payment of property taxes,
maintenance costs, and insurance on the properties.

Future minimum payments, by year and in the aggregate, under the capitalized
lease obligation are as follows (in thousands):

2000.................................................................. $ 155
2001.................................................................. 155
2002.................................................................. 155
2003.................................................................. 155
2004.................................................................. 103
-----
Total minimum lease payments........................................ $ 723
Less amount representing interest..................................... (155)
-----
Present value of net minimum lease payments......................... $ 568
=====

9. Other Borrowed Money

The Bank maintains a collateralized maximum borrowing capacity of
$263,148,000 with the Federal Home Loan Bank of Pittsburgh (FHLB). The Bank's
first advance of $10,000,000 was borrowed on January 30, 1996, and will mature
on August 23, 2000, with a fixed rate of 5.79%. A $5,000,000 and $10,000,000
advance were both borrowed in September 1997 with rates of 5.55% and 5.52%,
respectively. They both have a conversion date of September 1999, adjustable
quarterly thereafter at the option of the FHLB. An additional $5,000,000
advance was borrowed on January 16, 1998 as a seven-year/two-year convertible
program with a fixed rate of 5.14% also adjustable quarterly thereafter. In
November, a 91-day, 5.43% fixed rate advance maturing on January 3, 2000, was
borrowed in the amount of $30,000,000. On December 3, 1999, the Bank borrowed
two additional advances; one in the amount of $10,000,000 with a rate of 6.16%
taken as a five-year/two-year convertible advance and a 90-day, 6.10% fixed
rate advance.

Weighted
Maximum average
amount Average interest
Weighted outstanding amount rate
average at month outstanding during
Balance end interest end during during the the
1999 of period rate the period period period
---- ----------- -------- ----------- ----------- --------

FHLB advances........... $75,000,000 5.62% $75,000,000 $54,949,000 5.55%
Federal funds
purchased.............. 32,450,000 5.00 32,450,000 5,603,000 5.46

1998
----

FHLB advances........... $50,000,000 5.51% $50,000,000 $49,589,000 5.53%
Federal funds
purchased.............. 5,000,000 4.50 5,000,000 30,000 3.33

1997
----

FHLB advances........... $40,000,000 5.62% $40,000,000 $38,309,000 5.75%
Federal funds
purchased.............. -- -- 3,416,200 38,000 7.89

F-20

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

Advances from the FHLB with fixed rates ranging from 5.14% to 6.16% at
December 31, 1999, are due as follows:

Weighted
Average
Amount Rate
----------- --------

2000................................................ $45,000,000 5.58%
2001................................................ -- --
2002................................................ 15,000,000 5.53
2003................................................ -- --
2004................................................ 10,000,000 6.16
2005................................................ 5,000,000 5.14
----------- ----
$75,000,000
===========

10. Employee Benefit Plans

(a) Employee 401(k) Savings Plan

Certain subsidiaries of the Company maintain a qualified plan in which
employees may participate. Participants in the plan may elect to direct a
portion of their wages into investment accounts that include professionally
managed mutual and money market funds. The principal and earnings thereon are
tax deferred until withdrawn, generally. The Company does not match employee
contributions.

(b) Postretirement Benefit

The Company shares certain costs of providing health and life insurance
benefits to retired employees (and their eligible dependents). Substantially
all employees may become eligible for these benefits if they reach normal
retirement age while working for the Company.

The Company accounts for its obligations under the provisions of SFAS No.
106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
SFAS No. 106 requires that the costs of these benefits be recognized over an
employee's active working career. In December 1998, the Company adopted SFAS
No. 132, Employer's Disclosure About Pensions and Other Post Retirement
Benefits, which standardized such disclosure requirements. The following
disclosures are in accordance with SFAS No. 132.

F-21

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The following tables set forth FLIB's pension plan's status as of and for
the years indicated (in thousands):

1999 1998 1997
------- ------- ------

Change in benefit obligation:
Benefit obligation at beginning of year............... $ 9,502 $ 7,271 $6,430
Service cost.......................................... 577 423 337
Interest cost......................................... 570 556 441
Actuarial loss (gain)................................. (1,752) 1,452 242
Benefits paid......................................... (216) (200) (179)
------- ------- ------
Benefit obligation at end of year................... $ 8,681 $ 9,502 $7,271
======= ======= ======
Change in plan assets:
Fair value of plan assets at beginning of year........ $ 8,464 $ 7,525 $6,361
Actual return on plan assets.......................... 774 979 933
Employer contributions................................ -- 160 410
Benefits paid......................................... (216) (200) (179)
------- ------- ------
Fair value of plan assets at end of year............ $ 9,022 $ 8,464 $7,525
======= ======= ======
Funded status:
Funded (unfunded) status.............................. $ 341 $(1,038) $ 255
Unrecognized transition (asset) obligation............ 32 35 38
Unrecognized net prior service cost (benefit)......... (336) (80) (87)
Unrecognized net (gain) loss.......................... (780) 742 (310)
------- ------- ------
Net amount recognized............................... $ (743) $ (341) $(104)
======= ======= ======
Components of net periodic benefit cost:
Service cost.......................................... $ 577 $ 423 $ 337
Interest cost......................................... 570 556 442
Expected return on plan assets (gain) loss............ (724) (638) (487)
Amortization of transition (asset) obligation......... 3 3 3
Amortization of prior service (benefit) cost.......... (24) (6) (6)
------- ------- ------
Net periodic benefit cost........................... $ 402 $ 338 $ 289
======= ======= ======
Assumptions used to value the APBO:(1)
Discount rate......................................... 7.50 6.50 6.75
Expected long-term rate of return on assets........... 8.50 8.50 7.50
Rate of compensation increases........................ 5.00 4.50 4.50

- --------
(1) Assumptions for 1997 reflect First National Bank of Jermyn's rates.
Assumptions for NBO National Bank at December 31, 1997, were discount rate,
7.50%; expected long-term rate of return on assets, 8.50%; and rate of
compensation increases, 4.00%.

11. Income Taxes

The components of income tax expense (benefits) are as follows (in
thousands):

1999 1998 1997
------ ------ ------

Current--Federal....................................... $1,377 $1,825 $1,429
Deferred--Federal...................................... 144 (255) 308
------ ------ ------
$1,521 $1,570 $1,737
====== ====== ======

F-22

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

A reconciliation of the income tax expense in the accompanying statements of
income with the amount computed by applying the statutory federal income tax
rate to income before income taxes is as follows (in thousands):

1999 1998 1997
------ ------ ------

Tax expense at 34% rate............................ $2,566 $1,894 $2,331
Interest from tax-exempt loans and investments,
net............................................... (790) (794) (630)
Nondeductible merger costs......................... -- 138 --
Cash surrender value--life insurance............... (78) -- --
Low income housing tax credits..................... (74) -- --
Other, net......................................... (103) 332 36
------ ------ ------
Income tax expense............................... $1,521 $1,570 $1,737
====== ====== ======

The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 in accordance with SFAS No. 109 are presented
below (in thousands):

l999 1998
------ ------

Deferred tax assets:
Unrealized losses on securities available for sale......... $2,313 $ 0
Allowance for loan losses.................................. 1,209 984
Deferred loan fees......................................... 276 349
Deferred directors fees.................................... 64 77
Employee benefits.......................................... 350 231
Tax credit carryforwards................................... 345 645
Others, net................................................ 88 276
------ ------
Total gross deferred tax assets.......................... $4,645 $2,562
====== ======
Deferred tax liabilities:
Depreciation............................................... (128) (214)
Unrealized gains on securities available for sale.......... -- (392)
------ ------
Total gross deferred tax liabilities..................... (128) (606)
------ ------
Net deferred tax asset................................... $4,517 $1,956
====== ======

Based on the Company's current and past taxable history and the anticipated
level of future taxable income, management of the Company believes the existing
deductible temporary differences will, more likely than not, reverse in future
periods in which the Company generates net taxable income. Accordingly, the
Company does not believe a valuation allowance is necessary at December 31,
1999. There can be no assurance, however, that the Company will generate any
earnings or any specific level of continued earnings.

F-23

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The related tax effects allocated to each component of Other Comprehensive
Income are as follows (in thousands):

December 31, 1999 December 31, 1998 December 31, 1997
------------------------- ------------------------ -----------------------
Tax Tax Tax
Before (expense) Net of Before (expense) Net of Before (expense) Net of
tax or tax tax or tax tax or tax
amount benefit amount amount benefit amount amount benefit amount
------- --------- ------ ------ --------- ------ ------ --------- ------

Unrealized gains on
securities:
Unrealized holding
(losses) gains arising
during period......... $(7,734) 2,629 (5,105) 335 (85) 250 986 (250) 736
Add: transfers from
held to maturity to
available for sale.... -- -- -- 1,142 (417) 725 -- -- --
Reclassification
adjustment for (gains)
losses realized in
net income............ (225) 76 (149) (71) 24 (47) 256 (65) 191
------- ----- ------ ----- ---- --- ----- ---- ---
Net unrealized
(losses) gains...... $(7,959) 2,705 (5,254) 1,406 (478) 928 1,242 (315) 927
======= ===== ====== ===== ==== === ===== ==== ===

12. Stock Options Plan

In connection with its acquisition of Upper Valley, the Company assumed
stock options outstanding previously granted by Upper Valley under a stock
option plan (Option Plan) for officers, directors and employees of the Company
and its subsidiaries. The Option Plan will terminate on the tenth anniversary
of its effective date, after which no awards may be granted. A total of 275,600
awards may be granted under the Option Plan. At December 31, 1999, there were
114,100 shares available for future grants under the Option Plan.

The Option Plan provides for the granting of incentive stock options as
defined in Section 422 of the Internal Revenue Service Code as well as
nonincentive stock options (collectively, stock options). All awards are to be
granted at not less than the market price of the Company's common stock on the
date of the grant and expire no later than ten years from the grant date. In
August 1995, the board of Upper Valley granted options to purchase 161,500
shares at an exercise price of $8.35 per share, which are exercisable through
July 2005. Options issued to members of Upper Valley's board of directors
totaling 77,168 vested in 1996 and became exercisable. Options issued to
officers totaling 84,332, of which 2,908 and 2,756 were subsequently forfeited
in 1997 and 1996, respectively, vested in cumulative annual installments of 33
and 1/3% beginning on the first anniversary date of the grant. As a result of
change in control provisions in the Option Plan, all options became immediately
exercisable upon Upper Valley's merger with First Jermyn on June 30, 1998.

F-24

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

A summary of the status of the Company's Stock Option Plans as of December
31, 1999, 1998 and 1997, and changes during the years then ended is presented
below:

1999 1998 1997
------------------ ------------------ ------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- ------- --------- ------- ---------

Stock Options:
Outstanding at
beginning year....... 98,988 $8.35 154,584 $ 8.35 158,992 $8.35
Granted............... -- -- -- -- -- --
Exercised............. (18,436) 8.35 (52,688) 8.35 (1,652) 8.35
Canceled.............. -- (2,908) 8.35 (2,756) 8.35
------- ------- -------
Outstanding at end
of year............ 80,552 98,988 8.35 154,584 8.35
Exercisable at end
of year............ 80,552 98,988 129,348

The Black-Scholes option pricing model was used to determine the grant-date
fair-value of options. Significant assumptions used in the model included a
weighted average risk-free rate of return of 6.6%; expected option life of 10
years; and cash dividend yield of 2.0%.

In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, Accounting for Stock-Based Compensation. This statement encourages,
but does not require, the adoption of fair-value accounting for stock-based
compensation to employees. The Company, as permitted, has elected not to adopt
the fair value accounting provisions of SFAS No. 123, and has instead continued
to apply APB Opinion 25 and related Interpretations in accounting for the plans
and to provide the required pro forma disclosures of SFAS No. 123. Had the
grant-date fair-value provisions of SFAS No. 123 been adopted, the Company
would have recognized $0 in 1999, $43,000 in 1998 and $45,000 in 1997 of
compensation expense related to options granted in 1995 under its Option Plan.
As a result, pro forma net income of the Company would have been the same in
1999, $3,958,000 in 1998 and $5,075,000 in 1997, and pro forma diluted earnings
per share would have been the same in 1999, $.63 in 1998, $.80 in 1997.

The effects on pro forma net income and diluted earnings per share of
applying the disclosure requirement of SFAS No. 123 in past years may not be
representative of the future pro forma effects on net income and EPS due to the
vesting provisions of the options and future awards that are available to be
granted.

13. Infrequent Events

Noninterest expense for 1998 included $1,098,000 of merger-related costs
resulting from the Upper Valley acquisition, which were expensed in the second
quarter of 1998.

In 1997, the Company recognized $385,000 of benefits in noninterest income
relating to the restructuring of deferred compensation plans of Upper Valley.

F-25

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

14. Commitments and Contingent Liabilities

In the normal course of business, the Bank makes various commitments and
incurs certain contingent liabilities that are not presented in the
accompanying financial statements. The commitments include various commitments
to extend credit. At December 31, 1999, approximate unused commitments were as
follows (in thousands):

Revolving home equity lines...................................... $ 4,194
Real estate--mortgages........................................... 26,287
Standby letters of credit........................................ 3,740
Other............................................................ 24,694
--------
Total.......................................................... $ 58,919
========

Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements.

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. The Bank evaluated each customer's creditworthiness
on a case by case basis. The amount of collateral, if any, obtained upon
extension of credit is based on management's credit evaluation of the borrower.
Collateral held usually consists of real estate, but may include securities,
property or other assets.

The Bank does not anticipate any material losses as a result of its
commitments. These instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the balance sheet.
The exposure to credit loss in the event of nonperformance by the counter party
to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Bank holds various collateral to
support these commitments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance-sheet
instruments.

Legal Proceedings

In the normal course of business, various legal proceedings are incurred.
While it is difficult to predict or determine the ultimate outcome of such
proceedings, in the opinion of management, there are no current proceedings
against the Company which are expected to materially affect the Company's
financial position, operating results and/or liquidity.

15. Regulatory Matters

The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can initiate certain mandatory, and possibly additional discretionary, actions
by regulators, that if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's

F-26

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy
requires the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1999, that
the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 1999, the most recent notification from the Office of the
Comptroller of the Currency categorized the Bank as well capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the Bank's
category. To be categorized as well capitalized, the Bank must maintain minimum
total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in
the following table.

The following table illustrates the consolidated levels of capital amounts
and ratios for First Liberty Bank Corp. (FLIB); First National Bank of Jermyn
(FNBJ) and NBO National Bank (NBO):

To be well capitalized under
prompt corrective action
Actual For capital adequacy purposes provisions
------------- ------------------------------- --------------------------------
As of December 31, 1999 Amount Ratio Amount Ratio Amount Ratio
----------------------- ------- ----- ------- ----------------------- ------- ------------------------

Total Capital (to Risk
Weighted Assets):
FLIB.................. $66,183 16.87% $31,379 (greater than or =)8.00% $39,224 (greater than or =)10.00%
Tier I Capital (to Risk
Weighted Assets):
FLIB.................. 61,277 15.62% 15,690 (greater than or =)4.00% 23,535 (greater than or =)6.00%
Tier I Capital (to
Average Assets):
FLIB.................. 61,277 9.46% 25,908 (greater than or =)4.00% 32,385 (greater than or =)5.00%

To be well capitalized under
prompt corrective action
Actual For capital adequacy purposes provisions
------------- ------------------------------- --------------------------------
As of December 31, 1998 Amount Ratio Amount Ratio Amount Ratio
----------------------- ------- ----- ------- ----------------------- ------- ------------------------

Total Capital (to Risk
Weighted Assets):
FLIB.................. $61,900 18.91% $26,188 (greater than or =)8.00% $32,735 (greater than or =)10.00%
FNBJ.................. 34,353 16.48% 16,674 (greater than or =)8.00% 20,843 (greater than or =)10.00%
NBO................... 27,542 17.25% 12,771 (greater than or =)8.00% 15,964 (greater than or =)10.00%
Tier I Capital (to Risk
Weighted Assets):
FLIB.................. 57,802 17.66% 13,094 (greater than or =)4.00% 19,641 (greater than or =)6.00%
FNBJ.................. 31,790 15.25% 8,337 (greater than or =)4.00% 12,506 (greater than or =)6.00%
NBO................... 25,546 16.00% 6,386 (greater than or =)4.00% 9,578 (greater than or =)6.00%
Tier I Capital (to
Average Assets):
FLIB.................. 57,802 9.44% 24,799 (greater than or =)4.00% 30,999 (greater than or =)5.00%
FNBJ.................. 31,790 9.06% 14,170 (greater than or =)4.00% 17,713 (greater than or =)5.00%
NBO................... 25,546 9.77% 10,611 (greater than or =)4.00% 13,264 (greater than or =)5.00%

Banking regulations limit the amount of dividends that may be paid without
prior approval of the applicable regulatory agency. Under these limitations,
the payment in any year is limited to the net profits (as defined by the
regulations) for that year plus the retained net profits (as defined by the
regulations) for the

F-27

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

preceding two years. The Company and Bank are also subject to minimum capital
levels which could minimize payment of dividends, although the Company and Bank
currently have capital levels which are in excess of minimum capital level
ratios required. The limit on dividends by First Liberty Bank and Trust to the
Company as of December 31, 1999, was approximately $10,297,000.

Federal bank laws and regulations prohibit First Liberty Bank and Trust from
extending credit to the Company in excess of its capital and surplus (as
defined by the regulations). First Liberty Bank and Trust's limit on extension
of credit to the Company was approximately $8,116,000 as of December 31, 1999.

16. Parent Company Financial Statements

BALANCE SHEETS

At December 31, 1999 and 1998
(In thousands of dollars)

1999 1998
------- -------

ASSETS:
Investment in subsidiaries..................................... $56,899 $58,646
Cash........................................................... 154 3
Other assets................................................... 164 259
------- -------
Total assets................................................. $57,217 $58,908
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY:
Dividends payable.............................................. $ -- $ --
Shareholders' equity........................................... 57,217 58,908
------- -------
Total liabilities and shareholders' equity................... $57,217 $58,908
======= =======

STATEMENTS OF INCOME

For the years ended December 31, 1999, 1998 and 1997
(In thousands of dollars)

1999 1998 1997
------ ------ ------

EARNINGS OF SUBSIDIARIES:
Dividends received........................................ $2,672 $2,170 $2,119
Undistributed net income.................................. 3,365 1,838 3,007
Other expenses--net....................................... 10 7 8
Federal income tax benefit.............................. -- -- 2
------ ------ ------
$6,027 $4,001 $5,120
====== ====== ======

F-28

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

STATEMENTS OF CASH FLOWS

For the years ended December 31, 1999, 1998, and 1997
(In thousands of dollars)

1999 1998 1997
------- ------- -------

OPERATING ACTIVITIES:
Net income......................................... $ 6,027 $ 4,001 $ 5,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income of
subsidiaries.................................... (3,365) (1,838) (3,007)
Depreciation..................................... 7 7 7
Decrease in dividends payable.................... -- (220) --
Decrease in other assets, net.................... -- 220 1
------- ------- -------
Net cash provided by operating activities...... 2,669 2,170 2,121
------- ------- -------
INVESTING ACTIVITIES:
(Increase) decrease in investment in subsidiaries.. (54) (734) --
------- ------- -------
Net cash used in investing activities.......... (54) (734) --
------- ------- -------
FINANCING ACTIVITIES:
Dividends paid to shareholders..................... (2,672) (2,179) (2,119)
Issuance of common stock........................... 208 574 14
------- ------- -------
Net cash used in financing activities.......... 2,464 (1,605) (2,105)
------- ------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 151 (169) 16
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR..... 3 172 156
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR........... $ 154 $ 3 $ 172
======= ======= =======

17. Disclosures About Fair Value of Financial Instruments

The Company is required to provide disclosure about derivative financial
instruments and the fair values of financial instruments. The Company does not
presently invest in such derivative financial instruments and thus has no
disclosure regarding such investments. The reported fair values of financial
instruments are based on a variety of factors. In certain cases, fair values
have estimated based on assumptions regarding the amount and timing of
estimated future cash flows that are discounted to reflect varying degrees of
risk. Accordingly, the fair values may not represent actual values of the
financial instruments that could have been realized as of year end or that will
be realized in the future.

Limitations

Estimates of fair value are made at a specific point in time based upon,
where available, relevant market prices and information about the financial
instrument. Such estimates do not include any premium or discount that could
result from offering for sale at one time the Company's entire holdings of a
particular financial instrument. For a substantial portion of the Company's
financial instruments, no quoted market exists. Therefore, estimates of fair
value are necessarily based on a number of significant assumptions (many of
which involve events outside the control of management). Such assumptions
include assessments of current economic conditions, perceived risks associated
with these financial instruments and their counterparties, future expected loss
experience, and other factors. Given the uncertainties surrounding these
assumptions, the reported fair values represent estimates only, and therefore
cannot be compared to the historical accounting model. Use of different
assumptions or methodologies are likely to result in significantly different
fair value estimates.

F-29

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The estimated fair values presented neither include nor give effect to the
values associated with the Company's banking, or other businesses, existing
customer relationships, extensive branch banking network, property, equipment,
goodwill, or certain tax implications related to the realization of unrealized
gains or losses. Also, the fair value of noninterest-bearing demand deposits,
savings and NOW accounts and money market deposit accounts is equal to the
carrying amount because these deposits have no stated maturity. Obviously, this
approach to estimating fair value excludes the significant benefit that results
from the low-cost funding provided by such deposit liabilities, as compared to
alternative sources of funding. As a consequence, the fair value of individual
assets and liabilities may not be reflective of the fair value of a banking
organization that is a going concern.

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:

(a) Cash, Due From Banks, Federal Funds Sold and Purchased, Accrued Interest
Receivable, and Accrued Interest Payable

For cash, due from banks, federal funds sold/purchased, and accrued interest
receivable/payable the carrying amount is a reasonable estimate of fair value.

(b) Securities

For securities, fair value equals quoted market price, if available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.

Fair values are estimated for portfolios of loans with similar
characteristics. Loans are segregated by type: commercial, commercial
mortgages, construction, residential mortgages, and consumer. The fair value of
residential mortgage loans are estimated using quoted market prices for sales
of whole loans with similar characteristics such as repricing dates, product
type, and size. For residential loans that reprice frequently, the carrying
amount approximates fair value. The fair value of other types of loans for
which quoted market prices are not available is estimated by discounting
expected future cash flows using the current rates at which similar loans would
be made to borrowers with comparable credit ratings and for similar remaining
maturities.

(d) Deposit Liabilities

The fair value of deposits with no stated maturity, such as noninterest-
bearing demand deposits, money market and interest-bearing demand deposits and
savings deposits, is equal to the amount payable on demand. The fair value of
the remaining time deposits is based on the discounted value of the contractual
cash flows. The discount rate is estimated using the rates currently offered
for deposits with comparable remaining maturities.

(e) Off-Balance Sheet Instruments

The fair value of off-balance sheet instruments, including commitments to
extend credit and standby letters of credit, is estimated using the fees
currently charged to enter into similar agreements with comparable remaining
terms and reflect the present creditworthiness of the counterparties.

F-30

FIRST LIBERTY BANK CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)

The carrying amount and estimated fair value of the Company's financial
instruments are as follows (in thousands):

December 31,
-----------------------------------
1999 1998
----------------- -----------------
Carrying Fair Carrying Fair
amount value amount value
-------- -------- -------- --------

Financial assets:
Cash and due from banks and federal
funds sold.......................... $ 26,023 $ 26,023 $ 25,628 $ 25,628
Securities available for sale........ 185,908 185,908 196,563 196,563
Loans, net........................... 411,443 367,390 371,297 386,343
Accrued interest receivable.......... 3,397 3,397 3,914 3,914

Financial liabilities:
Deposits............................. $484,446 $486,799 $496,600 $494,866
Federal funds purchased.............. 32,450 32,450 5,000 5,000
Other borrowed money................. 75,567 75,567 50,660 50,660
Accrued interest payable............. 2,040 2,040 2,218 2,218

The fair values of the Banks' off-balance sheet financial instruments at
December 31, 1999 and 1998, are as follows (in thousands):

December 31,
-----------------------------
1999 1998
-------------- --------------
Contract Fair Contract Fair
value value value value
-------- ----- -------- -----

Off-balance sheet instruments:
Commitments to extend credit................. $30,481 $457 $14,817 $120
Standby letters of credit.................... 3,740 56 1,217 15
Other........................................ 24,694 370 13,224 174

F-31

INDEPENDENT AUDITORS' REPORT

The Board of Directors
First Liberty Bank Corp.:

We have audited the accompanying consolidated balance sheets of the First
Liberty Bank Corp. and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of operations, changes in shareholders' equity,
and cash flows for each of the years in the three-year period ended December
31, 1999. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits. As described in Note 1,
the consolidated financial statements of First Liberty Bank Corp. and
subsidiaries for December 31, 1997, were restated for the 1998 pooling-of-
interests transaction with Upper Valley Bancorp, Inc. We did not audit the
separate financial statements of Upper Valley Bancorp, Inc. for 1997, which
report total assets constituting 44% and total interest income constituting 43%
of the related consolidated totals. Those statements were audited by other
auditors whose report dated January 16, 1998, has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Upper Valley
Bancorp. Inc., is based solely on the report of the other auditors.

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, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of First Liberty Bank Corp. and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.

/s/ KPMG LLP

Philadelphia, Pennsylvania
February 8, 2000

F-32

ANNEX A

AGREEMENT AND PLAN OF MERGER

DATED NOVEMBER 29, 2000

BY AND BETWEEN

COMMUNITY BANK SYSTEM, INC.

AND

FIRST LIBERTY BANK CORP.,

AS AMENDED ON FEBRUARY 2, 2001

TABLE OF CONTENTS

Page
----

ARTICLE I DEFINITIONS................................................... 2

ARTICLE II THE MERGER................................................... 5
2.1 The Merger..................................................... 5
2.2 Merger Consideration........................................... 6
2.3 Effect of Merger............................................... 7
2.4 Dissenting Shares.............................................. 7
2.5 Procedure to Exchange Shares................................... 7
2.6 Tax and Accounting Treatment................................... 8

ARTICLE III REPRESENTATIONS AND WARRANTIES OF FIRST LIBERTY 9
3.1 Capital Structure of First Liberty ............................ 9
3.2 Organization, Standing and Authority of First Liberty.......... 9
Ownership of First Liberty Subsidiaries; Capital Structure of
3.3 First Liberty Subsidiaries..................................... 9
3.4 Authorized and Effective Agreement............................. 9
3.5 Regulatory Filings............................................. 10
SEC Documents; Financial Statements; Books and Records; Minute
3.6 Books.......................................................... 10
3.7 Material Adverse Change........................................ 11
3.8 Absence of Undisclosed Liabilities............................. 11
3.9 Properties..................................................... 11
3.10 Loans.......................................................... 11
3.11 Tax Matters.................................................... 11
3.12 Employee Benefit Plans......................................... 12
3.13 Material Contracts............................................. 14
3.14 Legal Proceedings.............................................. 14
3.15 Compliance with Laws........................................... 14
3.16 Labor Matters.................................................. 15
3.17 Brokers and Finders............................................ 15
3.18 Insurance...................................................... 15
3.19 Environmental Liability........................................ 15
3.20 Administration of Trust Accounts............................... 15
3.21 Intellectual Property.......................................... 16
3.22 Certain Information............................................ 16
3.23 Risk Management Instruments.................................... 16
3.24 Tax Treatment.................................................. 16
3.25 Interested Party Transactions.................................. 17
3.26 Pooling Matters................................................ 17
3.27 Takeover Statutes Not Applicable; No Rights Agreement.......... 17
3.28 Ownership of CBSI Common Stock................................. 17

ARTICLE IV REPRESENTATIONS AND WARRANTIES OF CBSI.................... 17
4.1 Capital Structure of CBSI...................................... 17
4.2 Organization, Standing and Authority of CBSI................... 17

Page
----

Ownership of CBSI Subsidiaries; Capital Structure of CBSI
4.3 Subsidiaries................................................... 18
4.4 Authorized and Effective Agreement............................. 18
4.5 Regulatory Filings............................................. 19
SEC Documents; Financial Statements; Books and Records; Minute
4.6 Books.......................................................... 19
4.7 Material Adverse Change........................................ 19
4.8 Absence of Undisclosed Liabilities............................. 19
4.9 Properties..................................................... 19
4.10 Loans.......................................................... 20
4.11 Tax Matters.................................................... 20
4.12 Employee Benefit Plans......................................... 20
4.13 Material Contracts............................................. 21
4.14 Legal Proceedings.............................................. 21
4.15 Compliance with Laws........................................... 21
4.16 Brokers and Finders............................................ 21
4.17 Insurance...................................................... 21
4.18 Environmental Liability........................................ 21
4.19 Certain Information............................................ 22
4.20 Risk Management Instruments.................................... 22
4.21 Tax Treatment.................................................. 22
4.22 Pooling Matters................................................ 22
4.23 Merger Consideration........................................... 22

ARTICLE V COVENANTS.................................................. 23
5.1 Shareholders' Meeting.......................................... 23
5.2 Proxy Statement; Registration Statement........................ 23
5.3 Applications................................................... 24
5.4 Best Efforts................................................... 24
5.5 Investigation and Confidentiality.............................. 25
5.6 Press Releases and Other Public Disclosures.................... 25
5.7 Actions Pending the Mergers.................................... 25
5.8 [Reserved]..................................................... 27
5.9 Closing; Articles of Merger.................................... 27
5.10 Affiliates..................................................... 27
5.11 Employee Benefits; Directors and Management; Indemnification... 27
5.12 Dividends...................................................... 30
5.13 Advisory Board................................................. 30
5.14 Use of First Liberty Bank Name................................. 30
5.15 Takeover Laws.................................................. 30
5.16 Publication of Post-Merger Results of Operations............... 31

ARTICLE VI CONDITIONS PRECEDENT...................................... 31
6.1 Conditions Precedent to Obligations of CBSI and First Liberty.. 31
6.2 Conditions Precedent to Obligations of First Liberty........... 32
Conditions Precedent to Obligations of CBSI and Community
6.3 Banks.......................................................... 33

Page
----

ARTICLE VII TERMINATION, WAIVER AND AMENDMENT.......................... 33
7.1 Termination....................................................... 33
7.2 Effect of Termination............................................. 34
7.3 Survival of Representations, Warranties and Covenants............. 34
7.4 Waiver............................................................ 34
7.5 Amendment or Supplement........................................... 34

ARTICLE VIII MISCELLANEOUS............................................. 35
8.1 Expenses.......................................................... 35
8.2 Entire Agreement.................................................. 35
8.3 No Assignment..................................................... 35
8.4 Alternative Structure............................................. 35
8.5 Notices........................................................... 35
8.6 Captions.......................................................... 36
8.7 Counterparts...................................................... 36
8.8 Governing Law..................................................... 36

iii

AGREEMENT AND PLAN OF MERGER

THIS AGREEMENT AND PLAN OF MERGER ("Agreement") is made and entered into as
of November 29, 2000, by and between COMMUNITY BANK SYSTEM, INC., a Delaware
corporation ("CBSI") and FIRST LIBERTY BANK CORP., a Pennsylvania corporation
("First Liberty"), as amended on February 2, 2001.

WHEREAS, CBSI is a bank holding company, the principal banking subsidiary of
which is Community Bank, N.A., a national banking association ("Community
Bank");

WHEREAS, First Liberty is a bank holding company, the principal banking
subsidiary of which is First Liberty Bank & Trust, a Pennsylvania banking
institution ("First Liberty Bank");

WHEREAS, the respective Boards of Directors of CBSI and First Liberty have
each determined that it is in the best interests of their respective
shareholders for CBSI to acquire First Liberty through the merger (the
"Merger") of First Liberty with and into CBSI upon the terms and subject to the
conditions set forth herein, and that the Merger presents an opportunity for
their respective companies and shareholders to achieve long-term strategic and
financial benefits;

WHEREAS, following the consummation of the Merger, First Liberty Bank, which
shall become a wholly-owned subsidiary of CBSI as a result of the Merger, shall
merge (the "Bank Merger") with and into Community Bank, with Community Bank
continuing as the surviving bank, pursuant to a plan of merger;

WHEREAS, it is the current intention of CBSI to operate, after the
consummation of the Bank Merger, the existing business of First Liberty Bank as
a division of Community Bank doing business as "First Liberty Bank & Trust," to
the extent permitted by law;

WHEREAS, in furtherance of such acquisition, the respective Boards of
Directors of CBSI and First Liberty have each approved this Agreement and the
Merger in accordance with the General Corporation Law of the State of Delaware
(the "DGCL") and the Business Corporation Law of the Commonwealth of
Pennsylvania (the "PBCL") and upon the terms and conditions set forth herein;

WHEREAS, upon the consummation and effectiveness of the Merger, all of the
issued and outstanding shares of common stock, par value $0.31 per share, of
First Liberty ("First Liberty Common Stock"), other than the Dissenting Shares
(as defined below), shall be converted into the right to receive shares of
common stock, no par value, of CBSI ("CBSI Common Stock") and cash in lieu of
fractional shares, as provided in Article II of this Agreement;

WHEREAS, the parties intend that the Merger be accounted for as a pooling-
of-interests for financial reporting purposes; and

WHEREAS, the parties desire to effectuate the Merger as a tax free
reorganization within the meaning of Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), so that the exchange of First Liberty
Common Stock for CBSI Common Stock will not give rise to a tax recognition
event for the shareholders of First Liberty;

WHEREAS, concurrently with the execution of this Agreement, and as a
condition and inducement to CBSI's willingness to enter into this Agreement,
all executive officers and directors of First Liberty are entering into a
Voting Agreement (collectively, the "Voting Agreements"), substantially in the
form attached hereto as Exhibit A, and First Liberty is entering into a Stock
Option Agreement (the "Option Agreement"), substantially in the form attached
hereto as Exhibit B;

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants,
representations, and agreements herein contained, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:

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ARTICLE I

DEFINITIONS

"Advisory Board" is defined in Section 5.13 hereof.

"Affiliates Agreement" is defined in Section 5.10 hereof.

"Agreement" is defined in the preamble hereof.

"Bank Holding Company Act" shall mean the Bank Holding Company Act of 1956,
as amended.

"Bank Merger" is defined in the preamble of this Agreement.

"CBSI" is defined in the preamble of this Agreement.

"CBSI Common Stock" is defined in the preamble of this Agreement.

"CBSI Financial Statements" shall mean (i) the consolidated statements of
condition of CBSI as of September 30, 2000 and as of December 31, 1999 and 1998
and the related consolidated statements of income, cash flows and changes in
shareholders' equity for the nine months ended September 30, 2000 and each of
the three years ended December 31, 1999, 1998 and 1997 (including related
notes, if any), as filed by CBSI in its SEC Documents and (ii) the consolidated
statements of condition of CBSI and related consolidated statements of income,
cash flows and changes in shareholders' equity (including related notes, if
any) as filed by CBSI in its SEC Documents as of dates or with respect to
periods ended subsequent to September 30, 2000.

"CBSI Stockholders' Meeting" shall mean the special meeting of the
shareholders of CBSI to be called for the purpose of approving this Agreement
and the transactions contemplated hereby.

"Certificate" is defined in Section 2.2(c) hereof.

"Closing Date" shall mean the date specified pursuant to Section 5.9 hereof
as the date on which the parties hereto shall close the transactions
contemplated herein.

"Closing Price" is defined in Section 2.2(a)(ii) hereof.

"Code" is defined in the preamble of this Agreement.

"Commission" or "SEC" shall mean the Securities and Exchange Commission.

"Community Bank" is defined in the preamble of this Agreement.

"Consulting Agreement" is defined in Section 6.1 hereof.

"DGCL" is defined in the preamble of this Agreement.

"Dissenting Shares" is defined in Section 2.4 hereof.

"Effective Date" is defined in Section 5.1(a) hereof.

"Effective Time" is defined in Section 2.1(b) hereof.

"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended.

"ERISA Affiliate" is defined in Section 2.13 hereof.

"Employment Agreements" is defined in Section 6.1 hereof.

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"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended.

"Exchange Agent" is defined in Section 2.5 hereof.

"Exchange Ratio" is defined in Section 2.2(a)(i) hereof.

"FDIA" shall mean the Federal Deposit Insurance Act.

"FDIC" shall mean the Federal Deposit Insurance Corporation.

"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System.

"First Liberty" is defined in the preamble of this Agreement.

"First Liberty Bank" is defined in the preamble of this Agreement.

"FDIC" shall mean the Federal Deposit Insurance Corporation.

"Federal Reserve Board" shall mean the Board of Governors of the Federal
Reserve System.

"First Liberty" is defined in the preamble of this Agreement.

"First Liberty Bank" is defined in the preamble of this Agreement.

"First Liberty Common Stock" is defined in the preamble of this Agreement.

"First Liberty Shareholders' Meeting" shall mean the special meeting of the
shareholders of First Liberty to be called for the purpose of approving this
Agreement and the transactions contemplated thereby.

"First Liberty Financial Statements" shall mean (i) the consolidated balance
sheets of First Liberty as of September 30, 2000 and as of December 31, 1999
and 1998 and the related consolidated statements of operations or income, cash
flows and changes in shareholders' equity for the nine months ended
September 30, 2000 and each of the three years ended December 31, 1999, 1998
and 1997 (including related notes, if any), as filed by First Liberty in its
SEC Documents and (ii) the consolidated balance sheets of First Liberty and
related consolidated statements of operations or income, cash flows and changes
in shareholders' equity (including related notes, if any) as filed by First
Liberty in its SEC Documents as of dates or with respect to periods ended
subsequent to September 30, 2000.

"Indemnified Parties" is defined in Section 5.11(d) hereof.

"Intellectual Property" means domestic and foreign letters patent, patents,
patent applications, patent licenses, software licensed or owned, know-how
licenses, trade names, common law and other trademarks, service marks, licenses
of trademarks, trade names and/or service marks, trademark registrations and
applications, service mark registrations and applications and copyright
registrations and applications.

"IRS" means the Internal Revenue Service.

"Material Adverse Effect" shall mean, with respect to any party, a material
adverse effect on the business, results of operations or financial condition of
such party and its Subsidiaries, taken as a whole, or a material adverse effect
on such party's ability to consummate the transactions contemplated hereby;
provided, however, that in determining whether a Material Adverse Effect has
occurred there shall be excluded any effect on the referenced party the primary
cause of which is (i) any change in banking or similar laws, rules or
regulations of general applicability or interpretations thereof by courts or
governmental authorities, (ii) any change in generally accepted accounting
principles or regulatory accounting requirements applicable to banks or their
holding companies generally, (iii) general changes in conditions, including
interest rates, in the banking

A-3

industry or in the global or United States economy or financial markets, with
respect to clause (i), (ii) or (iii), to the extent that such a change does not
materially affect the referenced party to a materially different extent than
other similarly situated banking organizations, and (iv) any action or omission
of the referenced party or any of its Subsidiaries taken with the prior written
consent of the other party to this Agreement in contemplation of the Merger.

"Merger" is defined in the preamble of this Agreement.

"Merger Consideration" is defined in Section 2.2(a)(i) hereof.

"NYSE" is defined in Section 2.2(a)(ii) hereof.

"OCC" shall mean the Office of the Comptroller of Currency.

"Option Agreement" is defined in the preamble of this Agreement.

"PA Banking Department" means the Pennsylvania Department of Banking.

"PBCL" is defined in the preamble of this Agreement.

"Person" shall mean an individual, corporation, partnership, bank, limited
liability company, trust, association, unincorporated organization, other
entity or group (as defined in Section 13(d)(3) of the Exchange Act).

"Previously Disclosed" shall mean disclosed prior to the execution hereof in
(i) an SEC Document filed with the SEC subsequent to January 1, 2000 and prior
to the date hereof or (ii) a letter dated of even date herewith from the party
making such disclosure and delivered to the other party prior to the execution
hereof. Any information disclosed by one party to the other for any purpose
hereunder shall be deemed to be disclosed for all purposes hereunder provided
that the relevance of the disclosed information to the representations or
warranties in question is reasonably apparent. The inclusion of any matter in
such letter shall not be deemed an admission or otherwise to imply that any
such matter is material for purposes of this Agreement.

"Joint Proxy Statement/Prospectus" shall mean the joint proxy
statement/prospectus (or similar documents) together with any supplements
thereto and related materials sent to the respective shareholders of First
Liberty and CBSI to solicit their votes in connection with this Agreement and
the Merger.

"Registration Statement" shall mean the registration statement under the
Securities Act covering the shares of CBSI Common Stock to be issued in
connection with the Merger.

"Rights" shall mean warrants, options, rights, convertible securities and
other arrangements or commitments which obligate an entity to issue or dispose
of any of its capital stock, and stock appreciation rights, performance units
and other similar stock-based rights whether they obligate the issuer thereof
to issue stock or other securities or to pay cash.

"SEC Documents" shall mean all reports and registration statements filed, or
required to be filed, by a party hereto pursuant to the Securities Laws.

"Securities Act" shall mean the Securities Act of 1933, as amended.

"Securities Laws" shall mean the Securities Act; the Exchange Act; the
Investment Company Act of 1940, as amended; the Investment Advisers Act of
1940, as amended; the Trust Indenture Act of 1939, as amended; and the rules
and regulations of the Commission promulgated thereunder.

"Stock Option" is defined in Section 2.2(a)(ii) hereof.

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"Stock Option Plan" is defined in Section 2.2(a)(ii) hereof.

"Subsidiary" shall mean with respect to any party, any Person which is
consolidated with such party for financial reporting purposes; provided,
however, that "Subsidiary" shall not include any subsidiary trust formed for
the purpose of issuing trust preferred or similar securities.

"Surviving Corporation" is defined in Section 2.1(a) hereof.

"Takeover Laws" is defined in Section 5.14 hereof.

"Takeover Proposal" is defined in Section 5.7(b)(13) hereof.

"Taxes" shall mean all taxes, however denominated, including any interest,
penalties, criminal sanctions or additions to tax (including, without
limitation, any underpayment penalties for insufficient estimated tax payments)
or other additional amounts that may become payable in respect thereof (or in
respect of a failure to file any Tax Return when and as required), imposed by
any federal, state, local or foreign government or any agency or political
subdivision of any such government, which taxes shall include, without limiting
the generality of the foregoing, all income taxes, payroll and employment
taxes, withholding taxes (including withholding taxes in connection with
amounts paid or owing to any employee, independent contractor, creditor,
stockholder or other person or entity), unemployment insurance taxes, social
security (or similar) taxes, sales and use taxes, excise taxes, franchise
taxes, gross receipts taxes, bank shares taxes, occupation taxes, real and
personal property taxes, stamp taxes, value added taxes, transfer taxes,
profits or windfall profits taxes, licenses in the nature of taxes, estimated
taxes, severance taxes, duties (custom and others), workers' compensation
taxes, premium taxes, environmental taxes (including taxes under Section 59A of
the Code), disability taxes, registration taxes, alternative or add-on minimum
taxes, estimated taxes, and other fees, assessments, charges or obligations of
the same or of a similar nature.

"Tax Returns" shall mean all returns, reports, estimates, information
statements or other written submissions, and any schedules or attachments
thereto, required or permitted to be filed pursuant to the statutes, rules and
regulations of any federal, state, local or foreign government Tax authority,
including but not limited to, original returns and filings, amended returns,
claims for refunds, information returns and accounting method change requests.

"Transaction Documents" shall mean, collectively, the Voting Agreement, the
Option Agreement, the Employment Agreements, the Affiliates Agreement, and the
Consulting Agreement, and certificates and other documents contemplated thereby
or by this Agreement.

"Voting Agreement" is defined in the preamble of this Agreement.

For purposes of this Agreement, the terms "First Liberty," "First Liberty
Bank," "CBSI, " "Community Bank" and "Subsidiary" include all of the respective
predecessors thereof (including without limitation, any previously acquired
Person).

ARTICLE II

THE MERGER

2.1 The Merger.

(a) At the Effective Time, and upon the terms and subject to the
conditions of this Agreement, First Liberty shall be merged with and into CBSI,
the separate existence of First Liberty shall cease and CBSI shall continue as
the surviving corporation. CBSI as the surviving corporation after the Merger
is hereinafter sometimes referred to as the "Surviving Corporation."

A-5

(b) As promptly as practicable after the satisfaction or waiver of the
conditions set forth in Article VI, the parties shall cause the Merger to be
consummated by filing a certificate or articles of merger as contemplated by
the DGCL or the PBCL, together with any required related documents, with the
Secretary of State of the State of Delaware and the Secretary of State of the
Commonwealth of Pennsylvania, in such form as required by, and executed in
accordance with, the relevant provisions of the DGCL and the PBCL (the time of
the last of such filings being the "Effective Time").

2.2 Merger Consideration.

(a) Conversion of Securities. At the Effective Time, by virtue of the
Merger and without any further action by the parties:

(i) First Liberty Common Stock. Each share of First Liberty Common
Stock issued and outstanding immediately prior to the Effective Time (other
than shares to be cancelled pursuant to Section 2.2(a) (iii) and Dissenting
Shares, if any) shall be cancelled and shall be converted automatically into
the right to receive 0.56 of a share of CBSI Common Stock for each share of
First Liberty Common Stock (the "Exchange Ratio"). Shares of CBSI Common Stock,
and cash in lieu of fractional shares, issuable to the holders of First Liberty
Common Stock in the Merger pursuant to this Section 2.2 are collectively
sometimes hereinafter referred to as the "Merger Consideration."

(ii) Stock Options. (1) At the Effective Time each outstanding option
to purchase shares of First Liberty Common Stock (a "Stock Option") granted
under the Upper Valley Bancorp, Inc. 1995 Employee Stock Option Plan (the
"Stock Option Plan") shall be deemed assumed by CBSI and deemed to constitute
an option to acquire, on the same terms and conditions mutatis mutandis as were
applicable under such Stock Option prior to the Effective Time, such number of
shares of CBSI Common Stock as the holder of such Stock Option would have been
entitled to receive pursuant to the Merger had such holder exercised such
option in full immediately prior to the Effective Time (not taking into account
whether or not such option was in fact exercisable), at a price per share equal
to (x) the aggregate exercise price for First Liberty Common Stock otherwise
purchasable pursuant to such Stock Option divided by (y) the number of shares
of CBSI Common Stock deemed purchasable pursuant to such Stock Option;
provided, however, that the number of shares of CBSI Common Stock that may be
purchased upon exercise of any such Stock Option shall not include any
fractional share and, upon exercise of the Stock Option, a cash payment shall
be made for any fractional share based upon the Closing Price of a share of
CBSI Common Stock on the trading day immediately preceding the date of
exercise. "Closing Price" shall mean, on any day, the last reported sale price
of one share of CBSI Common Stock on the New York Stock Exchange (the "NYSE"),
as reported in The Wall Street Journal. As soon as practicable after the
Effective Time, CBSI shall cause to be delivered to each holder of an
outstanding Stock Option an appropriate notice setting forth such holder's
rights pursuant thereto.

(2) CBSI shall use its reasonable best efforts to file with the
SEC, no later than 45 days after the Effective Time, a registration statement
on Form S-8 (or any other successor or appropriate form) under the Securities
Act with respect to shares of CBSI Common Stock issuable upon the exercise of
Stock Options assumed hereunder. CBSI shall use its reasonable best efforts to
keep such registration statement effective, and to maintain the current status
of the prospectus included therein, for so long as any such assumed Stock
Options remain outstanding.

(iii) Treasury Shares, Etc. Each share of First Liberty Common Stock
held in treasury by First Liberty or owned by any Subsidiary of First Liberty,
CBSI or any Subsidiary of CBSI (in each case other than in a fiduciary
capacity) immediately prior to the Effective Time shall be cancelled without
any conversion thereof and no payment or distribution shall be made with
respect thereto.

(iv) CBSI Common Stock. Each share of CBSI Common Stock outstanding
immediately prior to the Effective Time shall remain unchanged and shall
constitute the common stock of the Surviving Corporation.

A-6

(b) Adjustments to Exchange Ratio. The Exchange Ratio shall not be
subject to decrease or increase in the event of increases or decreases in the
market price of the CBSI Common Stock. If, subsequent to the date of this
Agreement but prior to the Effective Time, the outstanding shares of CBSI
Common Stock shall be increased, decreased, changed into or exchanged for a
different number of shares, in each case by reason of any stock split, stock
dividend, recapitalization, or reclassification or other similar change, or
CBSI shall set a record date with respect to any of the foregoing prior to the
Effective Time, then the Exchange Ratio shall be adjusted proportionately.

(c) Fractional Shares. No certificates or scrip representing less than
one share of CBSI Common Stock shall be issued upon the surrender for exchange
of a certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of First Liberty Common Stock (the
"Certificates"). In lieu of any such fractional share, each holder of such
shares who would otherwise have been entitled to a fraction of a share of CBSI
Common Stock, upon surrender of Certificates representing shares of First
Liberty Common Stock for exchange, shall be paid upon such surrender cash
(without interest) in an amount equal to such fraction multiplied by the
Closing Price of CBSI Common Stock on the date of the Effective Time.

2.3 Effect of Merger.

Upon the Effective Time of the Merger:

(a) The certificate of incorporation and bylaws of CBSI, each as in
effect immediately prior to the Effective Time, shall be the certificate of
incorporation and bylaws, respectively, of the Surviving Corporation, in each
case until amended in accordance with the DGCL.

(b) All respective assets, rights, franchises, and interest of First
Liberty and CBSI in and to every type of property shall be vested in the
Surviving Corporation by virtue of the Merger without any deed or other
transfer; and the Surviving Corporation, without any order or other action on
the part of any court or otherwise, shall hold and enjoy all rights of
property, franchises and interest, in the same manner and to the same extent as
such rights, franchises and interests were held and enjoyed by First Liberty
and CBSI immediately prior to the Effective Time.

(c) The Surviving Corporation shall be liable for all of the liabilities
of First Liberty and CBSI and shall be bound by and subject to all of the
obligations and contracts of First Liberty and CBSI. All rights of creditors
and obligees and all liens on property of First Liberty and CBSI shall be
preserved and unimpaired.

(d) The directors and officers of CBSI immediately prior to the
Effective Time shall be the directors and officers, respectively, of the
Surviving Corporation, with the additions of new directors and officers
contemplated by Section 5.11(c).

2.4 Dissenting Shares. Notwithstanding any other provision contained in this
Agreement, no shares of First Liberty Common Stock that are issued and
outstanding as of the Effective Time and that are held by a shareholder who has
properly exercised his or her appraisal rights (such shares being collectively
referred to herein as "Dissenting Shares") under the PBCL shall be converted
into the right to receive the Merger Consideration as provided in Section 2.2
unless and until the holder shall have failed to perfect, or shall have
effectively withdrawn or lost, such holder's right to dissent from the Merger
under the PBCL and to receive such consideration as may be determined to be due
with respect to such Dissenting Shares pursuant to and subject to the
requirements of the PBCL. If any holder of Dissenting Shares shall have so
failed to perfect or effectively withdrawn or lost such holder's right to
dissent from the Merger, each of such holder's shares of First Liberty Common
Stock shall thereupon no longer be deemed Dissenting Shares and to have become,
as of the Effective Time, the right to receive the Merger Consideration
pursuant to Section 2.2.

2.5 Procedure to Exchange Shares.

(a) On the date of the Effective Time, CBSI shall cause to be deposited
with American Stock Transfer & Trust Company (the "Exchange Agent"), for
exchange in accordance with this Article II,

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certificates representing the aggregate number of shares of CBSI Common Stock
into which the outstanding shares of First Liberty Common Stock shall be
converted pursuant to Section 2.2 of this Agreement. As soon as practicable
after the Effective Time but in no event later than five (5) business days
after the Effective Time, CBSI shall use its best reasonable efforts to cause
the Exchange Agent to mail to all holders of record of First Liberty Common
Stock, excluding any holders of Dissenting Shares, letters of transmittal
specifying the procedures for delivery of such holders' certificates formerly
representing First Liberty Common Stock to the Exchange Agent in exchange for
new certificates of CBSI Common Stock and cash in lieu of fractional shares
issuable pursuant to this Article II. As soon as practicable after surrender to
the Exchange Agent of the certificates of First Liberty Common Stock in
accordance with the instructions of the letter of transmittal but in no event
later than 15 days after receipt of surrendered certificates of First Liberty
Common Stock in accordance with instructions of the letter of transmittal, CBSI
shall use its best reasonable efforts to cause the Exchange Agent to distribute
to the former holders of shares of First Liberty Common Stock a certificate
representing that number of shares of CBSI Common Stock, and a check for cash
lieu of fractional shares, if any, that such holder is entitled to receive
pursuant to this Agreement. In no event shall the holder of any such
surrendered certificates be entitled to receive interest on any amounts to be
received in the Merger. If any certificate surrendered for exchange is to be
issued in a name other than that in which the surrendered certificate is
issued, the certificate so surrendered shall be properly endorsed and otherwise
in proper form for transfer and the Person requesting such exchange shall affix
any required stock transfer tax stamps to the certificate or provide funds for
their purchase or established to the satisfaction of the Exchange Agent that
such taxes are not payable.

(b) No dividends or other distributions declared after the Effective
Time with respect to CBSI Common Stock shall be paid to the holder of any
unsurrendered certificate formerly representing shares of First Liberty Common
Stock until such holder shall surrender such certificate in accordance with
this Section. After the surrender of a certificate in accordance with this
Section, the record holder thereof shall be entitled to receive any such
dividends or other distributions, without any interest thereon, which
theretofore have become payable with respect to shares of CBSI Common Stock.

(c) At the Effective Time, the stock transfer books of First Liberty
shall be closed and no transfer of First Liberty Common Stock shall thereafter
be made or recognized. If, after the Effective Time, certificates representing
such shares are presented for transfer, they shall be cancelled and exchanged
for the Merger Consideration as provided in this Section.

(d) In the event any certificate shall have been lost, stolen, destroyed
or mutilated, upon the making of an affidavit of that fact by the Person
claiming such certificate to be lost, stolen, destroyed or mutilated and, if
required by CBSI, the making of an indemnity agreement in a form reasonably
requested by CBSI and/or the posting by such Person of a bond in such amount as
CBSI may reasonably direct as indemnity against any claim that may be made
against it with respect to such certificate, the Exchange Agent will issue in
exchange for such lost, stolen, destroyed or mutilated certificate the Merger
Consideration deliverable in respect thereof pursuant to this Agreement.

(e) Neither CBSI nor First Liberty shall be liable to any holder of
shares of First Liberty Common Stock for any Merger Consideration delivered to
a public official pursuant to any applicable abandoned property, escheat or
similar law.

2.6 Tax and Accounting Treatment. The parties hereto intend that the Merger
qualify for accounting treatment as a pooling of interests under applicable
accounting standards and constitute a tax free reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended.

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ARTICLE III

REPRESENTATIONS AND WARRANTIES OF FIRST LIBERTY

Except as Previously Disclosed, First Liberty hereby represents and warrants
to CBSI as follows:

3.1 Capital Structure of First Liberty. The authorized capital stock of
First Liberty consists solely of 10,000,000 shares of First Liberty Common
Stock, of which 6,368,640 shares are issued and outstanding and 60,820 shares
are held in treasury. An aggregate of 78,096 shares of First Liberty Common
Stock are subject to options issued and outstanding on the date hereof, all of
which options are currently exercisable. Except for such options, there are no
outstanding options, warrants, agreements, arrangements, commitments or any
similar rights in existence for the purchase of or issuance of First Liberty
Common Stock or any equity interest in any Subsidiary of First Liberty. All
outstanding shares of First Liberty Common Stock and capital stock of each
Subsidiary of First Liberty have been duly authorized and validly issued and
are fully paid and nonassessable. None of the shares of the capital stock of
First Liberty or any of its Subsidiaries has been issued in violation of the
preemptive rights of any Person.

3.2 Organization, Standing and Authority of First Liberty. Each of First
Liberty and its Subsidiaries is a duly organized corporation, validly existing
and in good standing under the laws of its incorporation with full corporate
power and authority to own, lease and operate the properties it purports to
own, lease or operate and to carry on its business as now conducted, except
where the failure to be in good standing or to have such power or authority
would not have a Material Adverse Effect on First Liberty. Each of First
Liberty and its Subsidiaries is duly licensed or qualified to do business in
the states of the United States and foreign jurisdictions where its ownership
or leasing of property or the conduct of its business requires such
qualification, except where the failure to be so licensed or qualified would
not have a Material Adverse Effect on First Liberty. First Liberty is
registered as a bank holding company under the Bank Holding Company Act.

3.3 Ownership of First Liberty Subsidiaries; Capital Structure of First
Liberty Subsidiaries. A true and complete list of all of First Liberty's
Subsidiaries, together with the jurisdiction of incorporation of each
Subsidiary and the percentage of each Subsidiary's outstanding capital stock
owned by First Liberty or another subsidiary of First Liberty, has been
Previously Disclosed. Except as Previously Disclosed, First Liberty does not,
directly or indirectly, own any equity or similar interest in, or any interest
convertible into or exchangeable or exercisable for, any equity or similar
interest in, any Person, except for equity interests held (i) in the investment
portfolios of First Liberty or any of its Subsidiaries, (ii) in a fiduciary
capacity, (iii) in connection with the commercial loan activities of First
Liberty Bank, and (iv) in the Federal Home Loan Bank, in each case in the
ordinary course of business.

3.4 Authorized and Effective Agreement.

(a) First Liberty has all requisite corporate power and authority to
enter into and perform all of its obligations under this Agreement and each of
the Transaction Documents to which it is a party. The execution and delivery of
this Agreement and each such Transaction Document and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action in respect thereof on the part of
First Liberty, except for the affirmative vote of a majority of the votes cast
by the holders of First Liberty Common Stock entitled to vote thereon, which is
the only shareholder vote required to approve the Merger pursuant to First
Liberty's articles of incorporation and bylaws. The Board of Directors of First
Liberty has approved and adopted this Agreement and the Merger, and directed
that this Agreement be submitted to First Liberty's shareholders for approval
at a special meeting to be held as soon as practicable. The Board of Directors
of First Liberty has unanimously recommended that the shareholders of First
Liberty approve this Agreement and the Merger.

(b) This Agreement and each Transaction Document to which First Liberty
is a party have been duly executed and delivered by First Liberty and, assuming
the representation contained in Section 4.3(b) hereof, this Agreement
constitutes the legal, valid and binding obligations of First Liberty,
enforceable against First

A-9

Liberty in accordance with its terms, except that such enforceability may be
subject to supervisory powers of bank regulatory agencies, bankruptcy,
insolvency and other laws of general applicability relating to or affecting
creditors' rights and to general equity principles.

(c) Neither the execution and delivery by First Liberty of this
Agreement or any Transaction Document to which it is a party, nor consummation
of the transactions contemplated hereby or thereby, nor compliance by First
Liberty with any of the provisions hereof or thereof shall (i) conflict with or
result in a breach of any provision of the articles of incorporation or bylaws
of First Liberty, (ii) assuming the consents and approvals contemplated by
Section 5.3 hereof and the consents and approvals which are Previously
Disclosed are duly obtained, constitute or result in a breach of any term,
condition or provision of, or constitute a default under, or give rise to any
right of termination, cancellation or acceleration with respect to, or result
in the creation of any lien, charge or encumbrance upon any property or asset
of First Liberty or any of its Subsidiaries pursuant to, any note, bond,
mortgage, indenture, license, agreement or other instrument or obligation to
which First Liberty or any of its Subsidiaries is a party, or (iii) assuming
the consents and approvals contemplated by Section 5.3 hereof and the consents
and approvals which are Previously Disclosed are duly obtained, conflict with
or violate any law, order, writ, injunction, decree, statute, rule or
regulation applicable to First Liberty or any of its Subsidiaries or their
respective assets; except, in case of clauses (ii) and (iii) above, for any
such breach, default, right, lien, charge, encumbrances, violation or conflict
which, individually or in the aggregate, would not have a Material Adverse
Effect on First Liberty.

(d) Other than as contemplated by Section 5.3 hereof, no consent,
approval or authorization of, or declaration, notice, filing or registration
with, any governmental or regulatory authority, or any other Person, is
required to be made or obtained by First Liberty on or prior to the Closing
Date in connection with the execution, delivery and performance of this
Agreement or any of the Transaction Documents to which it is a party or the
consummation of the transactions contemplated hereby or thereby. As of the date
hereof, First Liberty is not aware of any reason that the condition set forth
in Section 6.1(b) of this Agreement would not be satisfied.

3.5 Regulatory Filings. Each of First Liberty and its Subsidiaries has filed
all reports required by statute or regulation to be filed with any federal or
state bank regulatory agency, except where the failure to so file would not
have a Material Adverse Effect on First Liberty, and such reports were prepared
in accordance with the applicable statutes, regulations and instructions in
existence as of the date of filing of such reports in all material respects.

3.6 SEC Documents; Financial Statements; Books and Records; Minute
Books. First Liberty has filed all forms, reports and documents required to be
filed with the SEC since January 1, 1998. The SEC Documents (i) were prepared
in all material respects in accordance with the requirements of the Securities
Act or the Exchange Act, as the case may be, and (ii) did not at the time they
were filed (or if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The First Liberty
Financial Statements filed by First Liberty in SEC Documents prior to the date
of this Agreement fairly present, and the First Liberty Financial Statements
filed by First Liberty in SEC Documents after the date of this Agreement will
fairly present, the consolidated financial position of First Liberty as of the
dates indicated and the consolidated income, changes in shareholders' equity
and cash flows of First Liberty and its consolidated Subsidiaries for the
periods then ended and each such financial statement has been or will be, as
the case may be, prepared in conformity with generally accepted accounting
principles applicable to financial institutions applied on a consistent basis,
except that the unaudited interim financial statements were or are subject to
normal and recurring year-end adjustments which were not or are not expected to
be material in amount, and may not contain certain related notes as may be
permitted by the applicable rules promulgated by the SEC. The books and records
of First Liberty and each of its Subsidiaries fairly reflect in all material
respects the transactions to which it is a party or by which its properties are
subject or bound. Such books and

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records have been properly kept and maintained and are in compliance with all
applicable legal and accounting requirements in all material respects. The
minute books of First Liberty and each of its Subsidiaries contain records
which are accurate in all material respects of all corporate actions of its
shareholders and Board of Directors (including committees of its Board of
Directors).

3.7 Material Adverse Change. First Liberty has not, on a consolidated basis,
suffered any change in its financial condition, results of operations or
business since December 31, 1999 which, individually or in the aggregate with
any other such changes, would constitute a Material Adverse Effect with respect
to First Liberty.

3.8 Absence of Undisclosed Liabilities. Neither First Liberty nor any of its
Subsidiaries has any liability (contingent or otherwise) that is material to
First Liberty on a consolidated basis, or that, when combined with all similar
liabilities, would be material to First Liberty on a consolidated basis, except
as disclosed in the First Liberty Financial Statements contained in an SEC
Document filed prior to the date hereof and except for liabilities incurred in
the ordinary course of business consistent with past practice since October 1,
2000.

3.9 Properties. First Liberty and its Subsidiaries have good and marketable
title free and clear of all liens, encumbrances, charges, defaults or equitable
interests to all of the properties and assets, real and personal, which are
owned by First Liberty or its Subsidiaries and which are material to the
business of First Liberty on a consolidated basis, and which are reflected on
the First Liberty Financial Statements as of December 31, 1999 or acquired
after such date, except (i) liens for taxes not yet due and payable, (ii)
pledges to secure deposits and other liens incurred in the ordinary course of
banking business as reflected in the books and records of First Liberty,
including, but not limited to, liens which secure liabilities for borrowed
money from a member bank of the Federal Reserve System, (iii) such
imperfections of title, easements and encumbrances, if any, as are not material
in character, amount or extent and (iv) dispositions and encumbrances for
adequate consideration in the ordinary course of business consistent with past
practice. All leases pursuant to which First Liberty or any of its
Subsidiaries, as lessee, leases real and personal property which, individually
or in the aggregate, are material to the business of First Liberty on a
consolidated basis are valid and enforceable against the lessor in accordance
with their respective terms. All tangible property used in the business of
First Liberty is in good condition, reasonable wear and tear excepted, and is
usable in the ordinary course of business consistent with First Liberty's past
practices.

3.10 Loans.

(a) Each loan reflected as an asset in the First Liberty Financial
Statements (i) is evidenced by notes, agreements or other evidences of
indebtedness which are true, genuine and what they purport to be, (ii) to the
extent secured, has been secured by valid liens and security interests which
have been perfected, and (iii) is the legal, valid and binding obligation of
the obligor named therein, enforceable in accordance with its terms, except
that the enforceability thereof may be subject to bankruptcy, insolvency,
fraudulent conveyance and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles, in each case
other than loans as to which the failure to satisfy the foregoing standards,
individually or in the aggregate, would not have a Material Adverse Effect on
First Liberty.

(b) The allowance for loan losses reflected on the First Liberty
Financial Statements, as of their respective dates, is in all material respects
consistent with the requirements of generally accepted accounting principles to
provide for reasonably anticipated losses with respect to the loan portfolio of
First Liberty and its Subsidiaries based upon information available at the
time.

3.11 Tax Matters.

(a) First Liberty and each of its Subsidiaries have timely filed federal
income tax returns for each year through December 31, 1999 and has timely
filed, or caused to be filed, all other Tax Returns required to be filed with
respect to First Liberty or any of its Subsidiaries, except where the failure
to file timely any such Tax Returns would not, individually or in the
aggregate, have a Material Adverse Effect on First Liberty. All Taxes due by or
on behalf of First Liberty or any of its Subsidiaries have been paid or
adequate reserves have been

A-11

established on the First Liberty Financial Statements for the payment of such
Taxes, except where any such failure to pay or establish adequate reserves
would not, individually or in the aggregate, have a Material Adverse Effect on
First Liberty. Neither First Liberty nor any of its Subsidiaries will have any
liability for any such Taxes in excess of the amounts so paid or reserves or
accruals so established, except where such liability would not, individually or
in the aggregate, have a Material Adverse Effect on First Liberty.

(b) All Tax Returns filed by First Liberty and each of its Subsidiaries
are complete and accurate in all material respects. Neither First Liberty nor
any of its Subsidiaries is delinquent in the payment of any material Tax and,
except as Previously Disclosed, none of them has requested any extension of
time within which to file any Tax Returns which have not since been filed.
Except as Previously Disclosed or as fully settled and paid or accrued on the
First Liberty Financial Statements, no material audit examination, deficiency,
adjustment, refund claim or litigation with respect to Tax Returns, paid Taxes,
unpaid Taxes or Tax attributes of First Liberty or any of its Subsidiaries has
been proposed, asserted or assessed (tentatively or otherwise). There are
currently no agreements in effect with respect to First Liberty or any of its
Subsidiaries to extend the period of limitations for the assessment or
collection of any Tax.

(c) Neither the transactions contemplated hereby nor the termination of
the employment of any employees of First Liberty prior to or following
consummation of the transactions contemplated hereby will result in First
Liberty or any of its Subsidiaries (or any successor thereof) making or being
required to make any "excess parachute payment" as that term is defined in
Section 280G of the Code.

(d) Neither First Liberty nor any of its Subsidiaries is a party to any
agreement providing for the allocation or sharing of, or indemnification for,
Taxes.

(e) Except as Previously Disclosed, neither First Liberty nor any of its
Subsidiaries is required to include in income any adjustment in any taxable
period ending after the date hereof pursuant to Section 481(a) of the Code,
other than any adjustment for which it already has made an accrual on the First
Liberty Financial Statements.

(f) Neither First Liberty nor any of its Subsidiaries has executed or
entered into any written agreement with any Tax authority conceding or agreeing
to any treatment of Taxes or Tax attributes, including, without limitation, an
Internal Revenue Service Form 870 or Form 870-AD, closing agreement or special
closing agreement, affecting First Liberty or any of its Subsidiaries pursuant
to Section 7121 of the Code or any predecessor provision thereof or any similar
provision of state, local or foreign law, which agreement would have a material
impact on the calculation of the Taxes of CBSI or any of its Subsidiaries after
the Effective Time.

3.12 Employee Benefit Plans.

(a) Schedule 3.12(a) hereto sets forth a true and complete list of each
First Liberty Plan. For purposes of this Section 3.12, the term "First Liberty
Plan" means each bonus, deferred compensation, incentive compensation, stock
purchase, stock option, severance pay, medical, life or other insurance,
profit-sharing, or pension plan, program, agreement or arrangement, and each
other employee benefit plan, program, agreement or arrangement, sponsored,
maintained or contributed to or required to be contributed to by First Liberty
or by any trade or business, whether or not incorporated, that, together with
First Liberty or any First Liberty Subsidiary, would be deemed a "single
employer" under Section 414 of the Code (an "ERISA Affiliate") for the benefit
of any employee or director or former employee or former director of First
Liberty or any ERISA Affiliate of First Liberty.

(b) With respect to each of the First Liberty Plans, First Liberty has
made available to CBSI true and complete copies of each of the following
documents: (a) the First Liberty Plan and related documents (including all
amendments thereto); (b) the most recent annual reports, financial statements,
and actuarial reports, if any; (c) the most recent summary plan description,
together with each summary of material modifications, required under ERISA with
respect to such First Liberty Plan and all material communications

A-12

relating to each such First Liberty Plan; and (d) the most recent determination
letter received from the IRS with respect to each First Liberty Plan that is
intended to be qualified under the Code and all material communications to or
from the IRS or any other governmental or regulatory agency or authority
relating to each First Liberty Plan.

(c) No liability under Title IV of ERISA has been incurred by First
Liberty or any ERISA Affiliate of First Liberty that has not been satisfied in
full, and no condition exists that presents a material risk to First Liberty or
any ERISA Affiliate of First Liberty of incurring a liability under such Title,
other than liability for premium payments to the Pension Benefit Guaranty
Corporation, which premiums have been or will be paid when due.

(d) Neither First Liberty nor, to the knowledge of First Liberty, any
ERISA Affiliate of First Liberty, nor any of the First Liberty Plans, nor, to
the knowledge of First Liberty, any trust created thereunder, nor any trustee
or administrator thereof has engaged in a prohibited transaction (within the
meaning of Section 406 of ERISA and Section 4975 of the Code) in connection
with which First Liberty or any ERISA Affiliate of First Liberty could
reasonably be expected to, either directly or indirectly, incur any material
liability or material cost.

(e) Full payment has been made, or will be made in accordance with
Section 404(a)(6) of the Code, of all amounts that First Liberty or any ERISA
Affiliate of First Liberty is required to pay under Section 412 of the Code or
under the terms of the First Liberty Plans, and no accumulated funding
deficiency (within the meaning of Section 412 of the Code) exists with respect
to any First Liberty Plan.

(f) The fair market value of the assets held under each First Liberty
Plan that is subject to Title IV of ERISA equals or exceeds the actuarial
present value of all accrued benefits under each such First Liberty Plan. No
reportable event under Section 4043 of ERISA has occurred with respect to any
First Liberty Plan other than any reportable event occurring by reason of the
transactions contemplated by this Agreement or a reportable event for which the
requirement of notice to the PBGC has been waived.

(g) None of the First Liberty Plans is a "multiemployer pension plan,"
as such term is defined in Section 3(37) of ERISA, a "multiple employer welfare
arrangement," as such term is defined in Section 3(40) of ERISA, or a single
employer plan that has two or more contributing sponsors, at least two of whom
are not under common control, within the meaning of Section 4063(a) of ERISA.

(h) A favorable determination letter has been issued by the Internal
Revenue Service with respect to each of the First Liberty Plans that is
intended to be "qualified" within the meaning of Section 401(a) of the Code to
the effect that such plan is so qualified and, to the knowledge of First
Liberty, no condition exists that could adversely affect the qualified status
of any such First Liberty Plan. Each of the First Liberty Plans that is
intended to satisfy the requirements of Section 125 or 501(c)(9) of the Code
satisfies such requirements in all material respects. Each of the First Liberty
Plans has been operated and administered in all material respects in accordance
with its terms and applicable laws, including but not limited to ERISA and the
Code.

(i) There are no actions, suits or claims pending, or, to the knowledge
of First Liberty, threatened or anticipated (other than routine claims for
benefits) against any First Liberty Plan, the assets of any First Liberty Plan
or against First Liberty or any ERISA Affiliate of First Liberty with respect
to any First Liberty Plan. There is no judgment, decree, injunction, rule or
order of any court, governmental body, commission, agency or arbitrator
outstanding against or in favor of any First Liberty Plan or any fiduciary
thereof, other than rules of general applicability. There are no pending or, to
the knowledge of First Liberty, threatened audits, examinations or
investigations by any governmental body, commission or agency involving any
First Liberty Plan.

(j) Except as set forth in Schedule 3.12(j), the consummation of the
transactions contemplated by this Agreement will not result in, and is not a
precondition to, (i) any current or former employee or director of First
Liberty or any ERISA Affiliate of First Liberty becoming entitled to severance
pay, unemployment

A-13

compensation or any similar payment, (ii) any acceleration in the time of
payment or vesting, or increase in the amount, of any compensation due to any
such current or former employee or director, or (iii) any renewal or extension
of the term of any agreement regarding compensation for any such current or
former employee or director.

(k) Neither First Liberty nor any of its Subsidiaries maintains nor has
any obligation to continue to (or any other liability with respect to) any plan
or arrangement, whether or not terminated, which provides medical, health, life
insurance or other welfare-type benefits for current or future retired or
terminated employees or any dependents of such employees (except for limited
continued medical benefit coverage required to be provided under Section 4980B
of the Code ("COBRA") or as required under applicable state law).

3.13 Material Contracts.

(a) Except as set forth in Schedule 3.13, neither First Liberty nor any
of its Subsidiaries is a party to, and is bound by, (i) any material contract,
as defined in Item 601(b)(10) of Regulation S-K promulgated by the SEC, which
has not been filed as an exhibit to First Liberty's SEC Documents or any other
material agreement or similar arrangement (any contract or commitment which
could reasonably be expected to involve expenditures or receipt by First
Liberty or any of its Subsidiaries in excess of $25,000 in the aggregate shall
be deemed material for these purposes) whether or not made in the ordinary
course of business (other than loans or loan commitments and funding
transactions in the ordinary course of business consistent with past practice
of First Liberty Bank) or any agreement restricting the nature or geographic
scope of its business activities in any material respect, (ii) any agreement,
indenture or other instrument relating to the borrowing of money by First
Liberty or any of its Subsidiaries or the guarantee by First Liberty of any of
its Subsidiaries of any such obligation, other than instruments relating to
transactions entered into in the ordinary course of business consistent with
past practice, (iii) any agreement, arrangement or commitment relating to the
employment of a consultant who was a director or executive officer or to the
employment, election, retention in office or severance of any present or former
director or officer, or (iv) any contract, agreement or understanding with a
labor union, in each case whether written or oral.

(b) Neither First Liberty nor any of its Subsidiaries is in default
under any material agreement, commitment, arrangement, lease, insurance policy
or other instrument whether entered into in the ordinary course of business or
otherwise and whether written or oral, and there has not occurred any event
that, with the lapse of time or giving of notice or both, would constitute such
a default, except for such defaults which would not, individually or in the
aggregate, have a Material Adverse Effect on First Liberty.

3.14 Legal Proceedings. Except as Previously Disclosed, there are no
actions, suits or proceedings instituted, pending or, to the knowledge of First
Liberty, threatened against First Liberty or any of its Subsidiaries or against
any asset, interest or right of First Liberty or any of its Subsidiaries that,
if decided against First Liberty or any of its Subsidiaries, would,
individually or in the aggregate, have a Material Adverse Effect on First
Liberty. There are no actions, suits or proceedings instituted, pending or, to
the knowledge of First Liberty, threatened which seek to restrain or prohibit
the transactions contemplated herein or to impose any material liability or
restrictions in connection therewith. There are no actions, suits or
proceedings instituted, pending or, to the knowledge of First Liberty,
threatened against any present or former director or officer of First Liberty
or any of its Subsidiaries, that would reasonably be expected to give rise to a
claim for indemnification.

3.15 Compliance with Laws. First Liberty and each of its Subsidiaries are in
compliance in all material respects with all statutes and regulations
applicable to the conduct of their respective businesses, and neither First
Liberty nor any of its Subsidiaries has received notification from any agency
or department of federal, state or local government (i) asserting a violation
of any such statute or regulation, (ii) threatening to revoke any license,
franchise, permit or government authorization or (iii) in any way restricting
or limiting its operations. Neither First Liberty nor any of its Subsidiaries
is subject to any regulatory or supervisory cease

A-14

and desist order, agreement, directive, memorandum of understanding or
commitment which would, individually or in the aggregate, have a Material
Adverse Effect on First Liberty, or has received any communication
contemplating any of the foregoing.

3.16 Labor Matters. With respect to their employees, neither First Liberty
nor its Subsidiaries is a party to any collective bargaining or other similar
agreement with any labor organization, group or association or has engaged in
any unfair labor practice. Since January 1, 1998, neither First Liberty nor its
Subsidiaries has experienced any attempt by organized labor or its
representatives to make First Liberty or any of its Subsidiaries conform to
demands of organized labor relating to their employees or to enter into a
binding agreement with organized labor that would cover the employees of First
Liberty or any of its Subsidiaries. To the knowledge of First Liberty, there is
no unfair labor practice charge or other complaint by any employee or former
employee of First Liberty or any of its Subsidiaries against any of them
pending before any court, arbitrator or governmental agency arising out of
First Liberty's or such Subsidiary's activities or such employee's employment
with First Liberty or such Subsidiary. There is no strike, work stoppage or
labor disturbance pending or, to the knowledge of First Liberty, threatened
against First Liberty or any of its Subsidiaries, and neither First Liberty nor
any of its Subsidiaries has experienced any such strike, stoppage or
disturbance since January 1, 1998.

3.17 Brokers and Finders. Neither First Liberty nor any of its Subsidiaries,
nor any of their respective officers, directors or employees, has engaged any
broker, finder or financial advisor or become obligated to or incurred any
liability for any fees or commissions in connection with the transactions
contemplated herein, except for the firm of Berwind Financial, L.P. to provide
financial advice with respect to the transaction provided for in this
Agreement. First Liberty has heretofore furnished to CBSI a complete and
correct copy of all agreements between First Liberty or any of its Subsidiaries
and Berwind Financial, L.P., pursuant to which such firm would be entitled to
any payment relating to the transactions contemplated hereunder.

3.18 Insurance. Each of First Liberty and its Subsidiaries currently
maintains insurance in amounts reasonably adequate for their operations.
Neither First Liberty nor any of its Subsidiaries has received any notice of a
material premium increase over current rates or cancellation with respect to
any of their insurance policies or bonds, and within the last three years,
neither First Liberty nor any of its Subsidiaries has been refused any
insurance coverage sought or applied for, and neither First Liberty nor any of
its Subsidiaries has any reason to believe that existing insurance coverage
cannot be renewed as and when the same shall expire, upon terms and conditions
as favorable as those presently in effect subject to ordinary premium increases
consistent with past experience. First Liberty has Previously Disclosed a list
of all outstanding claims as of the date hereof by First Liberty or any of its
Subsidiaries under any insurance policy. The deposits of First Liberty Bank are
insured by the FDIC in accordance with the FDIA, and First Liberty Bank has
paid all assessments and filed all reports required by the FDIA.

3.19 Environmental Liability. Neither First Liberty nor any of its
Subsidiaries has received any written notice of any legal, administrative,
arbitral or other proceeding, claim or action and, to the knowledge of
First Liberty, there is no governmental investigation of any nature pending, in
each case that would reasonably be expected to result in the imposition on
First Liberty or any of its Subsidiaries of any liability arising under any
local, state or federal environmental statute, regulation or ordinance
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended; there are no facts or
circumstances which would reasonably be expected to form the basis for any such
proceeding, claim, action or governmental investigation that would impose any
such liability; and neither First Liberty nor any of its Subsidiaries is
subject to any agreement, order, judgment, decree or memorandum by or with any
court, governmental authority, regulatory agency or third party imposing any
such liability.

3.20 Administration of Trust Accounts. First Liberty and each of its
Subsidiaries have properly administered all common trust funds and collective
investment funds and all accounts for which each of them acts as a fiduciary or
agent, including but not limited to accounts for which it serves as a trustee,
agent, custodian, personal representative, guardian, conservator or investment
advisor, in accordance with the terms of

A-15

the governing documents and applicable state and federal law and regulation and
common law, except where the failure to do so would not, individually or in the
aggregate, have a Material Adverse Effect on First Liberty. Neither First
Liberty nor any of its Subsidiaries, nor any of their respective directors,
officers or employees acting on behalf of First Liberty or any of its
Subsidiaries, has committed any breach of trust with respect to any such common
trust fund or collective investment fund or fiduciary or agency account, and
the accountings for each such common trust fund or collective investment fund
or fiduciary or agency account are true and correct in all material respects
and accurately reflect the assets of such common trust fund or collective
investment fund or fiduciary or agency account, except for such breaches and
failures to be true, correct and accurate which would not, individually or in
the aggregate, have a Material Adverse Effect on First Liberty.

3.21 Intellectual Property. Each of First Liberty and its Subsidiaries owns
the entire right, title and interest in and to, or has valid licenses with
respect to, all of the Intellectual Property necessary in all material respects
to conduct their respective businesses and operations as presently conducted,
except where the failure to do so would not, individually or in the aggregate,
have a Material Adverse Effect on First Liberty. The ownership, licensing or
use of Intellectual Property by First Liberty or any of its Subsidiaries does
not conflict with, infringe, misappropriate or otherwise violate the
Intellectual Property rights of any other Person. None of such Intellectual
Property is subject to any outstanding order, decree, judgment, stipulation,
settlement, lien, charge, encumbrance or attachment, which order, decree,
judgment, stipulation, settlement, lien, charge, encumbrance or attachment
would, individually or in the aggregate, have a Material Adverse Effect on
First Liberty. Except as Previously Disclosed, upon consummation of the
transactions contemplated by this Agreement, CBSI will be entitled to continue
to use all such Intellectual Property without the payment of any fees, licenses
or other payments.

3.22 Certain Information. When the Registration Statement or any post-
effective amendment thereto shall become effective, and at all times subsequent
to such effectiveness up to and including the time of the First Liberty
Shareholders' Meeting or the CBSI Stockholders' Meeting to vote upon the
approval of this Agreement, such Registration Statement and all amendments or
supplements thereto, with respect to all information set forth or incorporated
by reference therein furnished by First Liberty relating to First Liberty or
any of its Subsidiaries, (i) shall comply in all material respects with the
applicable provisions of the Securities Laws, and (ii) shall not contain any
untrue statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements contained therein, in
the light of the circumstances under which they were made, not misleading. All
information concerning First Liberty and its directors, officers, and
shareholders included (or submitted for inclusion) in any application and
furnished by it pursuant to Sections 5.2 or 5.3 of this Agreement shall be
true, correct and complete in all material respects.

3.23 Risk Management Instruments. All interest rate swaps, caps, floors,
option agreements, futures and forward contracts and other similar risk
management arrangements to which First Liberty or any of its Subsidiaries is a
party, whether entered into for First Liberty's own account, or for the account
of one or more of such Subsidiaries or their customers, were entered into (i)
in accordance with prudent business practices and all applicable laws, rules,
regulations and regulatory policies and (ii) with parties reasonably believed
to be financially responsible; and each of them constitutes the valid and
legally binding obligation of First Liberty or such Subsidiary, enforceable in
accordance with its terms (except that enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer and similar laws of general equity principles), and neither First
Liberty nor any of its Subsidiaries nor to First Liberty's knowledge, any other
party thereto, is in breach of any of its obligations under any such agreement
or arrangement. First Liberty has previously made available to CBSI all of such
agreements and arrangements that are in effect as of the date of this
Agreement.

3.24 Tax Treatment. As of the date of this Agreement, First Liberty knows of
no reason relating to it which would reasonably cause it to believe that the
Merger will not qualify as a reorganization under Section 368(a) of the Code.

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3.25 Interested Party Transactions. Except as Previously Disclosed, there
are no events, relationships or transactions that would be required to be
reported under Item 404 of Regulation S-K promulgated by the SEC.

3.26 Pooling Matters. To First Liberty's knowledge and based upon
consultation with its independent accountants, First Liberty has provided to
CBSI and its independent accountants all information concerning actions taken
or agreed to be taken by First Liberty or any of its affiliates on or before
the date of this Agreement that could reasonably be expected to adversely
affect the ability of CBSI to account for the business combination to be
effected by the Merger as a pooling of interests.

3.27 Takeover Statutes Not Applicable; No Rights Agreement. The Board of
Directors of First Liberty has taken all actions so that the provisions
contained in Subchapter F of Chapter 25 of the PBCL applicable to a "business
combination" (as defined therein) will not apply to the execution or delivery
of this Agreement or any Transaction Document to which First Liberty is a
party, or to the consummation of the Merger or the other transactions
contemplated hereby or thereby. First Liberty has no shareholder rights
agreement or plan or other similar plan, agreement or arrangement.

3.28 Ownership of CBSI Common Stock. Neither First Liberty nor any of its
affiliates or associates beneficially owns in the aggregate three percent or
more of the outstanding shares of CBSI Common Stock or, to the knowledge of
First Liberty, has acquired shares of CBSI Common Stock which were at any time
in the past two years beneficially owned by an "Interested Shareholder" (as
defined below) if such acquisition occurred other than pursuant to a public
offering within the meaning of the Securities Act, in each case such that First
Liberty would be deemed an "Interested Shareholder" under CBSI's certificate of
incorporation.

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF CBSI

Except as disclosed in any attached disclosure, CBSI hereby represents and
warrants to First Liberty as follows:

4.1 Capital Structure of CBSI. The authorized capital stock of CBSI consists
of (i) 500,000 shares of preferred stock, par value $1.00 per share, none of
which were issued and outstanding and (ii) 20,000,000 shares of CBSI Common
Stock, of which, as of the date hereof, 6,993,459 shares were issued and
outstanding and 648,100 shares were held in treasury. An aggregate of 952,814
shares of CBSI Common Stock are reserved for existing and future grants under
CBSI's Long Term Incentive Compensation Plan, pursuant to which options to
purchase a total of 730,193 shares of CBSI Common Stock are issued and
outstanding on the date hereof (of which options to purchase an aggregate of
483,357 shares are currently exercisable). Except for such options, there are
no outstanding options, warrants, agreements, arrangements, commitments or any
similar rights in existence for the purchase of or issuance of CBSI Common
Stock or any equity interest in any Subsidiary of CBSI. All outstanding shares
of CBSI Common Stock have been duly authorized and validly issued and are fully
paid and nonassessable. None of the shares of CBSI Common Stock has been issued
in violation of the preemptive rights of any Person. The shares of CBSI Common
Stock to be issued in connection with the Merger have been duly authorized and,
when issued in accordance with the terms of this Agreement, will be validly
issued, fully paid, nonassessable and free and clear of any preemptive rights.

4.2 Organization, Standing and Authority of CBSI. Each of CBSI and its
Subsidiaries is a duly organized corporation or bank, validly existing and in
good standing under the laws of its incorporation with full corporate power and
authority to own, lease and operate the properties it purports to own, lease or
operate and to carry on its business as now conducted, except where the failure
to be in good standing or to have such power or authority would not have a
Material Adverse Effect on CBSI. Each of CBSI and its Subsidiaries is duly
licensed or qualified to do business in the states of the United States and
foreign jurisdictions where its ownership or leasing of property or the conduct
of its business requires such qualification, except where the

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failure to be so licensed or qualified would not have a Material Adverse Effect
on CBSI. CBSI is registered as a bank holding company under the Bank Holding
Company Act. Except as Previously Disclosed, CBSI has no "significant
subsidiary," as such term is defined under Regulation S-X promulgated by the
SEC.

4.3 Ownership of CBSI Subsidiaries; Capital Structure of CBSI Subsidiaries
A true and complete list of all of the CBSI Subsidiaries, together with the
jurisdiction of incorporation of each Subsidiary and the percentage of each
Subsidiary's outstanding capital stock owned by CBSI or another subsidiary of
CBSI, has been Previously Disclosed. Except as Previously Disclosed, CBSI does
not, directly or indirectly, own any equity or similar interest in, or any
interest convertible into or exchangeable or exercisable for, any equity or
similar interest in, any Person, except for equity interests held (i) in the
investment portfolios of CBSI or any of its Subsidiaries, (ii) in a fiduciary
capacity, (iii) in connection with the commercial loan activities of Community
Bank, and (iv) in the Federal Home Loan Bank, in each case in the ordinary
course of business.

4.4 Authorized and Effective Agreement.

(a) CBSI has all requisite corporate power and authority to enter into
and perform all of its obligations under this Agreement and each of the
Transaction Documents to which it is a party. The execution and delivery of
this Agreement and each such Transaction Document and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action in respect thereof on the part of
CBSI, except for the affirmative vote of a majority of the outstanding shares
of CBSI Common Stock (assuming that neither First Liberty nor its affiliates
are deemed an "Interested Shareholder" under CBSI's certificate of
incorporation), which is the only stockholder vote required to approve the
Merger pursuant to CBSI's certificate of incorporation and bylaws. The Board of
Directors of CBSI has approved and adopted this Agreement and the Merger, and
directed that this Agreement be submitted to CBSI's stockholders for approval
at a special meeting to be held as soon as practicable. The Board of Directors
of CBSI has unanimously recommended that the stockholders of CBSI approve this
Agreement and the Merger.

(b) This Agreement and each Transaction Document to which CBSI is a
party have been duly executed and delivered by CBSI and, assuming the
representation contained in Section 3.4(b) hereof, this Agreement constitutes
the legal, valid and binding obligations of CBSI, enforceable against CBSI in
accordance with its terms, except that such enforceability may be subject to
supervisory powers of bank regulatory agencies, bankruptcy, insolvency and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles.

(c) Neither the execution and delivery by CBSI of this Agreement or any
Transaction Document to which it is a party, nor consummation of the
transactions contemplated hereby or thereby, nor compliance by CBSI with any of
the provisions hereof or thereof shall (i) conflict with or result in a breach
of any provision of the certificate of incorporation or bylaws of CBSI, (ii)
assuming the consents and approvals contemplated by Section 5.3 hereof and the
consents and approvals which are Previously Disclosed are duly obtained,
constitute or result in a breach of any term, condition or provision of, or
constitute a default under, or give rise to any right of termination,
cancellation or acceleration with respect to, or result in the creation of any
lien, charge or encumbrance upon any property or asset of CBSI or any of its
Subsidiaries pursuant to, any note, bond, mortgage, indenture, license,
agreement or other instrument or obligation to which CBSI or any of its
Subsidiaries is a party, or (iii) assuming the consents and approvals
contemplated by Section 5.3 hereof and the consents and approvals which are
Previously Disclosed are duly obtained, conflict with or violate any law,
order, writ, injunction, decree, statute, rule or regulation applicable to CBSI
or any of its Subsidiaries or their respective assets; except, in case of
clauses (ii) and (iii) above, for any such breach, default, right, lien,
charge, encumbrances, violation or conflict which, individually or in the
aggregate, would not have a Material Adverse Effect on CBSI.

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delivery and performance of this Agreement or any of the Transaction Documents
to which it is a party or the consummation of the transactions contemplated
hereby or thereby. As of the date hereof, CBSI is not aware of any reason that
the condition set forth in Section 6.1(b) of this Agreement would not be
satisfied.

4.5 Regulatory Filings. Each of CBSI and its Subsidiaries has filed all
reports required by statute or regulation to be filed with any federal or state
bank regulatory agency, except where the failure to so file would not have a
Material Adverse Effect on CBSI, and such reports were prepared in accordance
with the applicable statutes, regulations and instructions in existence as of
the date of filing of such reports in all material respects.

4.6 SEC Documents; Financial Statements; Books and Records; Minute
Books. CBSI has filed all forms, reports and documents required to be filed
with the SEC since January 1, 1998. The SEC Documents (i) were prepared in all
material respects in accordance with the requirements of the Securities Act or
the Exchange Act, as the case may be, and (ii) did not at the time they were
filed (or if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing) contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The CBSI Financial
Statements filed by CBSI in SEC Documents prior to the date of this Agreement
fairly present, and the CBSI Financial Statements filed by CBSI in SEC
Documents after the date of this Agreement will fairly present, the
consolidated financial position of CBSI as of the dates indicated and the
consolidated income, changes in shareholders' equity and cash flows of CBSI and
its consolidated Subsidiaries for the periods then ended and each such
financial statement has been or will be, as the case may be, prepared in
conformity with generally accepted accounting principles applicable to
financial institutions applied on a consistent basis, except that the unaudited
interim financial statements were or are subject to normal and recurring year-
end adjustments which were not or are not expected to be material in amount,
and may not contain certain related notes as may be permitted by the applicable
rules promulgated by the SEC. The books and records of CBSI and each of its
Subsidiaries fairly reflect in all material respects the transactions to which
it is a party or by which its properties are subject or bound. Such books and
records have been properly kept and maintained and are in compliance with all
applicable legal and accounting requirements in all material respects. The
minute books of CBSI and each of its Subsidiaries contain records which are
accurate in all material respects of all corporate actions of its shareholders
and Board of Directors (including committees of its Board of Directors).

4.7 Material Adverse Change. CBSI has not, on a consolidated basis, suffered
any change in its financial condition, results of operations or business since
December 31, 1999 which, individually or in the aggregate with any other such
changes, would constitute a Material Adverse Effect with respect to CBSI.

4.8 Absence of Undisclosed Liabilities. Neither CBSI nor any of its
Subsidiaries has any liability (contingent or otherwise) that is material to
CBSI on a consolidated basis, or that, when combined with all similar
liabilities, would be material to CBSI on a consolidated basis, except as
disclosed in the CBSI Financial Statements contained in an SEC Document filed
prior to the date hereof and except for liabilities incurred in the ordinary
course of business consistent with past practice since October 1, 2000.

4.9 Properties. CBSI and its Subsidiaries have good and marketable title
free and clear of all liens, encumbrances, charges, defaults or equitable
interests to all of the properties and assets, real and personal, which are
owned by CBSI or any of its Subsidiaries and which are material to the business
of CBSI on a consolidated basis, and which are reflected on the CBSI Financial
Statements as of December 31, 1999 or acquired after such date, except (i)
liens for taxes not yet due and payable, (ii) pledges to secure deposits and
other liens incurred in the ordinary course of banking business as reflected in
the books and records of CBSI, including, but no limited to, liens which secure
liabilities for borrowed money from a member bank of the Federal Reserve System
(iii) such imperfections of title, easements and encumbrances, if any, as are
not material in character, amount or extent and (iv) dispositions and
encumbrances for adequate consideration in the ordinary course of business
consistent with past practice. All leases pursuant to which CBSI or any of its
Subsidiaries, as lessee, leases real and personal property which, individually
or in the aggregate, are material to the business of CBSI on a consolidated
basis are valid and enforceable against the lessor in accordance with

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their respective terms. All tangible property used in the business of CBSI is
in good condition, reasonable wear and tear excepted, and is usable in the
ordinary course of business consistent with CBSI's past practices.

4.10 Loans.

(a) Each loan reflected as an asset in the CBSI Financial Statements (i)
is evidenced by notes, agreements or other evidences of indebtedness which are
true, genuine and what they purport to be, (ii) to the extent secured, has been
secured by valid liens and security interests which have been perfected, and
(iii) is the legal, valid and binding obligation of the obligor named therein,
enforceable in accordance with its terms, except that the enforceability
thereof may be subject to bankruptcy, insolvency, fraudulent conveyance and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles, in each case other than loans as to which the
failure to satisfy the foregoing standards, individually or in the aggregate,
would not have a Material Adverse Effect on CBSI.

(b) The allowance for loan losses reflected on the CBSI Financial
Statements, as of their respective dates, is in all material respects
consistent with the requirements of generally accepted accounting principles to
provide for reasonably anticipated losses with respect to the loan portfolio of
CBSI and its Subsidiaries based upon information available at the time.

4.11 Tax Matters.

(a) CBSI and each CBSI Subsidiary have timely filed federal income tax
returns for each year through December 31, 1999 and have timely filed, or
caused to be filed, all other Tax Returns required to be filed with respect to
CBSI or any of its Subsidiaries, except where the failure to file timely such
federal income and other Tax Returns would not, in the aggregate, have a
Material Adverse Effect on CBSI. All Taxes due by or on behalf of CBSI or any
of its Subsidiaries have been paid or adequate reserves have been established
on the CBSI Financial Statements for the payment of such Taxes, except where
any such failure to pay or establish adequate reserves would not, in the
aggregate, have a Material Adverse Effect on CBSI. Neither CBSI nor any of its
Subsidiaries will have any material liability for any such Taxes in excess of
the amounts so paid or reserves or accruals so established, except where such
liability would not, individually or in the aggregate, have a Material Adverse
Effect on CBSI.

(b) All Tax Returns filed by CBSI and each of its Subsidiaries are
complete and accurate in all material respects. Neither CBSI nor any CBSI
Subsidiary is delinquent in the payment of any material Tax, and, except as
Previously Disclosed, none of them has requested any extension of time within
which to file any Tax Returns which have not since been filed. Except as
Previously Disclosed or as fully settled and paid or accrued on the CBSI
Financial Statements, no material audit examination, deficiency, adjustment,
refund claim or litigation with respect to Tax Returns, paid Taxes, unpaid
Taxes or Tax attributes of CBSI or any of its Subsidiaries has been proposed,
asserted or assessed (tentatively or otherwise).

(c) Except as Previously Disclosed, neither CBSI nor any of its
Subsidiaries is required to include in income any adjustment in any taxable
period ending after the date hereof pursuant to Section 481(a) of the Code
other than any adjustment for which it already has made an accrual.

4.12 Employee Benefit Plans.

Each of the CBSI Plans complies with the requirements of applicable law,
including ERISA and the Code, except where the failure to so comply would not,
in individually or in the aggregate, have a Material Adverse Effect on CBSI.
For purposes of this Agreement, the term "CBSI Plan" means each bonus, deferred
compensation, incentive compensation, stock purchase, stock option, severance
pay, medical, life or other insurance, profit-sharing, or pension plan,
program, agreement or arrangement sponsored, maintained or contributed to or
required to be contributed to by CBSI or any trade or business, whether or not
incorporated, that, together with CBSI or any of the CBSI Subsidiaries would be
deemed a "single employer" under Section 414 of the Code (an "ERISA Affiliate")
or under which CBSI or any ERISA Affiliate has any liability or

A-20

obligation. No liability under Title IV of ERISA has been incurred by CBSI or
any ERISA Affiliate that has not been satisfied in full, and no condition
exists that presents a material risk to CBSI or any ERISA Affiliate of
incurring any such liability. Full payment has been made, or will be made in
accordance with Section 404(a)(6) of the Code, of all amounts that CBSI or any
ERISA Affiliate is required to pay under Section 412 of the Code or under the
terms of the CBSI Plans, and no accumulated funding deficiency (within the
meaning of Section 412 of the Code) exists with respect to any CBSI Plan.

4.13 Material Contracts.

Neither CBSI nor any of its Subsidiaries is in default under any
material agreement, commitment, arrangement, lease, insurance policy or other
instrument whether entered into in the ordinary course of business or otherwise
and whether written or oral, and there has not occurred any event that, with
the lapse of time or giving of notice or both, would constitute such a default,
except for such defaults which would not, individually or in the aggregate,
have a Material Adverse Effect on CBSI.

4.14 Legal Proceedings.

(a) Except as Previously Disclosed, there are no actions, suits or
proceedings instituted, pending or, to the knowledge of CBSI, threatened
against CBSI or any of its Subsidiaries or against any asset, interest or right
of CBSI or any of its Subsidiaries that, if decided against CBSI or any of its
Subsidiaries, would, individually or in the aggregate, have a Material Adverse
Effect on CBSI. There are no actual or threatened actions, suits or proceedings
instituted, pending or, to the knowledge of First Liberty, threatened which
seek to restrain or prohibit the transactions contemplated herein or to impose
any material liability or restrictions in connection therewith. There are no
actions suits or proceedings instituted, pending or, to the knowledge of CBSI,
threatened against any present or former director or officer of CBSI or any of
its Subsidiaries, that would reasonably be expected to give rise to a claim for
indemnification.

4.15 Compliance with Laws. CBSI and each of its Subsidiaries are in
compliance in all material respects with all statutes and regulations
applicable to the conduct of their respective businesses, and neither CBSI nor
any of its Subsidiaries has received notification from any agency or department
of federal, state or local government (i) asserting a violation of any such
statute or regulation, (ii) threatening to revoke any license, franchise,
permit or government authorization or (iii) in any way restricting or limiting
its operations. Neither CBSI nor any of its Subsidiaries is subject to any
regulatory or supervisory cease and desist order, agreement, directive,
memorandum of understanding or commitment which would, individually or in the
aggregate, have a Material Adverse Effect on CBSI, or has received any
communication contemplating any of the foregoing.

4.16 Brokers and Finders. Neither CBSI nor any of its Subsidiaries, nor any
of their respective officers, directors or employees, has engaged any broker,
finder or financial advisor or become obligated to or incurred any liability
for any fees or commissions in connection with the transactions contemplated
herein, except for the firm of Janney Montgomery Scott LLC to provide financial
advice with respect to the transaction provided for in this Agreement.

4.17 Insurance. Each of CBSI and its Subsidiaries currently maintains
insurance in amounts reasonably adequate for their operations. Neither CBSI nor
any of its Subsidiaries has received any notice of a material premium increase
over current rates or cancellation with respect to any of their insurance
policies or bonds, and within the last three years, neither CBSI nor any of its
Subsidiaries has been refused any insurance coverage sought or applied for, and
neither CBSI nor any of its Subsidiaries has any reason to believe that
existing insurance coverage cannot be renewed as and when the same shall
expire, upon terms and conditions as favorable as those presently in effect
subject to ordinary premium increases consistent with past experience. The
deposits of Community Bank are insured by the FDIC in accordance with the FDIA,
and Community Bank has paid all assessments and filed all reports required by
the FDIA.

4.18 Environmental Liability. Except as Previously Disclosed, neither CBSI
nor any of its Subsidiaries has received any written notice of any legal,
administrative, arbitral or other proceeding, claim or action and, to

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the knowledge of CBSI, there is no governmental investigation of any nature
pending, in each case that would reasonably be expected to result in the
imposition on CBSI or any of its Subsidiaries of any liability arising under
any local, state or federal environmental statute, regulation or ordinance
including, without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended; there are no facts or
circumstances which would reasonably be expected to form the basis for any such
proceeding, claim, action or governmental investigation that would impose any
such liability; and neither CBSI nor any of its Subsidiaries is subject to any
agreement, order, judgment, decree or memorandum by or with any court,
governmental authority, regulatory agency or third party imposing any such
liability.

4.19 Certain Information. When the Registration Statement or any post-
effective amendment thereto shall become effective, and at all times subsequent
to such effectiveness up to and including the time of the First Liberty
Shareholders' Meeting or the CBSI Stockholders' Meeting to vote upon the
approval of this Agreement, such Registration Statement and all amendments or
supplements thereto, with respect to all information set forth or incorporated
by reference therein furnished by CBSI relating to CBSI or any of its
Subsidiaries, (i) shall comply in all material respects with the applicable
provisions of the Securities Laws, and (ii) shall not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein, in the
light of the circumstances under which they were made, not misleading. All
information concerning CBSI and its directors, officers, and shareholders
included (or submitted for inclusion) in any application and furnished by it
pursuant to Sections 5.2 or 5.3 of this Agreement shall be true, correct and
complete in all material respects.

4.20 Risk Management Instruments. All interest rate swaps, caps, floors,
option agreements, futures and forward contracts and other similar risk
management arrangements to which CBSI or any of its Subsidiaries is a party,
whether entered into for CBSI's own account, or for the account of one or more
of such Subsidiaries or their customers, were entered into (i) in accordance
with prudent business practices and all applicable laws, rules, regulations and
regulatory policies and (ii) with parties reasonably believed to be financially
responsible; and each of them constitutes the valid and legally binding
obligation of CBSI or such Subsidiary, enforceable in accordance with its terms
(except that enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, fraudulent transfer and similar laws of
general equity principles), and neither CBSI nor any of its Subsidiaries nor to
CBSI's knowledge, any other party thereto, is in breach of any of its
obligations under any such agreement or arrangement.

4.21 Tax Treatment. As of the date of this Agreement, CBSI knows of no
reason relating to it which would reasonably cause it to believe that the
Merger will not qualify as a reorganization under Section 368(a) of the Code.

4.22 Pooling Matters. To CBSI's knowledge and based upon consultation with
its independent accountants, CBSI has Previously Disclosed or otherwise
provided to First Liberty and its independent accountants all information
concerning actions taken or agreed to be taken by CBSI or any of its affiliates
on or before the date of this Agreement that could reasonably be expected to
adversely affect the ability of CBSI to account for the business combination to
be effected by the Merger as a pooling of interests.

4.23 Merger Consideration. CBSI will have, at the Effective Time, unissued
shares of Common Stock and shares of Common Stock held in its treasury that are
not reserved for any other purpose sufficient to issue the Merger Consideration
as set forth in Article II.

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ARTICLE V

COVENANTS

5.1 Shareholders' Meeting.

(a) First Liberty Shareholders' Meeting. First Liberty shall call and give
notice of the First Liberty Shareholders' Meeting as promptly as practicable
after the Registration Statement contemplated by Section 5.2 is first declared
effective by the SEC, but in no event later than 10 days after the date of such
effectiveness (the "Effective Date"), for the purpose of voting upon the
approval of this Agreement, and First Liberty shall use all reasonable efforts
to hold the First Liberty Shareholders' Meeting as soon as practicable after
the Effective Date, subject to the applicable notice requirements under the
PBCL and, to the extent applicable, the prospectus delivery requirements under
General Instruction A.2 of SEC Form S-4. Subject to the fiduciary duties of the
Board of Directors of First Liberty, as determined after consultation with and
based upon consultation with outside counsel and financial advisors, (i) the
Board of Directors of First Liberty shall recommend that the shareholders vote
in favor of the approval of this Agreement, and (ii) First Liberty shall
solicit from its shareholders proxies in favor of approval of this Agreement
and shall take all other action necessary or desirable to secure the vote of
shareholders to obtain such approval. Notwithstanding any withdrawal,
modification or change in any recommendation of the Board of Directors of First
Liberty, First Liberty agrees to hold the First Liberty Shareholders' Meeting
within the time period specified above.

(b) CBSI Stockholders' Meeting. CBSI shall call and give notice of the
CBSI Stockholders' Meeting as promptly as practicable after the Effective Date,
but in no event later than 10 days after the Effective Date, for the purpose of
voting upon the approval of this Agreement, and CBSI shall use all reasonable
efforts to hold the CBSI Stockholders' Meeting as soon as practicable after the
Effective Date, subject to the applicable notice requirements under the DGCL
and, to the extent applicable, the prospectus delivery requirements under
General Instruction A.2 of SEC Form S-4. The Board of Directors of CBSI shall
recommend that the stockholders vote in favor of the approval of this
Agreement, and CBSI shall solicit from its stockholders proxies in favor of
approval of this Agreement and shall take all other action necessary or
desirable to secure the vote of stockholders to obtain such approval.
Notwithstanding any withdrawal, modification or change in any recommendation of
the Board of Directors of CBSI, CBSI agrees to hold the CBSI Stockholders'
Meeting within the time period specified above.

5.2 Proxy Statement; Registration Statement. As promptly as practicable
after the date hereof, CBSI shall prepare and file the Registration Statement
with the SEC, and First Liberty shall cooperate in the preparation of the
Registration Statement, which shall include the Joint Proxy
Statement/Prospectus to be mailed to the shareholders of First Liberty and the
stockholders of CBSI in connection with obtaining their approval of this
Agreement. CBSI will advise First Liberty, promptly after it receives notice
thereof, of the time when the Registration Statement or any post-effective
amendment thereto has become effective or any supplement or amendment has been
filed, of the issuance of any stop order, of the suspension of qualification of
the CBSI Common Stock issuable in connection with the Merger for offering or
sale in any jurisdiction, or the initiation or threat of any proceeding for any
such purpose, or of any request by the SEC for the amendment or supplement of
the Registration Statement or for additional information. If, at any time prior
to the Effective Time, any event or circumstance relating to a party to this
Agreement, or its directors, officers or 5% or greater shareholders, shall be
discovered by such party that pursuant to the Securities Act or the Exchange
Act should be set forth in an amendment or a supplement to the Registration
Statement or the Joint Proxy Statement/Prospectus included therein, such party
shall promptly notify the other party. To the extent applicable, CBSI shall
take all actions necessary to register or qualify the shares of CBSI Common
Stock to be issued in the Merger pursuant to all applicable state "blue sky" or
securities laws and shall maintain such registrations or qualifications in
effect for all purposes hereof. CBSI shall apply for, and shall use reasonable
best efforts to obtain, approval to list the shares of CBSI Common Stock to be
issued in the Merger on the NYSE, subject to official notice of issuance, prior
to the Effective Time.

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5.3 Applications. As promptly as practicable after the date hereof, and
after a reasonable opportunity for review by the other party and its counsel,
CBSI and First Liberty shall submit any requisite applications for prior
approval of, and notices with respect to, the transactions contemplated herein
to the OCC, PA Banking Department and the Federal Reserve Board, and each of
the parties hereto shall, and shall cause its Subsidiaries to, submit any
applications, notices or other filings to any other state or federal government
agency, department or body, the approval of which is required or desirable for
consummation of the Merger. First Liberty and CBSI each represents and warrants
to the other that all information concerning it and its directors, officers,
shareholders and Subsidiaries included (or submitted for inclusion) in any such
application and furnished by it shall be true, correct and complete in all
material respects. Each party agrees to consult with the other parties with
respect to obtaining all necessary approvals and consents and each will keep
the other apprised of the status of matters relating to such approvals and
consents.

5.4 Best Efforts.

(a) Subject to the terms and conditions of this Agreement, CBSI and First
Liberty shall each use reasonable best efforts in good faith to (i) furnish
such information as may be required or desirable in connection with the
preparation of the documents referred to in Sections 5.2 and 5.3 above, and
(ii) take or cause to be taken all action necessary or desirable on its part so
as to permit consummation of the Merger at the earliest possible date,
including, without limitation, (1) obtaining the consent or approval of each
Person whose consent or approval is required for consummation of the
transactions contemplated hereby, provided that First Liberty shall not agree
to make any payments or modifications to agreements in connection therewith
without the prior written consent of CBSI, which consent shall not be
unreasonably withheld, and (2) requesting the delivery of appropriate opinions,
consents and letters from its counsel and independent auditors. Subject to the
terms and conditions of this Agreement, no party hereto shall take or fail to
take, or cause or permit its Subsidiaries to take or fail to take, or to the
best of its ability permit to be taken or omitted to be taken by any third
party, any action that would substantially impair the prospects of completing
the Merger pursuant to this Agreement, that would materially delay such
completion, or that would adversely affect the qualification of the Merger as a
reorganization within the meaning of Section 368(a) of the Code or as a pooling
of interests under applicable accounting rules. In the event that either party
has taken any action, whether before, on or after the date hereof, that would
adversely affect such qualification, each party shall take such action as the
other party may reasonably request to cure such effect to the extent curable
without a Material Adverse Effect on either of the parties.

(b) Each party hereto shall give prompt notice to the other party of (i)
the occurrence, or failure to occur, of any event which occurrence or failure
would be reasonably likely to cause any representation or warranty contained in
this Agreement to be untrue or inaccurate at any time from the date hereof to
the Closing Date such that the condition set forth in Section 6.2(a) or 6.3(a),
as applicable, would not be met if such failure to be true or accurate were to
occur or be continuing on the Closing Date, and (ii) any material failure of
any party to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder, and each party shall use all
reasonable best efforts in good faith to remedy such failure.

(c) From the date of this Agreement through the Effective Time, to the
extent permitted by law, First Liberty shall cause First Liberty Bank to
provide such assistance to Community Bank as reasonably necessary for Community
Bank to prepare for the conversion and transfer in connection with the Merger
all information concerning the loans, deposits and other assets and liabilities
of First Liberty Bank into Community Bank's own data processing system, with a
view to facilitating the integration of Community Bank's and First Liberty
Bank's systems and otherwise combining Community Bank's and First Liberty
Bank's operations upon consummation of the Merger. Such assistance shall
include providing Community Bank with computer file instructions with respect
to the information in its data processing system regarding the assets and
liabilities of First Liberty Bank, together with operational procedures
designed to implement the transfer of such information to Community Bank,
provided that the confidentiality of customer information shall be preserved
and no information shall be transferred until the Effective Time. After
execution of this Agreement, First Liberty Bank and Community Bank shall each
designate an individual to serve as liaison concerning the transfer of data
processing information and other similar operational matters.

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(d) Each party shall provide, and shall request its auditors to provide,
the other party with such historical financial information regarding it (and
related audit reports and consents) as the other party may reasonably request
for disclosure purposes under the Securities Laws.

5.5 Investigation and Confidentiality. First Liberty and CBSI each will keep
the other advised of all material developments relevant to its and its
Subsidiaries' businesses and to consummation of the transactions contemplated
herein. First Liberty and CBSI each may make or cause to be made such
investigation of the financial and legal condition of the other as such party
reasonably deems necessary or advisable in connection with the transactions
contemplated herein, provided, however, that such investigation shall be
reasonably related to such transactions and the party conducting such
investigation shall use its reasonable best efforts to minimize any disruptions
to the operations of the other party. CBSI and First Liberty agree to furnish
the other and the other's advisors with such financial data and other
information with respect to its business and properties as such other party
shall from time to time reasonably request. No investigation pursuant to this
Section 5.5 shall affect or be deemed to modify any representation or warranty
made by, or the conditions to the obligations to consummate the Merger of, any
party hereto. Each party hereto shall hold all information furnished by the
other party or any of such party's Subsidiaries or representatives pursuant to
this Agreement in confidence and in accordance with the confidentiality
agreement dated August 1, 2000, between First Liberty and CBSI (the
"Confidentiality Agreement").

5.6 Press Releases and Other Public Disclosures. First Liberty and CBSI
shall agree with each other as to the form and substance of any press release
related to this Agreement or the transactions contemplated hereby, and shall
consult and agree with each other as to the form and substance of other public
disclosures related thereto, including without limitation, any communications
with securities market professionals and investors, provided, however, that
nothing contained herein shall prohibit any party, following notification to
the other parties, from making any disclosure which is required by applicable
law or NYSE rules.

5.7 Actions Pending the Merger.

(a) Prior to the Closing Date, and except as otherwise provided for by
this Agreement or consented to or approved in writing by the other party
hereto, each of CBSI and First Liberty shall, and shall cause each of its
Subsidiaries to, use its reasonable best efforts to preserve its properties,
business and relationships with customers, employees and other persons.

(b) Except with the prior written consent of CBSI (which consent will not
be unreasonably withheld) or as expressly permitted by this Agreement, First
Liberty shall not, and shall not permit any of its Subsidiaries to:

(1) carry on its business other than in the usual, regular and ordinary
course in substantially the same manner as heretofore conducted, or incur an
obligation in excess of $25,000 in the aggregate or which requires performance
over more than one year (other than loans and investments booked in the usual,
regular and ordinary course of business);

(2) declare, set aside, make or pay any dividend or other distribution
in respect of its capital stock or earnings other than its regular quarterly
cash dividends on First Liberty Common Stock in amounts not in excess of $0.11
per share;

(3) issue any shares of its capital stock or permit any treasury shares
to become outstanding, other than pursuant to the exercise of Stock Options
which are outstanding on the date hereof; redeem, purchase or otherwise acquire
any shares of its capital stock or any securities or obligations convertible
into or exchangeable for any shares of its capital stock;

(4) incur any additional debt obligation or other obligation for
borrowed money other than in the ordinary course of business consistent with
past practice;

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(5) issue, grant or authorize any Rights (or amend or modify the terms
or exercisability of any outstanding Rights) or effect any recapitalization,
reclassification, stock dividend, stock split or like change in capitalization,
or redeem, repurchase or otherwise acquire any shares of its capital stock;

(6) amend or otherwise change its articles of incorporation or articles
of association or bylaws; impose, or suffer the imposition, on any share of its
capital stock of any lien, charge or encumbrance;

(7) merge or consolidate with, or acquire control over, any Person or
create any Subsidiary;

(8) waive or release any material right or cancel or compromise any
material debt or claim other than in the ordinary course of business consistent
with past practice with prior notice to CBSI;

(9) sell, liquidate, pledge or encumber or dispose of, or acquire any,
assets with a value in excess of $25,000 (other than assets acquired in
foreclosure, in lieu of foreclosure or other legal proceedings relating to
collateral for loans, or transactions in investment portfolio securities, in
each case in the ordinary course of business consistent with past practice);
make any capital expenditure in excess of $25,000 in the aggregate; or
establish new branches or other similar facilities, close existing branches or
similar facilities or enter into or modify any leases or other contracts
relating thereto;

(10) increase the rate of compensation of, pay or agree to pay any bonus
to, or provide any additional employee benefit or incentive (including without
limitation, any "change of control" or severance payment) to, any of its
directors, officers or employees except as required by law or contractual
obligation in effect as of the date hereof, except for normal bonus payments
and compensation increases which are in each case consistent with past practice
(which payments and increases First Liberty shall keep CBSI apprised of); or
become party to, adopt, terminate, amend, or commit itself to, any pension,
retirement, profit sharing or welfare benefit plan or agreement or employment
agreement, other than in the ordinary course of business consistent with past
practice or except as required by existing plans or agreements; or accelerate
the vesting of any deferred compensation;

(11) change its lending, investment, asset/liability management or other
material banking policies in any material respect except as may be required by
changes in applicable law;

(12) change its methods of accounting in effect at December 31, 1999,
except as required by changes in generally accepted accounting principles
concurred in by its independent certified public accountants, or change any of
its methods of reporting income, deductions or other items for federal income
tax purposes from those employed in the preparation of its federal income tax
returns for the year ended December 31, 1999, except as required by applicable
law;

(13) authorize or permit any of its officers, directors, employees or
agents to directly or indirectly solicit, initiate or encourage any inquiries
relating to, or the making of any proposal which constitutes, a "Takeover
Proposal" (as defined below), or, except to the extent legally required for the
discharge of the fiduciary duties of its Board of Directors, recommend or
endorse any Takeover Proposal, or participate in any discussions or
negotiations, or provide third parties with any nonpublic information, relating
to any such inquiry or proposal or otherwise facilitate any effort or attempt
to make or implement a Takeover Proposal; provided, however, that First Liberty
may communicate information about any such Takeover Proposal to its
stockholders if, in the judgment of First Liberty's Board of Directors, after
consultation with outside counsel and its financial advisor, such communication
is necessary in order to comply with its fiduciary duties to First Liberty's
shareholders required under applicable law. First Liberty will immediately
cease any and all existing activities, negotiations or discussions with any
Person (other than CBSI) conducted heretofore with respect to any Takeover
Proposal. First Liberty will take all actions necessary or advisable to inform
the appropriate individuals or entities referred to in the first sentence
hereof of the obligations undertaken herein. First Liberty will notify CBSI
immediately if any such inquiries or Takeover Proposals are received by, any
such information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, First Liberty, and First Liberty will
promptly inform CBSI in writing of all of the relevant details with respect to
the foregoing. Notwithstanding anything to the contrary herein, First Liberty
will not

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provide any non-public information to a third party other than a government
regulatory agency unless: (x) First Liberty provides such non-public
information pursuant to a nondisclosure agreement with terms regarding the
protection of oral or written confidential information at least as restrictive
as such terms in the Confidentiality Agreement; and (y) such non-public
information has been previously delivered or made available to CBSI. As used in
this Agreement, "Takeover Proposal" shall mean any tender or exchange offer,
proposal for a merger, consolidation or other business combination involving
First Liberty or any of its Subsidiaries or any proposal or offer to acquire in
any manner a substantial equity interest in, or a substantial portion of the
assets of, First Liberty or any of its Subsidiaries other than the transactions
contemplated or permitted by this Agreement;

(14) take any action that is intended or result in any of its
representations or warranties in this Agreement being or becoming untrue in any
material respects at any time prior to the Effective Time, or in any of the
conditions to the Merger set forth in Article VI not being satisfied, except as
may be required by law; or

(15) agree to do any of the foregoing or take any other action which
would in any manner interfere with, impede, delay, or make more costly the
consummation of the transactions contemplated hereby.

(c) CBSI shall not, except with the prior written consent of First Liberty
(which consent shall not unreasonably be withheld) or as expressly permitted by
this Agreement, carry on its business other than in the usual, regular and
ordinary course in substantially the same manner as heretofore conducted;
provided, however, that nothing herein shall be construed to prevent CBSI from
acquiring or agreeing to acquire any Person, by merging or consolidating with,
by purchasing an equity interest in or a portion of the assets of, or by any
other manner, such Person or taking actions reasonably related thereto, so long
as such transaction would not materially delay or prevent the consummation of
the transactions contemplated by this Agreement. Notwithstanding the foregoing,
prior to the Effective Time, except as otherwise consented to in writing by
First Liberty, CBSI shall not enter into a definitive agreement (but
specifically excluding any confidentiality agreement, non-binding letter of
intent or indication of interest) with a third party concerning any acquisition
of such third party by, or merger or consolidation of such third party with,
CBSI if (A) under applicable regulations, CBSI would be required to present pro
forma financial information reflecting such transaction in the Registration
Statement, or (B) CBSI would propose to issue shares of CBSI Common Stock in
such transaction in an amount exceeding 20% of the outstanding shares of CBSI
Common Stock on the date hereof.

5.8 [Reserved].

5.9 Closing; Articles of Merger. The transactions contemplated by this
Agreement shall be consummated at a closing to be held at the offices of the
law firm of Bond, Schoeneck & King, LLP, One Lincoln Center, Syracuse, New York
on the first business day, or other mutually agreeable time, following
satisfaction or waiver of the conditions to consummation of the Merger set
forth in Article VI hereof.

5.10 Affiliates. As soon as practicable after the date hereof, First Liberty
and CBSI shall cooperate and use their best reasonable efforts to identify
those Persons who may be deemed to be "affiliates" of First Liberty within the
meaning of Rule 145 promulgated by the SEC under the Securities Act or
"affiliates" of First Liberty or CBSI under the rules and regulations relating
to pooling of interests accounting treatment for merger transactions. First
Liberty and CBSI shall use their respective best reasonable efforts to cause
each Person so identified to deliver to CBSI or First Liberty, as the case may
be, no later than 30 days after the date hereof, an Affiliates Agreement, in
form and substance mutually acceptable to the parties hereto (collectively, the
"Affiliates Agreement"), but only to the extent that such Persons have not
heretofore executed and delivered a Voting Agreement which contains similar
provisions.

5.11 Employee Benefits; Directors and Management; Indemnification.

(a) The current employees of First Liberty or any of its Subsidiaries who
continue as employees of CBSI or its Subsidiaries after the Effective Time
("Continuing Employees") shall be (i) provided employee benefits (other than
any deferred or incentive compensation, bonus payments or other similar
compensation or payments, which shall be granted, if at all, on a case-by-case
basis in CBSI's sole discretion) that in the

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aggregate are no less favorable, as determined by CBSI in its reasonable, good
faith discretion, than those generally afforded to other similarly situated
employees of CBSI and its Subsidiaries, and (ii) given credit for past service
with First Liberty for purposes of determining eligibility for and vesting of
employee benefits (but not for pension benefit accrual purposes) under all
welfare and retirement programs maintained by CBSI or its Subsidiaries in which
such employees participate following the Merger. Nothing contained in this
Section 5.11(a) shall be construed to limit the ability of CBSI and its
Subsidiaries to review employee benefit plans from time to time and to make
such changes therein as they may deem appropriate.

(b) Prior to the Effective Time, First Liberty shall take all actions that
may be requested by CBSI in writing upon advance notice of not less than 30
days with respect to (i) causing one or more First Liberty Plans to terminate
as of the Effective Time or for benefit accrual and entitlements to cease as of
the Effective Time, (ii) causing the continuation on and after the Effective
Time of any contract, arrangement or insurance policy relating to any First
Liberty Plan for such period as may be requested by CBSI, or (iii) cooperating
with CBSI to facilitate the merger of any First Liberty Plan into any CBSI Plan
as of or following the Effective Time.

(c) Each employee of First Liberty or any of its Subsidiaries who becomes
an employee of CBSI or any of its Subsidiaries at the Effective Time shall be
eligible to receive severance pay, if any, upon termination of his or her
employment with CBSI or any of its Subsidiaries, in accordance with and subject
to the terms and conditions of a severance policy no less favorable than the
existing severance policy of CBSI. Prior to the Effective Time, the parties
shall cooperate reasonably with each other to coordinate reductions, if any, of
employees of First Liberty and its Subsidiaries and the payment of severance in
connection therewith.

(d) It is the intention of CBSI to provide a plan or policy to certain key
employees of First Liberty and First Liberty Bank who become employees of CBSI
or any of its Subsidiaries as a result of the Merger, in order to provide
incentives to such employees to remain in the employ of, assist in the
integration efforts and enhance the performance of, CBSI and its Subsidiaries
after the Merger. Prior to the Effective Time, CBSI shall develop such a plan
or policy, taking into account the business and integration plan for the merged
operations, the level and period of service of employees, the cost of such plan
or policy, and other factors deemed relevant by the Board of Directors of CBSI.
Prior to the Effective Time, the parties shall cooperate reasonably with each
other to coordinate the adoption, if any, of a retention plan or policy for
employees of First Liberty and its Subsidiaries which shall govern the period
prior to the Effective Time.

(e) (1) CBSI shall cause its Board of Directors to take all requisite
actions to expand the size of its Board of Directors by three directors and
shall appoint Saul Kaplan, Peter A. Sabia, and Harold Kaplan (the "First
Liberty Nominees") (whose initial terms shall expire at the 2001, 2002, and
2003 annual meetings of stockholders, respectively, unless the Effective Time
occurs after the 2001 annual meeting of stockholders, in which case the initial
terms shall expire at the 2002, 2003 and 2004 annual meetings of stockholders,
respectively) to fill the vacancies created thereby effective as of the
Effective Time, provided that (i) the First Liberty Nominees remain qualified
to serve under applicable law and regulations and CBSI's Bylaws subject to
modifications noted below, and (ii) subject to the exercise of the fiduciary
duties of CBSI's Board of Directors, CBSI shall cause its Board to nominate,
and to recommend for re-nomination, each of the First Liberty Nominees for at
least one additional three-year term to immediately succeed the initial term
set forth in the proceeding sentence (together with the initial term, the
"Designated Term"). In the event that any First Liberty Nominee resigns or
otherwise becomes ineligible to serve (other than as a result of the failure to
be re-elected by the stockholders of CBSI following the re-nomination and
recommendation of such First Liberty Nominee in accordance with the preceding
sentence), a majority of the members of the Advisory Board shall be entitled to
select an individual to serve as his replacement (a "Substitute First Liberty
Nominee") for the Designated Term. Any Substitute First Liberty Nominee must be
reasonably acceptable to CBSI and must meet all qualifications for serving on
the Board of CBSI that may generally apply to nominees and directors of CBSI at
that time. In connection with the initial appointment and re-nomination of the
First Liberty Nominees for the Designated Term, CBSI agrees to take necessary
action to waive or amend provisions of its Bylaws or its applicable policies
concerning mandatory retirement age with respect to the First Liberty Nominees
for the

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Designated Term. CBSI acknowledges that Saul and Harold Kaplan are brothers,
and CBSI further agrees to waive any provision of its Bylaws or other policies
which would preclude Saul and Harold Kaplan from serving on its Board of
Directors due to their relationship. Nothing contained in this Section 5.11
shall be construed to limit the ability of the respective Boards of Directors
of CBSI and Community Bank to further increase the size of such Boards from
time to time as they may deem appropriate.

(2) CBSI shall cause its Board of Directors to take all requisite
actions to cause the First Liberty Nominees, or the Substitute First Liberty
Nominees if applicable, to serve as members of the Board of Directors of
Community Bank during the Designated Term, assuming they are then serving as
directors of CBSI. CBSI agrees to take necessary action to waive or amend
provisions of its Bylaws or its applicable policies concerning mandatory
retirement age and restrictions on siblings serving on the Community Bank
Board, with respect to the First Liberty Nominees during the Designated Term.

(3) CBSI shall take, or cause to be taken, requisite actions to elect
Steven R. Tokach and Joseph Solfanelli as Chief Executive Officer and Executive
Vice President, respectively, of Community Bank's operations in markets served
by First Liberty Bank in accordance with the terms of the Employment
Agreements, effective as of the Effective Time.

(f) (1) In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or administrative,
including, without limitation, any such claim, action, suit, proceeding or
investigation in which any person (the "Indemnified Party") who is now, or has
been at any time prior to the date of this Agreement, or who becomes prior to
the Effective Time, a director or officer of First Liberty is, or is threatened
to be, made a party based in whole or in part on, or arising in whole or in
part out of, or pertaining to (i) the fact that he is or was a director,
officer or employee of First Liberty or any of its Subsidiaries, or (ii) this
Agreement or any of the transactions contemplated hereby, whether in any case
asserted or arising before or after the Effective Time, the parties hereto
agree to cooperate and use their best efforts to defend against and respond
thereto. For a period of six years after the Effective Time, CBSI shall
indemnify and hold harmless, to the fullest extent permitted by law, each such
Indemnified Party against any losses, claims, damages, liabilities, costs,
expenses (including reasonable attorney's fees and expenses in advance of the
final disposition of any claim, suit, proceeding or investigation to each
Indemnified Party to the fullest extent permitted by the DGCL upon receipt of
any undertaking required by the DGCL), judgments, fines and amounts paid in
settlement in connection with any such threatened or actual claim, action,
suit, proceeding or investigation, and in the event of any such threatened or
actual claim, action, suit, proceeding or investigation (whether asserted or
arising before or after the Effective Time), the Indemnified Parties may retain
counsel reasonably satisfactory to them after consultation with CBSI; provided,
however, that (1) CBSI shall have the right to assume the defense thereof and
upon such assumption CBSI shall not be liable to any Indemnified Party for any
legal expenses of other counsel or any other expenses subsequently incurred by
any Indemnified Party in connection with the defense thereof, except that if
CBSI elects not to assume such defense or counsel for the Indemnified Parties
reasonably advises the Indemnified Parties that there are issues which raise
conflicts of interest between CBSI and the Indemnified Parties, the Indemnified
Parties may retain counsel reasonably satisfactory to them after notification,
and CBSI shall pay the reasonable fees and expenses of such counsel for the
Indemnified Parties, (2) CBSI shall be obligated pursuant to this paragraph to
pay for only one firm of counsel for all Indemnified Parties, (3) CBSI shall
not be liable for any settlement effected without its prior written consent,
and (4) CBSI shall have no obligation hereunder to any Indemnified Party when
and if a court of competent jurisdiction shall ultimately determine, and such
determination shall have become final and nonappealable, that indemnification
of such Indemnified Party in the manner contemplated hereby is prohibited by
applicable law. Any Indemnified Party wishing to claim indemnification under
this Section 5.11(d), upon becoming aware of any such claim, action, suit,
proceeding or investigation, shall promptly notify CBSI thereof, provided that
the failure of any Indemnified Party to so notify CBSI shall relieve it of its
obligations to indemnify hereunder to the extent that such failure materially
prejudices CBSI.

(2) CBSI agrees that all rights to indemnification and all limitations
on liability existing in favor of the directors, officers and employees of
First Liberty and any of its Subsidiaries as provided in their

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respective articles of incorporation, bylaws or similar governing documents as
in effect as of the date of this Agreement with respect to matters occurring
prior to the Effective Time shall survive the Merger, and shall continue in
full force and effect, and shall be honored by such entities or their
respective successors as if they were the indemnifying party thereunder,
without any amendment thereto, for a period of six years from the Effective
Time.

(3) CBSI will use its reasonable best efforts directly or indirectly to
cause the persons who served as directors or officers of First Liberty on or
before the Effective Time to be covered by First Liberty's existing directors'
and officers' liability insurance policy (provided that CBSI may substitute
therefor policies of at least the same coverage and amounts containing terms
and conditions which are not less advantageous
than such policy) but in no event shall any insured person be entitled under
this Section to insurance coverage more favorable than that provided to him or
her in such capacities as of the date hereof with respect to acts or omissions
resulting from their service as such on or prior to the Effective Time. CBSI
will use its best reasonable efforts to cause such insurance coverage to
commence at the Effective Time and to be provided for a period of no less than
three years after the Effective Time; provided, however, that in no event shall
CBSI be required to expend for each year more than 150% of the current amount
expended per annum by First Liberty to maintain or procure insurance coverage
pursuant hereto (the "Maximum Amount"). If the amount of premiums necessary to
maintain or procure said insurance coverage exceeds the Maximum Amount, CBSI
shall use its reasonable best efforts in its good faith discretion to maintain
the most advantageous policies of directors' and officers' liability insurance
obtainable for a premium equal to the Maximum Amount. First Liberty agrees to
renew any such existing insurance or to purchase any "discovery period"
insurance provided for thereunder at CBSI's request.

5.12 Dividends. After the date of this Agreement, CBSI and First Liberty
shall coordinate with the other the declaration of any dividends in respect of
CBSI Common Stock and First Liberty Common Stock and the record dates and
payment dates relating thereto, it being the intention of the parties hereto
that holders of First Liberty Common Stock shall not receive dividends other
than regular dividends thereon, or fail to receive such regular dividends, for
any calendar quarter prior to the Effective Time with respect to their shares
of First Liberty Common Stock and for any calendar quarter following the
Effective Time with respect to any shares of CBSI Common Stock that such holder
receives as Merger Consideration.

5.13 Advisory Board. Promptly following the Effective Time, CBSI shall cause
to be formed a nine-member advisory board (the "Advisory Board") comprised of
the eight members of the Board of Directors of First Liberty set forth on
Exhibit C hereto, and the President and Chief Executive Officer of CBSI, the
function of which is to advise Community Bank on deposit, lending and financial
services activities in First Liberty's former market area and to insure a
smooth transition of business relationships in connection with the Merger and
the continued development of business relationships throughout such market
area. Each member of the Advisory Board, other than the President and Chief
Executive Officer of CBSI, shall be paid $12,000 per annum in cash in
consideration for his or her services on the Advisory Board. The Advisory Board
shall meet no more than 12 times per year and shall be maintained for a period
of at least four years after the Effective Time.

5.14 Use of First Liberty Bank Name. It is the current intention of CBSI to
continue to use the First Liberty Bank name in connection with the operation of
the First Liberty Bank branches for a period of at least three years following
the Effective Time, subject to appropriate and necessary regulatory approval,
if any, compliance with any applicable laws and regulations, and absence of any
changed circumstances in the operation of Community Bank or First Liberty Bank
(or current First Liberty Bank branches), including but not limited to mergers
and acquisitions, reorganizations, restructurings, or other circumstances
which, from an operational or marketing perspective, make it appropriate or
advisable to use another name.

5.15 Takeover Laws. No party hereto shall take any action that would cause
the transactions contemplated by this Agreement or any of the Transaction
Documents to be subject to the requirements imposed by any Takeover Law, and
each of them shall take all necessary steps within its control to exempt (or

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ensure the continued exemption of) all such transactions from, or if necessary
challenge the validity or applicability of, any applicable Takeover Law, as now
or hereafter in effect. For purposes of this Section, Takeover Law shall mean
any legal requirement related to mergers, business combinations, sale of
control, affiliate transactions, or antitrust laws or regulations which is
applicable to the transactions contemplated by this Agreement.

5.16 Publication of Post-Merger Results of Operations. CBSI shall use its
reasonable best efforts to publish, as soon as reasonably practicable after the
end of the first fiscal quarter of CBSI following the Effective Time in which
there are at least 30 days of post-Merger combined operations, the financial
information contemplated by and in accordance with the terms of the SEC's
Accounting Series Releases Nos. 130 and 135 and Section 201.01 of the SEC's
Codification of Financial Reporting Policies and other applicable accounting
rules.

ARTICLE VI

CONDITIONS PRECEDENT

6.1 Conditions Precedent to Obligations of CBSI and First Liberty. The
respective obligations of the parties to effect the Merger shall be subject to
satisfaction or waiver of the following conditions at or prior to the Closing
Date:

(a) All corporate action necessary to authorize the execution, delivery
and performance of this Agreement and consummation of the transactions
contemplated hereby and thereby, including without limitation the shareholder
approvals contemplated by Section 5.1 hereof, shall have been duly and validly
taken;

(b) The parties hereto shall have received all regulatory approvals
required or mutually deemed necessary in connection with the transactions
contemplated by this Agreement, all notice periods and waiting periods required
after the granting of any such approvals shall have passed and all conditions
contained in any such approval required to have been satisfied prior to
consummation of such transactions shall have been satisfied;

(c) The Registration Statement (including any post-effective amendment
thereto) shall be effective under the Securities Act, no stop order suspending
the effectiveness of such Registration Statement shall have been issued and no
proceeding shall be pending or threatened in writing by the Commission to
suspend the effectiveness of such Registration Statement, and CBSI shall have
received all "blue sky" or state securities approvals or other authorizations,
or confirmations as to the availability of an exemption from registration
requirements as may be necessary;

(d) There shall not have been instituted, pending or threatened in writing
any action or proceeding by any governmental authority or administrative agency
or in a court of competent jurisdiction, nor shall there be in any effect any
judgment, order, decree or injunction of any governmental authority,
administrative agency or court of competent jurisdiction, or any other legal
restraint, preventing or seeking to prevent the consummation of the
transactions contemplated by this Agreement;

(e) The shares of CBSI Common Stock issuable in the Merger shall have been
approved for listing on the NYSE, subject to official notice of issuance; and

(f) CBSI and First Liberty shall have received an opinion of
PricewaterhouseCoopers LLP, in form and substance reasonably satisfactory to
them, dated as of the date the Registration Statement is effective and on the
Closing Date, substantially to the effect that, on the basis of facts,
representations and assumptions set forth or referred to in such opinions, the
Merger will be treated for federal income tax purposes as a reorganization or
part of a reorganization within the meaning of Section 368(a) of the Code, and
that:

(1) First Liberty and CBSI will each be a party to such reorganization
within the meaning of Section 368(b) of the Code;

A-31

(2) No gain or loss will be recognized by CBSI or First Liberty as a
result of the Merger (except for amounts resulting from any required change in
accounting methods, any income and deferred gain recognized pursuant to
Treasury regulations issued under Section 1502 of the Code, or other exceptions
as set forth in such opinion);

(3) No gain or loss will be recognized by First Liberty shareholders
with respect to shares of CBSI Common Stock received in exchange for their
shares of First Liberty Common Stock, but gain or loss will be recognized by
First Liberty shareholders with respect to cash received in lieu of fractional
shares;

(4) Each First Liberty shareholder's aggregate tax basis in any shares
of CBSI Common Stock received in the transaction will be the same as the
aggregate tax basis of the shares of First Liberty Common Stock such
shareholder surrendered in the exchange therefor, decreased by any tax basis
allocable to fractional shares, if any, of CBSI Common Stock for which cash is
received; and

(5) Each First Liberty shareholder's holding period in any shares of
CBSI Common Stock received in the transaction will, in each instance, include
the period during which the shares of First Liberty Common Stock surrendered in
exchange therefor were held, provided that such shares of First Liberty Common
Stock were held as capital assets by the shareholder at the Effective Time.

(g) William M. Davis, President of First Liberty, and CBSI (or Community
Bank) shall have entered into a Consulting Agreement, substantially in the form
attached hereto as Exhibit D (the "Consulting Agreement");

(h) Each of Steven R. Tokach and Joseph R. Solfanelli, executive officers
of First Liberty, and CBSI (or Community Bank) shall have entered into an
Employment Agreement, substantially in the form attached hereto as Exhibits E
and F, respectively (collectively, the "Employment Agreements") and, pursuant
thereto, shall have waived in writing any right to receive a "change of
control" or similar payment as a result of the Merger; and

(i) CBSI shall have received from KPMG LLP, independent auditors for First
Liberty, a copy of a letter addressed to First Liberty dated the Closing Date,
in substance reasonably acceptable to CBSI (and which may contain customary
qualifications and assumptions), to the effect that KPMG LLP concurs with First
Liberty management's conclusion that no conditions exist related to First
Liberty that would preclude CBSI from accounting for the Merger as a pooling of
interests; and CBSI shall have received from PricewaterhouseCoopers LLP, the
independent auditors for CBSI, a letter dated the Closing Date, in substance
reasonably acceptable to CBSI (which may contain customary qualifications and
assumptions) to the effect that PricewaterhouseCoopers LLP concurs with CBSI
management's conclusion that, as of that date, no conditions exist that would
preclude CBSI from accounting for the Merger as a pooling of interests.

6.2 Conditions Precedent to Obligations of First Liberty. The obligations of
First Liberty to effect the Merger shall be subject to satisfaction of the
following additional conditions at or prior to the Closing Date unless waived
by First Liberty pursuant to Section 7.4 hereof:

(a) The representations and warranties of CBSI set forth in Article IV
hereof shall be true and correct in all material respects as of the date of
this Agreement and as of the Closing Date as though made on and as of the
Closing Date (or, in the case of any representation and warranty which
specifically relates to an earlier date, as of such earlier date), except as
otherwise contemplated by this Agreement or consented to in writing by First
Liberty; provided, however, that (i) in determining whether or not the
condition contained in this paragraph (a) is satisfied, no effect shall be
given to any qualifications or exceptions in such representations and
warranties relating to materiality or Material Adverse Effect and (ii) the
condition contained in this paragraph (a) shall be deemed to be satisfied
unless the failure of such representations and warranties to be so true and
correct constitute, individually or in the aggregate, a Material Adverse Effect
on CBSI;

A-32

(b) CBSI shall have in all material respects performed all obligations and
complied with all covenants required by this Agreement to be performed or
complied with at or prior to the Closing Date;

(c) CBSI shall have delivered to First Liberty a certificate, dated the
Closing Date and signed by its President and Chief Executive Officer, without
personal liability, to the effect that the conditions set forth in paragraphs
(a) and (b) of this Section have been satisfied;

(d) First Liberty shall have received an Affiliate Agreement from each
person identified as an "affiliate" of CBSI, and such Affiliate Agreement shall
be in full force and effect; and

(e) First Liberty shall have received a written opinion of Berwind
Financial, L.P., as of a date within five days of mailing the Joint Proxy
Statement/Prospectus, to the effect that the Exchange Ratio is fair, from a
financial point of view, to the shareholders of First Liberty.

6.3 Conditions Precedent to Obligations of CBSI and Community Bank.

The obligations of CBSI to effect the Merger shall be subject to
satisfaction of the following additional conditions at or prior to the Closing
Date, unless waived by CBSI pursuant to Section 7.4 hereof:

(a) The representations and warranties of First Liberty set forth in
Article III hereof shall be true and correct in all material respects as of the
date of this Agreement and as of the Closing Date as though made on and as of
the Closing Date (or, in the case of any representation and warranty which
specifically relates to an earlier date, as of such earlier date), except as
otherwise contemplated by this Agreement or consented to in writing by CBSI;
provided, however, that (i) in determining whether or not the condition
contained in this paragraph (a) is satisfied, no effect shall be given to any
qualifications or exceptions in such representations and warranties relating to
materiality or Material Adverse Effect and (ii) the condition contained in this
paragraph (a) shall be deemed to be satisfied unless the failure of such
representations and warranties to be so true and correct constitute,
individually or in the aggregate, a Material Adverse Effect on First Liberty;

(b) First Liberty shall have in all material respects performed all
obligations and complied with all covenants required by this Agreement to be
performed or complied with at or prior to the Closing Date;

(c) First Liberty shall have delivered to CBSI a certificate, dated the
Closing Date and signed by its President, without personal liability, to the
effect that the conditions set forth in paragraphs (a) and (b) of this Section
have been satisfied;

(d) CBSI shall have received an Affiliate Agreement from each Person
identified as an "affiliate" of First Liberty, and such Affiliate Agreement
shall be in full force and effect;

(e) Dissenters' rights shall not have been exercised with respect to more
than 7% of the outstanding shares of First Liberty Common Stock; and

(f) To the extent that any material, lease, license, loan, financing
agreement or other contract or agreement to which First Liberty is a party
requires the consent of or waiver from the other party thereto as a result of
the transactions contemplated by this Agreement, such consent or waiver shall
have been obtained.

ARTICLE VII

TERMINATION, WAIVER AND AMENDMENT

7.1 Termination. This Agreement may be terminated at any time prior to the
Effective Time, either before or after approval by the shareholders of First
Liberty or CBSI:

(a) by the mutual written consent duly authorized by the respective Boards
of Directors of the parties hereto;

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(b) by CBSI in writing, if First Liberty has, or by First Liberty in
writing, if CBSI has, breached (i) any covenant or agreement contained herein
or (ii) any representation or warranty contained herein, and in either case if
(x) to the extent that such breach is curable, such breach has not been cured
within 30 days after the date on which written notice thereof is given to the
breaching party and (y) such breach would entitle the non-breaching party not
to consummate the transactions contemplated hereby under Article VI hereof;

(c) by any party hereto in writing, if the applications for prior approval
referred to in Section 5.3 hereof have been finally denied, and the time period
for appeals and requests for reconsideration has expired, or if any
governmental entity of competent jurisdiction shall have issued a final
nonappealable order enjoining or otherwise prohibiting the Merger;

(d) by any party hereto in writing, if the respective shareholders of
First Liberty or CBSI do not approve this Agreement and the transactions
contemplated thereby at the special meetings duly called for that purpose; or

(e) by any party hereto in writing, if the Merger shall not have been
consummated by the close of business on September 30, 2001, unless the failure
to so consummate by such date shall be principally due to the failure of the
party seeking to terminate this Agreement to perform or observe the covenants
and agreements set forth herein.

7.2 Effect of Termination. In the event this Agreement is terminated
pursuant to Section 7.1 hereof, this Agreement shall become void and have no
effect, except that (i) the provisions relating to confidentiality and expenses
set forth in Sections 5.5 and 8.1 hereof, respectively, shall survive any such
termination and (ii) a termination pursuant to Section 7.1 shall not relieve
the breaching party from liability for any willful breach of such covenant or
agreement or representation or warranty giving rise to such termination.

7.3 Survival of Representations, Warranties and Covenants. All
representations, warranties and covenants in this Agreement or in any
instrument delivered pursuant hereto shall expire on, and be terminated and
extinguished at, the Effective Time other than covenants that by their terms
are to survive or be performed after the Effective Time; provided, that no such
representations, warranties or covenants shall be deemed to be terminated or
extinguished so as to deprive CBSI or First Liberty (or any director, officer
or controlling person thereof) of any defense in law or equity which otherwise
would be available against the claims of any Person, including, without
limitation, any shareholder or former shareholder of either CBSI or First
Liberty, the aforesaid representations, warranties and covenants being material
inducements to the consummation by CBSI and First Liberty of the transactions
contemplated herein.

7.4 Waiver. Except where not permitted by law, CBSI or First Liberty, by
written instrument signed by an executive officer of such party, may at any
time (whether before or after approval of this Agreement by the shareholders of
First Liberty or CBSI) extend the time for the performance of any of the
obligations or other acts of the other party, and may waive (i) any
inaccuracies of such other party in the representations or warranties contained
in this Agreement or any document delivered pursuant hereto, (ii) compliance
with any of the covenants, undertakings or agreements of such other party, or
satisfaction of any of the conditions precedent to its obligations, contained
herein or (iii) the performance by such other party of any of its obligations
set out herein or therein. No failure or delay on the part of any party hereto
in the exercise of any right hereunder shall impair such right or be construed
as a waiver of, or acquiescence in, any breach of any representation, warranty
or agreement herein, nor shall any single or partial exercise of any such right
preclude other or further exercise thereof or of any other right.

7.5 Amendment or Supplement. This Agreement may be amended or supplemented
at any time prior to the Effective Time only by mutual agreement of the parties
hereto or thereto. Any such amendment or supplement must be in writing and
approved by their respective Boards of Directors; provided, however, that,
after approval of this Agreement by the respective shareholders of First
Liberty or CBSI, no amendment may be made which by law requires further
approval by such shareholders without obtaining such further approval.

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ARTICLE VIII

MISCELLANEOUS

8.1 Expenses. Each party hereto shall bear and pay all costs and expenses
incurred by it in connection with the transactions contemplated in this
Agreement, including fees and expenses of its own financial consultants,
accountants and counsel, except that CBSI and First Liberty each shall bear and
pay 50% of all printing and mailing costs and filing fees associated with the
Registration Statement and the Joint Proxy Statement/Prospectus and any
amendment or supplement thereto; provided, however, in the event that this
Agreement is terminated after an Initial Triggering Event (as such term is
defined in the Option Agreement) shall have occurred, then First Liberty shall
immediately reimburse CBSI for all out-of-pocket costs and expenses (including
without limitation, professional fees of legal counsel, financial advisors and
accountants, and their expenses) actually incurred by CBSI and its Subsidiaries
in connection with the Merger and this Agreement.

8.2 Entire Agreement. This Agreement contains the entire agreement between
the parties with respect to the transactions contemplated hereunder and
supersedes all prior arrangements or understandings with respect thereto,
written or oral, other than documents referred to herein. The terms and
conditions of this Agreement shall inure to the benefit of and be binding upon
the parties hereto and thereto and their respective successors. Except as
specifically set forth herein, nothing in this Agreement, expressed or implied,
is intended to confer upon any party, other than the parties hereto and
thereto, and their respective successors, any rights, remedies, obligations or
liabilities. This Agreement shall constitute a plan of reorganization within
the meaning of Section 368 of the Code.

8.3 No Assignment. No party hereto may assign any of its rights or
obligations under this Agreement to any other person.

8.4 Alternative Structure. Notwithstanding any provision of this Agreement
to the contrary, CBSI may, with the written consent of First Liberty, which
consent shall not be unreasonably withheld, elect, subject to the filing of all
necessary applications and the receipt of all required regulatory approvals, to
modify the structure of the acquisition of First Liberty set forth herein,
provided, that (i) the federal income tax consequences of any transactions
created by such modification shall not be other than those set forth in Section
6.1(f) hereof, (ii) the consideration to be paid to the holders of the First
Liberty Common Stock is not thereby changed in kind or reduced in amount as a
result of such modification and (iii) such modification will not materially
delay or jeopardize the consummation of the transactions contemplated by the
Agreement.

8.5 Notices. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally
or sent by facsimile transmission or overnight express or by registered or
certified mail, postage prepaid, addressed as follows:

If to First Liberty:

First Liberty Bank Corp.
645 Washington Avenue
P.O. Box 39
Jermyn, Pennsylvania 18433-0039
Attn: William M. Davis, President
Telecopy: (570) 876-6506

With a required copy to:

Stevens & Lee, P.C.
111 North Sixth Street
P.O. Box 679
Reading, PA 19603-0679
Attn: David W. Swartz, Esq.
Telecopy: (610) 376-5610

A-35

If to CBSI:

Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, New York 13214
Attn: Sanford A. Belden, President and Chief Executive Officer
Telecopy: (315) 445-2997

With a required copy to:

Bond, Schoeneck & King, LLP
One Lincoln Center
Syracuse, New York 13202
Attn: George J. Getman, Esq.
Telecopy: (315) 422-3598

8.6 Captions. The captions contained in this Agreement are for reference
purposes only and are not part of this Agreement.

8.7 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.

8.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York applicable to agreements made
and entirely to be performed within such jurisdiction, except to the extent
federal law may be applicable.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]

A-36

IN WITNESS WHEREOF, the parties hereto, intending to be legally bound
hereby, have caused this Agreement to be executed by their duly authorized
officers, all as of the day and year first above written.

COMMUNITY BANK SYSTEM, INC.

/s/ Sanford A. Belden
By: _________________________________
Name: Sanford A. Belden
Title: President and Chief Executive
Officer

FIRST LIBERTY BANK CORP.

/s/ William M. Davis
By: _________________________________
Name: William M. Davis
Title: President

A-37

ANNEX B

STOCK OPTION AGREEMENT

This STOCK OPTION AGREEMENT, dated November 29, 2000 (this "Agreement"), is
by and between FIRST LIBERTY BANK CORP., a Pennsylvania corporation ("Issuer"),
and COMMUNITY BANK SYSTEM, INC., a Delaware corporation ("Grantee").

WITNESSETH:

WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger, dated as of the date herewith (the "Merger Agreement"), which agreement
has been executed by the parties hereto; and

WHEREAS, as a condition to Grantee's entering into the Merger Agreement and
in consideration therefor, Issuer has agreed to grant Grantee the Option (as
hereinafter defined);

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements set forth herein and in the Merger Agreement, the parties hereto
agree as follows:

1. Grant of Option; Shares Underlying Option.

(a) Issuer hereby grants to Grantee an unconditional, irrevocable option
(the "Option") to purchase, subject to the terms hereof, a total of 1,267,359
fully paid and nonassessable shares of Issuer's common stock, par value $0.31
per share ("Common Stock"), at a price of $13.25 per share (the "Option
Price"); provided, however, that in no event shall the number of shares of
Common Stock for which the Option is exercisable exceed 19.9% of the Issuer's
issued and outstanding shares of Common Stock without giving effect to any
shares subject to or issued pursuant to the Option. The number of shares of
Common Stock that may be received upon the exercise of the Option and the
Option Price are subject to adjustment as herein set forth.

(b) In the event that any additional shares of Common Stock are either (i)
issued or otherwise become outstanding after the date of this Agreement (other
than pursuant to this Agreement or as permitted under the terms of the Merger
Agreement) or (ii) redeemed, repurchased, retired or otherwise cease to be
outstanding after the date of the Agreement, the number of shares of Common
Stock subject to the Option shall be increased or decreased, as appropriate, so
that, after such issuance, such number equals 19.9% of the number of shares of
Common Stock then issued and outstanding without giving effect to any shares
subject or issued pursuant to the Option. Nothing contained in this Section
1(b) or elsewhere in this Agreement shall be deemed to authorize Issuer to
breach any provision of the Merger Agreement.

(c) Notwithstanding anything to the contrary herein, (i) in the event that
Issuer issues or agrees to issue any shares of Common Stock at a price less
than the Option Price then in effect (as adjusted pursuant to this Agreement)
other than upon exercise of any employee stock options outstanding on the date
hereof, the Option Price shall be adjusted to equal such lesser price; and (ii)
the number of shares of Common Stock subject to the Option shall be reduced to
such lesser number, if any, equal to the maximum number of shares which would
not cause Grantee to become an "interested shareholder," as such term is
defined in Subchapter F of Chapter 25 of the Business Corporation Law of the
Commonwealth of Pennsylvania, after giving effect to the authorization by the
Board of Directors of the Issuer of the execution and delivery of this
Agreement and the transactions contemplated hereby (which authorization the
Issuer hereby represents to the Grantee to have been granted prior to the
execution and delivery of this Agreement).

2. Exercise of Option.

(a) The holder(s) of the Option (collectively, the "Holder") may exercise
the Option, in whole or part, and from time to time, if, but only if, both an
Initial Triggering Event (as hereinafter defined) and a Subsequent

B-1

Triggering Event (as hereinafter defined) shall have occurred prior to the
occurrence of an Exercise Termination Event (as hereinafter defined); provided,
however, that the Holder shall have sent the written notice of such exercise
(as provided in subsection (e) of this Section 2) within six months following
such Subsequent Triggering Event; provided, further, however, that if the
Option cannot be exercised on any day because of any injunction, order or
similar restraint issued by a court of competent jurisdiction, the period
during which the Option may be exercised shall be extended so that the Option
shall expire no earlier than on the 10th business day after such injunction,
order or restraint shall have been dissolved or when such injunction, order or
restraint shall have become permanent and no longer subject to appeal, as the
case may be.

Each of the following shall be an "Exercise Termination Event": (i) the
Effective Time (as defined in the Merger Agreement); (ii) termination of the
Merger Agreement in accordance with the provisions thereof if such termination
occurs prior to the occurrence of an Initial Triggering Event except a
termination by Grantee pursuant to Section 7.1(b)(i) of the Merger Agreement
(unless the breach by Issuer giving rise to such right of termination is non-
volitional); or (iii) the passage of twelve months after termination of the
Merger Agreement if such termination follows the occurrence of an Initial
Triggering Event or is a termination by Grantee pursuant to Section 7.1(b)(i)
of the Merger Agreement (unless the breach by Issuer giving rise to such right
of termination is non-volitional).

(b) The term "Initial Triggering Event" shall mean any of the following
events or transactions occurring after the date hereof:

(i) Issuer or any of its Subsidiaries (as defined in the Merger
Agreement; each an "Issuer Subsidiary"), without having received Grantee's
prior written consent, shall have entered into a letter of intent or a
definitive agreement to engage in an Acquisition Transaction (as
hereinafter defined) with any Person (as defined in the Merger Agreement)
other than Grantee or any of its Subsidiaries (each a "Grantee
Subsidiary"). For purposes of this Agreement, "Acquisition Transaction"
shall mean (w) a merger or consolidation, or any similar transaction,
involving Issuer or any "significant subsidiary" (as defined in Rule 1-02
of Regulation S-X promulgated by the Securities and Exchange Commission
(the "SEC")) of Issuer, (x) a purchase, lease or other acquisition or
assumption of all or a substantial portion of the assets or deposits of
Issuer or any significant subsidiary of Issuer, (y) a purchase or other
acquisition (including by way of merger, consolidation, share exchange or
otherwise) of securities representing 10% or more of the outstanding voting
power of Issuer or any significant subsidiary thereof, or (z) any
substantially similar transaction;

(ii) Issuer or any Issuer Subsidiaries, without having received
Grantee's prior written consent, shall have authorized, recommended,
proposed, or publicly announced its intention to authorize, recommend or
propose to engage in, an Acquisition Transaction with any person other than
Grantee or a Grantee Subsidiary;

(iii) Any Person (other than Grantee, any Grantee Subsidiary or any
existing shareholder of the Issuer who has beneficial ownership of 10% or
more of the outstanding shares of Common Stock provided that such
shareholder does not acquire beneficial ownership of 15% or more of such
shares) shall have acquired beneficial ownership or the right to acquire
beneficial ownership of 10% or more of the outstanding shares of Common
Stock (the term "beneficial ownership" for purposes of this Agreement
having the meaning assigned thereto in Section 13(d) of the Exchange Act,
and the rules and regulations thereunder) or any Person other than Grantee
or any Grantee Subsidiary shall have commenced (as such term is defined
under the rules and regulations of the SEC), or shall have filed or
publicly disseminated a registration statement, tender offer statement,
proxy statement or similar disclosure statement with respect to or in
connection with, a tender offer or exchange offer to purchase any shares of
Issuer Common Stock such that, upon consummation of such offer, such Person
would beneficially own, directly or indirectly, 10% or more of the then
outstanding shares of Common Stock (such an offer being referred to herein
as a "Tender Offer" or an "Exchange Offer," respectively);

B-2

(iv) (A) the holders of Common Stock shall fail to approve the Merger
Agreement and the transactions contemplated thereby at the special meeting
of stockholders held for the purpose of voting on such approval, (B) such
meeting shall not have been held or shall have been cancelled prior to
termination of the Merger Agreement, or (C) the Board of Directors of
Issuer shall have withdrawn or modified, or publicly announced its intent
to withdraw or modify, in any manner adverse to Grantee, its recommendation
that the stockholders of Issuer approve the transactions contemplated by
the Merger Agreement, or fail to publicly oppose any Acquisition
Transaction made by a third party, in each case after (1) there has been a
public disclosure (including any written or oral communication that is or
becomes the subject of a public disclosure) that any Person other than
Grantee or any Grantee Subsidiary has (x) made, or disclosed an intention
to make, a proposal to engage in an Acquisition Transaction, (y) commenced,
or filed or publicly disseminated a registration statement, tender offer
statement, proxy statement or similar disclosure statement with respect to
or in connection with, a Tender Offer or an Exchange Offer, or (z) filed an
application (or given a notice), whether in draft or final form, under any
federal or state banking laws seeking regulatory approval to engage in an
Acquisition Transaction, and (2) such Acquisition Transaction, Tender Offer
or Exchange Offer, as the case may be, is not subsequently Publicly
Withdrawn (as defined below) at least 30 days prior to the date of the
special meeting of shareholders of Issuer to be held for the purpose of
considering whether to approve the Merger Agreement; or

(v) After an overture is made by a third party to Issuer or its
stockholders to engage in an Acquisition Transaction, Issuer shall have
breached any covenant or agreement contained in the Merger Agreement and
such breach would entitle Grantee to terminate the Merger Agreement
(whether immediately, upon the giving of notice or passage of time, or
both).

"Publicly Withdrawn" for purposes of this Section 2(b) shall mean an
unconditional and bona fide withdrawal of a proposal to engage in an
Acquisition Transaction, coupled with a public announcement of no further
interest in pursuing such proposal or in acquiring any controlling interest
over Issuer or in soliciting or inducing any other Person (other than the
Grantee or any of its affiliates) to do so.

(c) The term "Subsequent Triggering Event" shall mean either of the
following events or transactions occurring after the date hereof:

(i) The acquisition by any Person of beneficial ownership of 20% or more
of the then outstanding shares of Common Stock; or

(ii) The occurrence of the Initial Triggering Event described in
paragraph (i) of subsection (b) of this Section 2, except that the
percentage referred to in clause (y) shall be 20%.

(d) Issuer shall notify Grantee promptly in writing of the occurrence of any
Initial Triggering Event or Subsequent Triggering Event of which it has notice
(together, a "Triggering Event"), it being understood that the giving of such
notice by Issuer shall not be a condition to the right of the Holder to
exercise the Option.

(e) In the event the Holder is entitled to and wishes to exercise the
Option, it shall send to Issuer a written notice (the date of which being
herein referred to as the "Notice Date") specifying (i) the total number of
shares it will purchase pursuant to such exercise and (ii) a place and date not
earlier than three business days nor later than 60 business days from the
Notice Date for the closing of such purchase (the "Closing Date"); provided,
that if prior notification to or approval of the Federal Reserve Board or any
other regulatory agency is required in connection with such purchase, the
Holder shall promptly file the required notice or application for approval and
shall expeditiously process the same and the period of time that otherwise
would run pursuant to this sentence shall run instead from the date on which
any required notification periods have expired or been terminated or such
approvals have been obtained and any requisite waiting period or periods shall
have passed. Any exercise of the Option shall be deemed to occur on the Notice
Date relating thereto.

B-3

(f) At the closing referred to in subsection (e) of this Section 2, the
Holder shall pay to Issuer the aggregate purchase price for the shares of
Common Stock purchased pursuant to the exercise of the Option in immediately
available funds by wire transfer to a bank account designated by Issuer;
provided, that failure or refusal of Issuer to designate such a bank account
shall not preclude the Holder from exercising the Option so long as the Holder
makes such payment by a bank or certified check.

(g) At such closing, simultaneously with the delivery of the aggregate
purchase price as provided in subsection (f) of this Section 2, Issuer shall
deliver to the Holder a certificate or certificates representing the number of
shares of Common Stock purchased by the Holder and, if the Option should be
exercised in part only, a new Option evidencing the rights of the Holder
thereof to purchase the balance of the shares purchasable hereunder, and the
Holder shall deliver to Issuer a copy of this Agreement and a letter agreeing
that the Holder will not offer to sell or otherwise dispose of such shares in
violation of applicable law or the provisions of this Agreement.

(h) Certificates for Common Stock delivered at a closing pursuant to
subsection (g) of this Section 2 may contain a restrictive legend that shall
read substantially as follows:

"THE TRANSFER OF THE SHARES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO CERTAIN PROVISIONS OF AN AGREEMENT BETWEEN THE
REGISTERED HOLDER HEREOF AND ISSUER AND TO RESALE RESTRICTIONS
UNDER THE SECURITIES ACT OF 1933, AS AMENDED. A COPY OF SUCH
AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF ISSUER AND WILL BE
PROVIDED TO THE HOLDER HEREOF WITHOUT CHARGE UPON RECEIPT BY
ISSUER OF A WRITTEN REQUEST THEREFOR."

It is understood and agreed that: (i) the reference to the resale
restrictions of the Securities Act of 1933, as amended (the "Securities Act"),
in the above legend shall be removed by delivery of substitute certificate(s)
without such reference if the Holder shall have delivered to Issuer the
original certificate containing such legend, together with a copy of a letter
from the staff of the SEC, or an opinion of counsel, in form and substance
reasonably satisfactory to Issuer, to the effect that such legend is not
required for purposes of the Securities Act; (ii) the reference to the
provisions to this Agreement in the above legend shall be removed by delivery
of substitute certificate(s) without such reference upon the surrender of the
original certificate if the shares have been sold or transferred in compliance
with the provisions of this Agreement and under circumstances that do not
require the retention of such reference; and (iii) the legend shall be removed
in its entirety if the conditions in the preceding clauses (i) and (ii) are
both satisfied. In addition, such certificates shall bear any other legend as
may be required by law.

(i) Upon the giving by the Holder to Issuer of the written notice of
exercise of the Option provided for under subsection (e) of this Section 2 and
the tender of the applicable purchase price in accordance with subsection (f)
of this Section 2, the Holder shall be deemed to be the holder of record of the
shares of Common Stock issuable upon such exercise, notwithstanding that the
stock transfer books of Issuer shall then be closed or that certificates
representing such shares of Common Stock shall not then be actually delivered
to the Holder. Issuer shall pay all expenses, and any and all United States
federal, state and local taxes and other charges that may be payable in
connection with the preparation, issue and delivery of stock certificates under
this Section 2 in the name of the Holder or its assignee, transferee or
designee.

3. Covenant of Issuer. Issuer agrees: (i) that it shall at all times
maintain, free from preemptive rights, sufficient authorized but unissued or
treasury shares of Common Stock so that the Option may be exercised without
additional authorization of Common Stock, after giving effect to all other
options, warrants, convertible securities and other rights to purchase Common
Stock; (ii) that it will not, by charter amendment or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer; and (iii) promptly to take all action as may from time to time be
required

B-4

(including, if prior approval of or notice to the Federal Reserve Board or any
other federal or state regulatory authority is required under federal or state
law before the Option may be exercised, cooperating fully with the Holder in
preparing such applications or notices and providing such information to the
Federal Reserve Board or such other federal or state regulatory authority as
they may require) in order to permit the Holder to exercise the Option and
Issuer duly and effectively to issue shares of Common Stock pursuant hereto.

4. Exchange. This Agreement and the Option granted hereby are exchangeable,
without expense, at the option of the Holder, upon presentation and surrender
of this Agreement at the principal office of Issuer, for other Agreements
providing for Options of different denominations entitling the holder thereof
to purchase, on the same terms and subject to the same conditions as are set
forth herein, in the aggregate the same number of shares of Common Stock
purchasable hereunder. The terms "Agreement" and "Option" as used herein
include any Stock Option Agreements and related Options for which this
Agreement (and the Option granted hereby) may be exchanged. Upon receipt by
Issuer of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Agreement, and (in the case of loss, theft or
destruction) of reasonably satisfactory indemnification, and upon surrender and
cancellation of this Agreement, if mutilated, Issuer will execute and deliver a
new Agreement of like tenor and date. Any such new Agreement executed and
delivered shall constitute an additional contractual obligation on the part of
Issuer, whether or not the Agreement so lost, stolen, destroyed or mutilated
shall at any time be enforceable by anyone.

5. Adjustments. In addition to the adjustment in the number of shares of
Common Stock that are purchasable upon exercise of the Option pursuant to
Section 1 of this Agreement, the number of shares of Common Stock purchasable
upon the exercise of the Option and the Option Price shall be subject to
adjustment from time to time as provided in this Section 5. In the event of any
change in, or distributions in respect of, the Common Stock by reason of stock
dividends, splits, mergers, recapitalizations, combinations, subdivisions,
conversions, exchanges of shares, distributions on or in respect of the Common
Stock that would be prohibited under the terms of the Merger Agreement, or the
like, the type of securities and number of shares of Common Stock purchasable
upon exercise hereof and the Option Price shall be appropriately adjusted in
such manner as shall fully preserve the economic benefits provided hereunder
and proper provision shall be made in any agreement governing any such
transaction to provide for such proper adjustment and the full satisfaction of
the Issuer's obligations hereunder.

6. Registration Rights. Upon the occurrence of a Subsequent Triggering Event
that occurs prior to an Exercise Termination Event, Issuer shall, at the
request of Grantee delivered within six months of such Subsequent Triggering
Event (whether on its own behalf or on behalf of any subsequent Holder of the
Option (or part thereof) or any of the shares of Common Stock issued pursuant
hereto), promptly prepare, file and keep current a registration statement under
the Securities Act covering the Option and any shares issued and issuable
pursuant to this Option and shall use all reasonable efforts to cause such
registration statement to become effective as soon as practicable and remain
current in order to permit the sale or other disposition of the Option and any
shares of Common Stock issued or issuable upon total or partial exercise of
this Option ("Option Shares") in accordance with any plan of disposition
requested by Grantee. Issuer will use all reasonable efforts to cause such
registration statement first to become effective and then to remain effective
for such period not in excess of 180 days from the day such registration
statement first becomes effective or such shorter time as may be reasonably
necessary to effect such sales or other dispositions. Any registration effected
under this Section 6 shall be at the sole expense of Issuer, except for
underwriting discounts and commissions. Grantee shall have the right to demand
three such registrations. Each Holder shall provide all information reasonably
requested by Issuer for inclusion in any registration statement to be filed
hereunder. If requested by any such Holder in connection with any underwritten
registration, Issuer shall become a party to any underwriting agreement
relating to the sale of such shares, but only to the extent of obligating
itself in respect of representations, warranties, indemnities and other
agreements customarily included in secondary offering underwriting agreements
for the issuer. Upon receiving any request under this Section 6 from Grantee,
Issuer agrees to send a copy thereof to any other person known to Issuer to be
entitled to registration rights under this Section 6, in each case by promptly
mailing the same, postage prepaid, to the address of record of the persons
entitled to

B-5

receive such copies. Notwithstanding anything to the contrary contained herein,
in no event shall Issuer be obligated to effect more than three registrations
pursuant to this Section 6 by reason of the fact that there shall be more than
one Holder as a result of any assignment or division of this Agreement.

7. Tolling. The periods for exercise of rights under Sections 2, 6, 10 and
12 shall be extended: (i) to the extent necessary to obtain all regulatory
approvals for the exercise of such rights, and for the expiration of all
statutory waiting periods; and (ii) to the extent necessary to avoid liability
under Section 16(b) of the Exchange Act by reason of such exercise.

8. Representations of Issuer. Issuer hereby represents and warrants to
Grantee as follows:

(a) Issuer has full corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by
the Board of Directors of Issuer and no other corporate proceedings on the
part of Issuer are necessary to authorize this Agreement or to consummate
the transactions so contemplated. This Agreement has been duly and validly
executed and delivered by Issuer, and constitutes a binding obligation of
Issuer, enforceable against Issuer in accordance with its terms except that
such enforceability may be subject to supervisory powers of bank regulatory
agencies, bankruptcy, insolvency and other laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.

(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof
through the termination of this Agreement in accordance with its terms will
have reserved for issuance upon the exercise of the Option, that number of
shares of Common Stock equal to the maximum number of shares of Common
Stock at any time and from time to time issuable hereunder, and all such
shares, upon issuance pursuant hereto, will be duly authorized, validly
issued, fully paid, nonassessable, and will be delivered free and clear of
all claims, liens, encumbrance and security interests and not subject to
any preemptive rights.

9. Representations of Grantee. Grantee hereby represents and warrants to
Issuer that the Option is not being acquired, and any shares of Common Stock or
other securities issuable by Grantee upon exercise of the Option will not be
acquired, with a view to the public distribution thereof and will not be
transferred or otherwise disposed of except in a transaction registered or
exempt from registration under the Securities Act.

10. Assignment. Neither of the parties hereto may assign any of its rights
or obligations under this Agreement or the Option created hereunder to any
other Person, without the express written consent of the other party, except
that in the event a Subsequent Triggering Event shall have occurred prior to an
Exercise Termination Event, Grantee, subject to the express provisions hereof,
may assign in whole or in part its rights and obligations hereunder within six
months following such Subsequent Triggering Event (or such later period as
provided in Section 7); provided, however, that until the date 15 days
following the date on which the Federal Reserve Board approves an application
by Grantee to acquire the shares of Common Stock subject to the Option (proof
of which approval shall be furnished promptly to Issuer), Grantee may not
assign its rights under the Option except in (i) a widely dispersed public
distribution, (ii) a private placement in which no one party acquires the right
to purchase in excess of 2% of the voting shares of Issuer, (iii) an assignment
to a single party (e.g., a broker or investment banker) for the purpose of
conducting a widely dispersed public distribution on Grantee's behalf, or (iv)
any other manner approved by the Federal Reserve Board.

11. Further Assurance. Each of Grantee and Issuer will use its best efforts
to make all filings with, and to obtain consents of, all third parties and
governmental authorities necessary to the consummation of the transactions
contemplated by this Agreement, including without limitation, (i) to the extent
that shares of Issuer's Common Stock are then listed on a national securities
exchange or the Nasdaq Stock Market, making application to list the shares of
Common Stock issuable hereunder on such national securities exchange or the
Nasdaq Stock Market, as applicable, upon official notice of issuance and (ii)
applying to the Federal Reserve

B-6

Board, for approval to acquire the shares issuable hereunder, but Grantee shall
not be obligated to apply to state banking authorities for approval to acquire
the shares of Common Stock issuable hereunder until such time, if ever, as it
deems appropriate to do so.

12. Repurchase.

(a) Upon the occurrence of a Subsequent Triggering Event that occurs prior
to an Exercise Termination Event, (i) at the request of any Holder, delivered
within 30 days following such occurrence (or such later period as provided in
Section 7) but in any event prior to an Exercise Termination Event, Issuer
shall repurchase the Option from the Holder at a price (the "Option Repurchase
Price") equal to the amount by which (A) the Market/Offer Price (as defined
below) exceeds (B) the Option Price, multiplied by the number of shares for
which this Option may then be exercised, plus, to the extent not previously
reimbursed, Grantee's reasonable out-of-pocket expenses incurred in connection
with the transactions contemplated by, and the enforcement of Grantee's rights
under, the Merger Agreement, including without limitation, legal, accounting
and investment banking fees (the "Grantee's Out-of-Pocket Expenses"), and (ii)
at the request of any owner of Option Shares from time to time (the "Owner"),
delivered within 30 days following such occurrence (or such later period as
provided in Section 7), Issuer shall repurchase such number of the Option
Shares from such Owner as the Owner shall designate at a price per share
("Option Share Repurchase Price") equal to the greater of (A) the Market/Offer
Price and (B) the average price per share paid by the Owner for the Option
Shares so designated, plus, to the extent not previously reimbursed, Grantee's
Out-of-Pocket Expenses. The term "Market/Offer Price" shall mean the highest of
(w) the price per share of the Common Stock at which a tender offer or exchange
offer therefor has been made, (x) the price per share of the Common Stock to be
paid by any Person, other than Grantee or a Grantee Subsidiary, pursuant to an
agreement with Issuer, (y) the highest closing price for shares of Common Stock
within the six month period immediately preceding the required repurchase of
Options or Option Shares, as the case may be, or (z) in the event of a sale of
all or substantially all of Issuer's or any of its significant subsidiary's
assets, the sum of the price paid in such sale for such assets and the current
market value of the remaining assets of Issuer, on a consolidated basis, as
determined by a nationally recognized investment banking firm selected by a
majority in interest of the Holders or the Owners, as the case may be, and
reasonably acceptable to Issuer, divided by the number of shares of Common
Stock of Issuer outstanding at the time of such sale (including, for the
purposes of such calculation, the number of shares, if any, then issuable upon
exercise of the Option). In determining the Market/Offer Price, the value of
consideration other than cash shall be determined by a nationally recognized
investment banking firm selected by a majority in interest of the Holders or
the Owners, as the case may be, and reasonably acceptable to Issuer.

(b) Each Holder and Owner, as the case may be, may exercise its right to
require Issuer to repurchase the Option and any Option Shares pursuant to this
Section 12 by surrendering for such purpose to Issuer, at its principal office,
a copy of this Agreement or certificates for Option Shares, as applicable,
accompanied by a written notice or notices stating that such Holder or Owner
elects to require Issuer to repurchase the Option and/or Option Shares in
accordance with the provisions of this Section 12. As promptly as practicable,
and in any event within ten business days after the surrender of the Option
and/or certificates representing Option Shares and the receipt of such notice
or notices relating thereto, Issuer shall deliver or cause to be delivered to
each Holder the Option Repurchase Price and/or to each Owner the Option Share
Repurchase Price therefor or the portion thereof that Issuer is not then
prohibited under applicable law and regulation from so delivering.

(c) To the extent that Issuer is prohibited under applicable law or
regulation, or as a consequence of administrative policy, or as a result of a
written agreement or other binding obligation with a governmental or regulatory
body or agency, from repurchasing the Option and/or the Option Shares in full,
Issuer shall immediately so notify each Holder and/or each Owner and thereafter
deliver or cause to be delivered, from time to time, to such Holder and/or
Owner, as appropriate, the portion of the Option Repurchase Price and the
Option Share Repurchase Price, respectively, that it is no longer prohibited
from delivering, within ten business days after the date on which Issuer is no
longer so prohibited; provided, however, that if Issuer at any time after
delivery of a notice of repurchase pursuant to paragraph (b) of this Section 12
is prohibited under

B-7

applicable law or regulation, or as a consequence of administrative policy,
from delivering to any Holder and/or Owner, as appropriate, the Option
Repurchase Price and the Option Share Repurchase Price, respectively, in part
or in full (and Issuer hereby undertakes to use its best efforts to receive any
required regulatory and legal approvals and to file any required notices as
promptly as practicable in order to accomplish such repurchase), such Holder or
Owner may revoke its notice of repurchase of the Option or the Option Shares
either in whole or to the extent of the prohibition, whereupon Issuer shall
promptly (i) deliver to such Holder and/or Owner, as appropriate, that portion
of the Option Purchase Price or the Option Share Repurchase Price that Issuer
is not prohibited from delivering; and (ii) deliver, as appropriate, either (A)
to such Holder, a new Stock Option Agreement evidencing the right of such
Holder to purchase that number of shares of Common Stock obtained by
multiplying the number of shares of Common Stock for which the surrendered
Stock Option Agreement was exercisable at the time of delivery of the notice of
repurchase by a fraction, the numerator of which is the Option Repurchase Price
less the portion thereof theretofore delivered to the Holder and the
denominator of which is the Option Repurchase Price, or (B) to such Owner, a
certificate for the Option Shares it is then so prohibited from repurchasing.

13. Remedy. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party hereto and
that the obligations of the parties hereto shall be enforceable by either party
hereto through injunctive or other equitable relief.

14. Severability. If any term, provision, covenant or restriction contained
in this Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this
Agreement shall remain in full force and effect, and shall in no way be
affected, impaired or invalidated. If for any reason such court or regulatory
agency determines that the Holder is not permitted to acquire the full number
of shares of Common Stock provided in Section 1(a) hereof (as adjusted pursuant
to Section 1(b) or 5 hereof), it is the express intention of Issuer to allow
the Holder to acquire such lesser number of shares as may be permissible,
without any amendment or modification hereof.

15. Notice. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when given in accordance with
Section 8.5 of the Merger Agreement.

16. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, irrespective of the
principles of conflict of laws thereof.

17. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.

18. Expenses. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder,
including fees and expenses of its own financial consultants, investment
bankers, accountants and counsel.

19. Entire Agreement; Etc. Except as otherwise expressly provided herein or
in the Merger Agreement, this Agreement contains the entire agreement between
the parties with respect to the transactions contemplated hereunder and
supersedes all prior arrangements or understandings with respect thereof,
written or oral. The terms and conditions of this Agreement shall inure to the
benefit of and be binding upon the parties hereto and their respective
successors and permitted assigns. Nothing in this Agreement, expressed or
implied, is intended to confer upon any party, other than the parties hereto,
and their respective successors and permitted assigns, any rights, remedies,
obligations or liabilities under or by reason of this Agreement, except as
expressly provided herein.

B-8

IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized, all as of the
date first above written.

First Liberty Bank Corp.

/s/ William M. Davis
By:__________________________________
Name: William M. Davis
Title: President

Community Bank System, Inc.

/s/ Sanford A. Belden
By:__________________________________
Name: Sanford A. Belden
Title: President and Chief
Executive Officer

B-9

ANNEX C

FORM OF FAIRNESS OPINION

[Letterhead of Berwind Financial, L.P.]

[ ], 2001

Board of Directors
First Liberty Bank Corp.
645 Washington Avenue
P.O. Box 39
Jermyn, Pennsylvania 18433

Members of the Board:

You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the outstanding shares of the common stock (the
"Shares") of First Liberty Bank Corp. ("First Liberty") of the exchange ratio
in the proposed merger by and between First Liberty and Community Bank System,
Inc. ("Community"). The terms of the proposed merger (the "Proposed Merger") by
and between Community and First Liberty are set forth in the Agreement and Plan
of Merger dated as of November 29, 2000 (the "Merger Agreement") and provide
that each Share will be converted into the right to receive 0.56 shares of
common stock of Community (the "Exchange Ratio"), with cash paid in lieu of any
fractional shares.

Berwind Financial, L.P., as part of its investment banking business,
regularly is engaged in the valuation of assets, securities and companies in
connection with various types of asset and security transactions, including
mergers, acquisitions, private placements and valuations for various other
purposes, and in the determination of adequate consideration in such
transactions.

In arriving at our opinion, we have, among other things: (i) reviewed the
historical financial performance, current financial position and general
prospects of First Liberty and Community and reviewed certain internal
financial analyses and forecasts prepared by the management of First Liberty
and Community, (ii) reviewed the Merger Agreement, (iii) reviewed and analyzed
the stock market performance of First Liberty and Community, (iv) studied and
analyzed the consolidated financial and operating data of First Liberty and
Community, (v) considered the terms and conditions of the Proposed Merger
between First Liberty and Community as compared with the terms and conditions
of comparable bank, bank holding company and financial holding company mergers
and acquisitions, (vi) met and/or communicated with certain members of First
Liberty's and Community's senior management to discuss their respective
operations, historical financial statements and future prospects, (vii)
reviewed this joint proxy statement/prospectus, and (viii) conducted such other
financial analyses, studies and investigations as we deemed appropriate.

Our opinion is given in reliance on information and representations made or
given by First Liberty and Community, and their respective officers, directors,
auditors, counsel and other agents, and on filings, releases and other
information issued by First Liberty and Community including financial
statements, financial projections, and stock price data as well as certain
information from recognized independent sources. We have not independently
verified the information concerning First Liberty and Community nor other data
which we have considered in our review and, for purposes of the opinion set
forth below, we have assumed and relied upon the accuracy and completeness of
all such information and data. We have not conducted any valuation or appraisal
of any assets or liabilities of First Liberty or Community, nor have any
valuations or appraisals been provided to us. Additionally, we assume that the
Proposed Merger is, in all respects, lawful under applicable law.

With regard to financial and other information relating to the general
prospects of First Liberty or Community, we have assumed that such information
has been reasonably prepared and reflects the best

C-1

currently available estimates and judgment of the management of First Liberty
and Community as to their most likely future performance and the cost savings
and other potential synergies (including the amount, timing and achievability
thereof) anticipated to result from the Proposed Merger. For First Liberty and
Community, we have assumed the allowance for loan losses indicated on the
balance sheets of each entity is adequate to cover such losses; we have not
reviewed credit files of either First Liberty or Community. Also, in rendering
our opinion, we have assumed that in the course of obtaining the necessary
regulatory approvals for the Proposed Merger no conditions will be imposed that
will have a material adverse effect on the contemplated benefits of the
Proposed Merger to First Liberty or Community.

Our opinion is based upon information provided to us by the management of
First Liberty and Community, as well as market, economic, financial and other
conditions as they exist and can be evaluated only as of the date hereof and
speaks to no other period. Our opinion pertains only to the financial
consideration to be received by First Liberty in the Proposed Merger, is for
the information of First Liberty's Board of Directors in connection with its
evaluation of the Proposed Merger and does not constitute a recommendation to
the Board of First Liberty and does not constitute a recommendation to First
Liberty shareholders as to how such shareholders should vote on the Proposed
Merger. We are not expressing any opinion as to the actual value of Community
common stock when issued pursuant to the Proposed Merger or the prices at which
Community common stock will trade subsequent to the Proposed Merger.

Based on the foregoing, it is our opinion that, as of the date hereof that
the Exchange Ratio is fair, from a financial point of view, to the holders of
Shares.

Sincerely,

BERWIND FINANCIAL, L.P.

C-2

ANNEX D

FORM OF FAIRNESS OPINION

[JANNEY MONTGOMERY SCOTT LLC LETTERHEAD]

[ ], 2001

The Board of Directors
Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, NY 13214

Members of the Board:

Community Bank System, Inc. ("Community") and First Liberty Bank Corp.
("Liberty") have entered into an Agreement and Plan of Merger ("Merger
Agreement") providing for the merger of Liberty with and into Community (the
"Merger"). The proposed consideration is outlined in the Merger Agreement
dated November 29, 2000. You have asked our opinion, as of the date hereof,
whether the Exchange Ratio pursuant to the Merger Agreement is fair, from a
financial point of view, to the shareholders of Community.

Pursuant to the Merger Agreement, 0.56 shares of Community Common Stock
shall be exchanged for each share of Liberty Common Stock ("Exchange Ratio").

Janney Montgomery Scott LLC, as part of its investment banking business, is
engaged in the valuation of financial institutions and their securities in
connection with mergers and acquisitions. In addition, in the ordinary course
of our business as a broker-dealer, we may, from time to time, have a long or
short position in, and buy or sell, debt or equity securities of Community or
Liberty for our own account or for the accounts of our customers.
Additionally, we have received a fee for rendering this opinion.

In rendering our opinion, we have, among other things:

(a) reviewed the historical financial performances, current financial
positions and general prospects of Community and Liberty;

(b) considered the proposed financial terms of the Merger and have
examined the projected consequences of the Merger with respect to, among
other things, market value, earnings and tangible book value per share of
Community Common Stock;

(c) to the extent deemed relevant, analyzed selected public information
of certain other banks and bank holding companies and compared Community
and Liberty from a financial point of view to these other banks and bank
holding companies;

(d) reviewed the historical market price ranges and trading activity
performance of Common Stock of Community and Liberty;

(e) reviewed publicly-available information such as annual reports, SEC
filings and research reports;

(f) compared the terms of the Merger with the terms of certain other
comparable transactions to the extent information concerning such
acquisitions was publicly available;

(g) discussed with certain members of senior management of Community and
Liberty the strategic aspects of the Merger, including estimated cost
savings from the Merger;

(h) reviewed the Merger Agreement; and

(i) performed such other analyses and examinations as we deemed
necessary.

D-1

We have relied upon and assumed the accuracy and completeness of all
information provided to us by Community and Liberty or publicly available and
we have not independently verified such information. We have relied upon the
management of Community as to the reasonableness and achievability of the
financial and operational forecasts and projections, and the assumptions and
bases therefor, provided to us, and we have assumed that such forecasts and
projections reflect the best currently available estimates and judgements of
such management.

Our conclusion is rendered on the basis of market, economic and other
conditions prevailing as of the date hereof and on the conditions and
prospects, financial and otherwise, of Community and Liberty as they exist and
are known to us on the date hereof. Furthermore, this opinion does not
represent our opinion as to what the value of Community necessarily will be
when the Community Common Stock is issued to Liberty shareholders upon
consummation of the Merger. In addition, we express no recommendation as to how
the shareholders of Community should vote at the shareholders meeting held in
connection with the Merger.

On the basis of and subject to the foregoing, we are of the opinion that as
of the date hereof, the Exchange Ratio pursuant to the Merger Agreement is
fair, from a financial point of view, to the shareholders of Community.

Very truly yours,

Janney Montgomery Scott LLC

D-2

ANNEX E

SECTION 1930 OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988

Section 1930. Dissenters rights.

(a) General rule.--If any shareholder of a domestic business corporation
that is to be a party to a merger or consolidation pursuant to a plan of merger
or consolidation objects to the plan of merger or consolidation and complies
with the provisions of Subchapter D of Chapter 15/1/ (relating to dissenters
rights), the shareholder shall be entitled to the rights and remedies of
dissenting shareholders therein provided, if any. See also section 1906(c)
(relating to dissenters rights upon special treatment).

(b) Plans adopted by directors only.--Except as otherwise provided pursuant
to section 1571(c) (relating to grant of optional dissenters rights),
Subchapter D of Chapter 15 shall not apply to any of the shares of a
corporation that is a party to a merger or consolidation pursuant to section
1924(b)(1)(i) (relating to adoption by board of directors).

(c) Cross references.--See sections 1571(b) (relating to exceptions) and
1904 (relating to de facto transaction doctrine abolished).
- --------
/1/ 15 Pa. C.S.A. Section 1571 et seq.

E-1

SUBCHAPTER D OF CHAPTER 15 OF THE
PENNSYLVANIA BUSINESS CORPORATION LAW OF 1988

Subchapter D. Dissenters Rights

Section 1571. Application and effect of subchapter.

(a) General rule.--Except as otherwise provided in subsection (b), any
shareholder of a business corporation shall have the right to dissent from,
and to obtain payment of the fair value of his shares in the event of, any
corporate action, or to otherwise obtain fair value for his shares, where this
part expressly provides that a shareholder shall have the rights and remedies
provided in this subchapter. See:

Section 1906(c) (relating to dissenters rights upon special treatment).

Section 1930 (relating to dissenters rights).

Section 1931(d) (relating to dissenters rights in share exchanges).

Section 1932(c) (relating to dissenters rights in asset transfers).

Section 1952(d) (relating to dissenters rights in division).

Section 1962(c) (relating to dissenters rights in conversion).

Section 2104(b) (relating to procedure).

Section 2324 (relating to corporation option where a restriction on
transfer of a security is held invalid).

Section 2325(b) (relating to minimum vote requirement).

Section 2704(c) (relating to dissenters rights upon election).

Section 2705(d) (relating to dissenters rights upon renewal of election).

Section 2907(a) (relating to proceedings to terminate breach of qualifying
conditions).

Section 7104(b)(3) (relating to procedure).

(b) Exceptions.--

(1) Except as otherwise provided in paragraph (2), the holders of the
shares of any class or series of shares that, at the record date fixed to
determine the shareholders entitled to notice of and to vote at the meeting
at which a plan specified in any of section 1930, 1931(d), 1932(c) or
1952(d) is to be voted on, are either:

(i) listed on a national securities exchange; or

(ii) held of record by more than 2,000 shareholders;

shall not have the right to obtain payment of the fair value of any such
shares under this subchapter.

(2) Paragraph (1) shall not apply to and dissenters rights shall be
available without regard to the exception provided in that paragraph in the
case of:

(i) Shares converted by a plan if the shares are not converted solely
into shares of the acquiring, surviving, new or other corporation or
solely into such shares and money in lieu of fractional shares.

(ii) Shares of any preferred or special class unless the articles,
the plan or the terms of the transaction entitle all shareholders of the
class to vote thereon and require for the adoption of the plan or the
effectuation of the transaction the affirmative vote of a majority of
the votes cast by all shareholders of the class.

E-2

(iii) Shares entitled to dissenters rights under section 1906(c)
(relating to dissenters rights upon special treatment).

(3) The shareholders of a corporation that acquires by purchase, lease,
exchange or other disposition all or substantially all of the shares,
property or assets of another corporation by the issuance of shares,
obligations or otherwise, with or without assuming the liabilities of the
other corporation and with or without the intervention of another
corporation or other person, shall not be entitled to the rights and
remedies of dissenting shareholders provided in this subchapter regardless
of the fact, if it be the case, that the acquisition was accomplished by
the issuance of voting shares of the corporation to be outstanding
immediately after the acquisition sufficient to elect a majority or more of
the directors of the corporation.

(c) Grant of optional dissenters rights.--The bylaws or a resolution of the
board of directors may direct that all or a part of the shareholders shall have
dissenters rights in connection with any corporate action or other transaction
that would otherwise not entitle such shareholders to dissenters rights.

(d) Notice of dissenters rights.--Unless otherwise provided by statute, if a
proposed corporate action that would give rise to dissenters rights under this
subpart is submitted to a vote at a meeting of shareholders, there shall be
included in or enclosed with the notice of meeting:

(1) A statement of the proposed action and a statement that the
shareholders have a right to dissent and obtain payment of the fair value
of their shares by complying with the terms of this subchapter; and

(2) A copy of this subchapter.

(e) Other statutes.--The procedures of this subchapter shall also be
applicable to any transaction described in any statute other than this part
that makes reference to this subchapter for the purpose of granting dissenters
rights.

(f) Certain provisions of articles ineffective.--This subchapter may not be
relaxed by any provision of the articles.

(g) Cross references.--See sections 1105 (relating to restriction on
equitable relief), 1904 (relating to de facto transaction doctrine abolished)
and 2512 (relating to dissenters rights procedure).

Section 1572. Definitions.

The following words and phrases when used in this subchapter shall have the
meanings given to them in this section unless the context clearly indicates
otherwise:

"Corporation." The issuer of the shares held or owned by the dissenter
before the corporate action or the successor by merger, consolidation,
division, conversion or otherwise of that issuer. A plan of division may
designate which of the resulting corporations is the successor corporation for
the purposes of this subchapter. The successor corporation in a division shall
have sole responsibility for payments to dissenters and other liabilities under
this subchapter except as otherwise provided in the plan of division.

"Dissenter." A shareholder or beneficial owner who is entitled to and does
assert dissenters rights under this subchapter and who has performed every act
required up to the time involved for the assertion of those rights.

"Fair value." The fair value of shares immediately before the effectuation
of the corporate action to which the dissenter objects taking into account all
relevant factors, but excluding any appreciation or depreciation in
anticipation of the corporate action.

"Interest." Interest from the effective date of the corporate action until
the date of payment at such rate as is fair and equitable under all of the
circumstances, taking into account all relevant factors including the average
rate currently paid by the corporation on its principal bank loans.

E-3

Section 1573. Record and beneficial holders and owners.

(a) Record holders of shares.--A record holder of shares of a business
corporation may assert dissenters rights as to fewer than all of the shares
registered in his name only if he dissents with respect to all the shares
beneficially owned by any one person and discloses the name and address of the
person or persons on whose behalf he dissents. In that event, his rights shall
be determined as if the shares as to which he has dissented and his other
shares were registered in the names of different shareholders.

(b) Beneficial owners of shares.--A beneficial owner of shares of a business
corporation who is not the record holder may assert dissenters rights with
respect to shares held on his behalf and shall be treated as a dissenting
shareholder under the terms of this subchapter if he submits to the corporation
not later than the time of the assertion of dissenters rights a written consent
of the record holder. A beneficial owner may not dissent with respect to some
but less than all shares of the same class or series owned by the owner,
whether or not the shares so owned by him are registered in his name.

Section 1574. Notice of intention to dissent.

If the proposed corporate action is submitted to a vote at a meeting of
shareholders of a business corporation, any person who wishes to dissent and
obtain payment of the fair value of his shares must file with the corporation,
prior to the vote, a written notice of intention to demand that he be paid the
fair value of his shares if the proposed action is effectuated, must effect no
change in the beneficial ownership of his shares from the date of such filing
continuously through the effective date of the proposed action and must refrain
from voting his shares in approval of such action. A dissenter who fails in any
respect shall not acquire any right to payment of the fair value of his shares
under this subchapter. Neither a proxy nor a vote against the proposed
corporate action shall constitute the written notice required by this section.

Section 1575. Notice to demand payment.

(a) General rule.--If the proposed corporate action is approved by the
required vote at a meeting of shareholders of a business corporation, the
corporation shall mail a further notice to all dissenters who gave due notice
of intention to demand payment of the fair value of their shares and who
refrained from voting in favor of the proposed action. If the proposed
corporate action is to be taken without a vote of shareholders, the corporation
shall send to all shareholders who are entitled to dissent and demand payment
of the fair value of their shares a notice of the adoption of the plan or other
corporate action. In either case, the notice shall:

(1) State where and when a demand for payment must be sent and
certificates for certificated shares must be deposited in order to obtain
payment.

(2) Inform holders of uncertificated shares to what extent transfer of
shares will be restricted from the time that demand for payment is
received.

(3) Supply a form for demanding payment that includes a request for
certification of the date on which the shareholder, or the person on whose
beneficial shareholder dissents, acquired beneficial ownership of the
shares.

(4) Be accompanied by a copy of this subchapter.

(b) Time for receipt of demand for payment.--The time set for receipt of the
demand and deposit of certificated shares shall be not less than 30 days from
the mailing of the notice.

Section 1576. Failure to comply with notice to demand payment, etc.

(a) Effect of failure of shareholder to act.--A shareholder who fails to
timely demand payment, or fails (in the case of certificated shares) to timely
deposit certificates, as required by a notice pursuant to section 1575

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(relating to notice to demand payment) shall not have any right under this
subchapter to receive payment of the fair value of his shares.

(b) Restriction on uncertificated shares.--If the shares are not represented
by certificates, the business corporation may restrict their transfer from the
time of receipt of demand for payment until effectuation of the proposed
corporate action or the release of restrictions under the terms of section
1577(a) (relating to failure to effectuate corporate action).

(c) Rights retained by shareholder.--The dissenter shall retain all other
rights of a shareholder until those rights are modified by effectuation of the
proposed corporate action.

Section 1577. Release of restrictions or payment for shares.

(a) Failure to effectuate corporate action.--Within 60 days after the date
set for demanding payment and depositing certificates, if the business
corporation has not effectuated the proposed corporate action, it shall return
any certificates that have been deposited and release uncertificated shares
from any transfer restrictions imposed by reason of the demand for payment.

(b) Renewal of notice to demand payment.--When uncertified shares have been
released from transfer restrictions and deposited certificates have been
returned, the corporation may at any later time send a new notice conforming to
the requirements of section 1575 (relating to notice to demand payment), with
like effect.

(c) Payment of fair value of shares.--Promptly after effectuation of the
proposed corporate action, or upon timely receipt of demand for payment if the
corporate action has already been effectuated, the corporation shall either
remit to dissenters who have made demand and (if their shares are certificated)
have deposited their certificates the amount that the corporation estimates to
be the fair value of the shares, or give written notice that no remittance
under this section will be made. The remittance or notice shall be accompanied
by:

(1) The closing balance sheet and statement of income of the issuer of
the shares held or owned by the dissenter for a fiscal year ending not more
than 16 months before the date of remittance or notice together with the
latest available interim financial statements.

(2) A statement of the corporation's estimate of the fair value of the
shares.

(3) A notice of the right of the dissenter to demand payment or
supplemental payment, as the case may be, accompanied by a copy of this
subchapter.

(d) Failure to make payment.--If the corporation does not remit the amount
of its estimate of the fair value of the shares as provided by subsection (c),
it shall return any certificates that have been deposited and release
uncertificated shares from any transfer restrictions imposed by reason of the
demand for payment. The corporation may make a notation on any such certificate
or on the records of the corporation relating to any such uncertificated shares
that such demand has been made. If shares with respect to which notation has
been so made shall be transferred, each new certificate issued therefor or the
records relating to any transferred uncertificated shares shall bear a similar
notation, together with the name of the original dissenting holder or owner of
such shares. A transferee of such shares shall not acquire by such transfer any
rights in the corporation other than those which the original dissenter had
after making demand for payment of their fair value.

Section 1578. Estimate by dissenter of fair value of shares.

(a) General rule.--If the business corporation gives notice of its estimate
of the fair value of the shares, without remitting such amount, or remits
payment of its estimate of the fair value of a dissenter's shares as permitted
by section 1577(c) (relating to payment of fair value of shares) and the
dissenter believes that the amount stated or remitted is less than the fair
value of his shares, he may send to the corporation his own estimate of the
fair value of the shares, which shall be deemed a demand for payment of the
amount or the deficiency.

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(b) Effect of failure to file estimate.--Where the dissenter does not file
his own estimate under subsection (a) within 30 days after the mailing by the
corporation of its remittance or notice, the dissenter shall be entitled to no
more than the amount stated in the notice or remitted to him by the
corporation.

Section 1579. Valuation proceedings generally.

(a) General rule.--Within 60 days after the latest of:

(1) Effectuation of the proposed corporate action;

(2) Timely receipt of any demands for payment under section 1575
(relating to notice to demand payment); or

(3) Timely receipt of any estimates pursuant to section 1578 (relating
to estimate by dissenter of fair value of shares);

if any demands for payment remain unsettled, the business corporation may file
in court an application for relief requesting that the fair value of the shares
be determined by the court.

(b) Mandatory joinder of dissenters.--All dissenters, wherever residing,
whose demands have not been settled shall be made parties to the proceeding as
in an action against their shares. A copy of the application shall be served on
each such dissenter. If a dissenter is a nonresident, the copy may be served on
him in the manner provided or prescribed by or pursuant to 42 Pa. C.S. Ch. 53
(relating to bases of jurisdiction and interstate and international procedure).

(c) Jurisdiction of the court.--The jurisdiction of the court shall be
plenary and exclusive. The court may appoint an appraiser to receive evidence
and recommend a decision on the issue of fair value. The appraiser shall have
such power and authority as may be specified in the order of appointment or in
any amendment thereof.

(d) Measure of recovery.--Each dissenter who is made a party shall be
entitled to recover the amount by which the fair value of his shares is found
to exceed the amount, if any, previously remitted, plus interest.

(e) Effect of corporation's failure to file application.--If the corporation
fails to file an application as provided in subsection (a), any dissenter who
made a demand and who has not already settled his claim against the corporation
may do so in the name of the corporation at any time within 30 days after the
expiration of the 60-day period. If a dissenter does not file an application
within the 30-day period, each dissenter entitled to file an application shall
be paid the corporation's estimate of the fair value of the shares and no more,
and may bring an action to recover any amount not previously remitted.

Section 1580. Costs and expenses of valuation proceedings.

(a) General rule.--The costs and expenses of any proceeding under section
1579 (relating to valuation proceedings generally) including the reasonable
compensation and expenses of the appraiser appointed by the court, shall be
determined by the court and assessed against the business corporation except
that any part of the costs and expenses may be apportioned and assessed as the
court deems appropriate against all or some of the dissenters who are parties
and whose action in demanding supplemental payment under section 1578 (relating
to estimate by dissenter of fair value of shares) the court finds to be
dilatory, obdurate, arbitrary, vexatious or in bad faith.

(b) Assessment of counsel fees and expert fees where lack of good faith
appears.--Fees and expenses of counsel and of experts for the respective
parties may be assessed as the court deems appropriate against the corporation
and in favor of any or all dissenters if the corporation failed to comply
substantially with the requirements of this subchapter and may be assessed
against either the corporation or a dissenter, in favor of any other party, if
the court finds that the party against whom the fees and expenses are assessed
acted in bad

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faith or in a dilatory, obdurate, arbitrary or vexatious manner in respect to
the rights provided by this subchapter.

(c) Award of fees for benefits to other dissenters.--If the court finds that
the services of counsel for any dissenter were of substantial benefit to other
dissenters similarly situated and should not be assessed against the
corporation, it may award to those counsel reasonable fees to be paid out of
the amounts awarded to the dissenters who were benefited.

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PART II:

INFORMATION NOT REQUIRED IN THE PROSPECTUS

Item 20. Indemnification of Directors and Officers

Section 145 of the Delaware General Corporation Law authorizes a corporation
to indemnify any director, officer, employee or other agent of the corporation.

The Registrant's By-laws provide indemnity to the Registrant's directors and
officers in such capacity or as directors or officers of a wholly-owned
subsidiary of the Registrant for liability resulting from judgments, fines,
expenses or settlement amounts actually and reasonably incurred in connection
with any action brought against such person in such capacity to the fullest
extent and in the manner set forth in and permitted by the Delaware General
Corporation Law, and any other applicable law, as from time to time in effect.
Under Delaware law and the By-laws, no indemnification may be provided for any
person with respect to any matter as to which he or she shall have been
adjudicated in any proceeding not to have acted in good faith in the reasonable
belief that his or her action was in the best interests of the Registrant or of
such subsidiary.

In addition, as permitted under Delaware law, the Registrant maintains
liability insurance covering directors and officers of the Registrant and its
subsidiaries.

Item 21. Exhibits and Financial Statement Schedules

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

Exhibit
Number Description of Exhibit
------- ----------------------

2.1 Agreement and Plan of Merger, dated November 29, 2000, as amended, by
and between the Registrant and First Liberty Bank Corp. (1)

3.1 Certificate of Incorporation, as amended, of the Registrant (2)

3.2 Bylaws, as amended, of the Registrant (2)

5.1 Opinion of Bond, Schoeneck & King, LLP as to the validity of the
securities being registered

8.1 Opinion of PricewaterhouseCoopers LLP as to tax matters

10.1 Stock Option Agreement, dated November 29, 2000, by and between the
Registrant and First Liberty Bank Corp. (3)

10.2 Form of Voting Agreement by and between the Registrant and the
directors and executive officers of First Liberty Bank Corp. (4)

10.3 Form of Employment Agreement by and among the Registrant, Community
Bank, N.A. and Steven R. Tokach

10.4 Form of Employment Agreement by and among the Registrant, Community
Bank, N.A. and Joseph R. Solfanelli

10.5 Form of Consulting Agreement by and between Community Bank, N.A. and
William M. Davis

23.1 Consent of PricewaterhouseCoopers LLP

23.2 Consent of KPMG LLP

23.3 Consent of Bond, Schoeneck & King, LLP (included in Exhibit 5.1)

23.4 Consent of PricewaterhouseCoopers LLP (included in Exhibit 8.1)

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Exhibit
Number Description of Exhibit
------- ----------------------

23.5 Consent of Berwind Financial, L.P.

23.6 Consent of Janney Montgomery Scott LLC

23.7 Consent of Kronick Kalada Berdy & Co.

24.1 Power of Attorney (included in signature page)

99.1 Form of proxy card for the special meeting of the stockholders of the
Registrant

99.2 Form of proxy card for the special meeting of the shareholders of
First Liberty Bank Corp.

99.3 Consent of Saul Kaplan pursuant to Rule 438 promulgated under the
Securities Act

99.4 Consent of Peter A. Sabia pursuant to Rule 438 promulgated under the
Securities Act

99.5 Consent of Harold Kaplan pursuant to Rule 438 promulgated under the
Securities Act

- --------
(1) Attached as Annex A to the joint proxy statement/prospectus included in
this Registration Statement on Form S-4.
(2) Incorporated by reference to the exhibit with the same exhibit number filed
with the Registration Statement on Form S-4 (Registration No. 333-48374)
filed by the Registrant on October 20, 2000.
(3) Attached as Annex B to the joint proxy statement/prospectus included in
this Registration Statement on Form S-4.
(4) Incorporated by reference to Exhibit 99.1 to the Current Report on Form 8-K
filed by the Registrant on December 6, 2000.

(b) Not applicable.

(c) Forms of fairness opinions of Berwind Financial, L.P. and Janney
Montgomery Scott LLC are attached as Annex C and Annex D, respectively, to the
joint proxy statement/prospectus included in this Registration Statement on
Form S-4.

Item 22. Undertakings

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 Section 13(a) or Section 15(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.

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.

The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of

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receipt of such request, and to send the incorporated documents by first class
mail or other equally prompt means. This includes information contained in
documents filed subsequent to the effective date of the registration statement
through the date of responding to the request.

The undersigned Registrant hereby undertakes to supply by means of a post-
effective amendment all information concerning a transaction, and the company
being acquired involved herein, that was not the subject of and included in the
registration statement when it became effective.

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SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement or amendment to be signed on its
behalf by the undersigned, thereunto duly authorized, in DeWitt, New York on
this 5th day of February, 2001.

Community Bank System, Inc.

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

POWER OF ATTORNEY

Each person whose signature appears below hereby appoints each of Sanford A.
Belden and David G. Wallace, severally, acting alone and without the other, his
true and lawful attorney-in-fact with the authority to execute in the name of
each such person, any and all amendments (including without limitation, post-
effective amendments) to this Registration Statement on Form S-4, to sign any
and all additional registration statements relating to the same offering of
securities as this Registration Statement that are filed pursuant to Rule
462(b) of the Securities Act, and to file such registration statements with the
Securities and Exchange Commission, together with any exhibits thereto and
other documents therewith, necessary or advisable to enable the registrant to
comply with the Securities Act, and any rules, regulations and requirements of
the Securities and Exchange Commission in respect thereof, which amendments may
make such other changes in the Registration Statement as the aforesaid
attorney-in-fact executing the same deems appropriate.

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

Signature Title Date
--------- ----- ----

/s/ Sanford A. Belden Director, President and February 5, 2001
______________________________________ Chief Executive Officer
Sanford A. Belden (Principal Executive
Officer)

/s/ David G. Wallace Treasurer February 5, 2001
______________________________________ (Principal Financial
David G. Wallace Officer)

/s/ Charles M. Ertel Assistant Treasurer February 5, 2001
______________________________________ (Principal Accounting
Charles M. Ertel Officer)

/s/ John M. Burgess Director February 5, 2001
______________________________________
John M. Burgess

/s/ William M. Dempsey Director February 5, 2001
______________________________________
William M. Dempsey

/s/ Nicholas A. DiCerbo Director February 5, 2001
______________________________________
Nicholas A. DiCerbo

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Signature Title Date
--------- ----- ----

/s/ James A. Gabriel Director February 5, 2001
______________________________________
James A. Gabriel

/s/ Lee T. Hirschey Director February 5, 2001
______________________________________
Lee T. Hirschey

/s/ David C. Patterson Director February 5, 2001
______________________________________
David C. Patterson

/s/ William N. Sloan Director February 5, 2001
______________________________________
William N. Sloan

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