Edgar Filing: COMMUNITY BANK SYSTEM INC

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

Form 11-K

(Mark One)

|X| ANNUAL REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED) for the fiscal year ended
December 31, 2002 or

|_| TRANSACTION REPORT PURSUANT TO SECTION 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934 (NO FEE REQUIRED) for the
transaction period from ______________ to ___________________.

Commission File Number 0-11716

A. Full title of the plan and the address of the plan, if different from that
of the issuer named below:

Community Bank System, Inc.
Employee Savings and Retirement Plan
5790 Widewaters Parkway
DeWitt, New York 13214

B. Name of Issuer of the securities held pursuant to the plan and the address
of its principal executive office.

Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, New York 13214

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

COMMUNITY BANK SYSTEM, INC.
EMPLOYEE SAVINGS AND
RETIREMENT PLAN

COMMUNITY BANK, N. A., Trustee

Dated: June 30, 2003 By: /s/Charles M. Ertel
-------------------
Charles M. Ertel,
Chief Accounting Officer

Community Bank System, Inc.
Employee Savings and
Retirement Plan
Financial Statements
December 31, 2002 and 2001

Community Bank System, Inc.
Employee Savings and Retirement Plan
Index
December 31, 2002 and 2001
--------------------------------------------------------------------------------

Page(s)

Report of Independent Auditors ............................................. 2

Financial Statements

Statements of Net Assets Available for Benefits, ........................... 3

Statements of Changes in Net Assets Available for Benefits, ................ 4

Notes to Financial Statements .............................................. 5-8

Supplemental Schedule

Schedule of Assets Held for Investment Purposes, ........................... 9

PricewaterhouseCoopers LLP
One Lincoln Center
Syracuse NY 13202
Telephone (315) 474 8541
Facsimile (315) 473 1385

Report of Independent Auditors

Compensation Committee and Participants of
Community Bank System, Inc.
Employee Savings and Retirement Plan

In our opinion, the accompanying statements of net assets available for benefits
and the related statements of changes in net assets available for benefits
present fairly, in all material respects, the net assets available for benefits
of Community Bank System, Inc. Employee Savings and Retirement Plan (the "Plan")
at December 31, 2002 and 2001, and the changes in net assets available for
benefits for the years then ended in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Plan's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

Our audits were conducted for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule of assets held
for investment purposes is presented for the purpose of additional analysis and
is not a required part of the basic financial statements but is supplementary
information required by the Department of Labor's Rules and Regulations for
Reporting and Disclosure under the Employee Retirement Income Security Act of
1974. This supplemental schedule is the responsibility of the Plan's management.
The supplemental schedule has been subjected to the auditing procedures applied
in the audits of the basic financial statements and, in our opinion, is fairly
stated in all material respects in relation to the basic financial statements
taken as a whole.

/s/ PricewaterhouseCoopers LLP

June 19, 2003

Community Bank System, Inc.
Employee Savings and Retirement Plan
Statements of Net Assets Available for Benefits
December 31, 2002 and 2001
--------------------------------------------------------------------------------

Assets 2002 2001

Investments at fair value:
Mutual funds $21,178,625 $20,517,650
Common stock of Plan sponsor 10,605,978 7,989,756
Loans to participants 1,057,551 920,962

Contributions receivable - employee -- 64,436

Contributions receivable - employer 459,406 409,790
----------- -----------

Net assets available for benefits $33,301,560 $29,902,594
=========== ===========

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

Community Bank System, Inc.
Employee Savings and Retirement Plan
Statements of Changes in Net Assets Available for Benefits
Years Ended December 31, 2002 and 2001
--------------------------------------------------------------------------------

2002 2001

Additions
Employee contributions $ 3,158,388 $ 2,036,935
Employer contributions 1,162,120 947,979
Transfers in from merged plans (Note B) -- 2,561,546
Interest income 18,818 57,192
Dividend income 1,044,084 1,159,245
Net depreciation in the fair value of investments (767,771) (627,363)
------------ ------------

4,615,639 6,135,534
------------ ------------

Deductions
Participant benefits paid 1,143,335 2,202,270
Administrative expenses 73,338 74,276
------------ ------------

1,216,673 2,276,546
------------ ------------

Net increase in plan assets 3,398,966 3,858,988

Net assets available for benefits, beginning of year 29,902,594 26,043,606
------------ ------------

Net assets available for benefits, end of year $ 33,301,560 $ 29,902,594
============ ============

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

Community Bank System, Inc.
Employee Savings and Retirement Plan
Notes to Financial Statements
December 31, 2002 and 2001
--------------------------------------------------------------------------------

A. Description of the Plan

The following description of the Community Bank System, Inc. Employee
Savings and Retirement Plan ("the Plan") provides only general
information. Participants should refer to the Plan agreement for a more
complete description of the Plan's provisions.

General

The Plan is a defined contribution plan which covers substantially all
Community Bank System, Inc. (the "Company") employees who are age eighteen
or older. Employees must have 1 year of service to be eligible for the
Company's contribution. The Plan is subject to the provisions of the
Employment Retirement Income Security Act of 1974 (ERISA).

Contributions

Participants may make voluntary contributions of up to 90% of their total
compensation on a pre-tax or after-tax basis up to a maximum contribution
of $11,000. Voluntary cash contributions of up to 6% of total eligible
compensation are matched 50% by the Company and amounted to $723,732 and
$534,988 in 2002 and 2001, respectively. In addition, the Company may make
discretionary profit sharing contributions to the Plan which are allocated
to individual participant accounts. Such voluntary contributions amounted
to $388,135 and $303,525 in 2002 and 2001, respectively. Within certain
maximum limitations, the amount of the Bank's annual discretionary
contributions are determined by the Board of Directors.

Participant Accounts

Each participant's account is credited with the participant's contribution
and allocations of (a) the Company's contribution and (b) Plan earnings,
and charged with an allocation of administrative expenses. Allocation of
Plan earnings and administrative expenses are based on participant
earnings or account balances, as defined. The benefit to which a
participant is entitled is the benefit that can be provided from the
participant's vested account. Forfeited accounts are allocated annually to
eligible participant accounts based on the ratio of each eligible
participant's compensation to total eligible participant compensation.
Forfeited accounts allocated to eligible participants amounted to $9,087
and $16,628 for 2002 and 2001, respectively.

Vesting

Participants are immediately vested in their contributions and the
Company's discretionary profit sharing contributions. Vesting in the
Company's matching contribution portion plus actual earnings thereon is
based on years of continuous service. A participant is 100 percent vested
after three years of service.

Participant Loans

Participants may borrow from the Plan a minimum of $1,000 up to a maximum
equal to the lesser of $50,000 or 50 percent of their vested account
balance. Loans are secured by the balance in the participant's account and
bear interest at a rate of prime plus two percent.

Payment of Benefits

Normal retirement date for participants under the Plan is the later of age
65 or the completion of 5 years of service. Upon termination of service
due to death, disability or retirement, the participant will receive
either a lump sum amount or installment payments equal to the value of the
participant's vested interest in his or her account.

Plan Termination

Although it has not expressed any intent to do so, the Bank has the right
under the Plan to discontinue contributions at any time and terminate the
Plan subject to the terms of ERISA. In the event of a termination of the
Plan, the net assets of the Plan are to be set aside for participating
employees based upon balances then credited to individual accounts.
Participants shall be vested 100% in the assets so allocated to their
accounts.

B. Significant Accounting Policies

Basis of Accounting

The financial statements included herein have been prepared on an accrual
basis of accounting in accordance with accounting principles generally
accepted in the United States of America.

Investments

Investments are stated at aggregate fair value, except for the SEI Stable
Asset GIC Fund which is stated at cost. Securities which are traded on a
national securities exchange are valued at the last reported sales price
on the last business day of the Plan year. Participant loan receivable
balances are reported at cost.

The Plan presents in the statement of changes in net assets, the net
appreciation (depreciation) in the fair value of its investments which
consists of realized gains or losses and unrealized appreciation
(depreciation) on those investments.

Purchases and sales of securities are recorded on the settlement date.
Gains or losses on sales of securities are based on average cost. Interest
income is recorded on the accrual basis. Dividends are recorded on the
ex-dividend date.

Payment of Benefits

Benefits are recorded when paid.

Inactive Accounts

Account balances of individuals who have withdrawn from participation in
the Plan were approximately $5,540,627 and $4,731,372 at December 31, 2002
and 2001, respectively.

Transfers in From Merged Plans

During 2001, the Company acquired First Liberty Bank Corp. and Citizens
National Bank of Malone. Subsequent to acquisition the defined
contribution plans were terminated and merged into the Company plan.

Use of Estimates

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Risks and Uncertainties

The plan provides for various investment options in combination of mutual
funds and Company stock. Investment securities are exposed to various
risks, such as interest rate, market and credit. Due to the level of risk
associated with certain investment securities and the level of uncertainty
related to changes in the value of investment securities, it is at least
reasonably possible that changes in risk in the near term would materially
affect participants' account balances and the amounts reported in the
statement of net assets available for plan benefits and the statement of
changes in net assets available for plan benefits.

C. Investments

Investments are held within various common funds maintained by the
Community Bank, N.A. Trust Department. Participants, at their discretion,
may allocate contributions and account balances between various investment
options offered by the Plan. The Plan administrator's description of these
options is as follows:

Community Bank System, Inc. Stock Fund and Payroll Stock Ownership Fund -
these Funds invest in the common stock of the Plan sponsor, which is
traded on the New York Stock Exchange under the symbol "CBU".

Guaranteed Investment Contract Fund - invests in the SEI Stable Asset GIC
Fund, a mutual fund that holds primarily a diversified portfolio of stable
value contracts issued by insurance companies and banks. Investments in
the SEI Stable Asset GIC Fund are not marketable securities and are
reported at cost.

Washington Mutual Investors Fund - a mutual fund that invests in common
stocks and securities convertible into such common stocks.

Federated Total Return Bond Fund - a mutual fund seeking to provide total
return by investing primarily in a diversified portfolio of investment
grade fixed income securities.

Manager Special Equity Fund - a mutual fund that invests in equity
securities of small- and medium-sized U.S. companies.

Massachusetts Investors Growth Fund - a mutual fund that invests in common
stocks and securities convertible into common stocks that offer long-term
growth.

EuroPacific Growth Fund - a mutual fund that invests in stocks of issuers
located in Europe or the Pacific Basin.

Dreyfus S&P 500 Index Fund - a mutual fund that invests in equities and
seeks to match the performance of the S&P 500 Composite Stock Price Index.

Federated Mid-Cap Index Fund - a mutual fund primarily that invests in
stocks of U.S. companies.

TD Waterhouse IDA Account - participants select the investment securities
including equity securities, stocks and bonds.

The fair value of individual investments which represent 5% or more of net
assets available for benefits at December 31, 2002 are as follows:

Common Stock of Plan Sponsor,
Community Bank System, Inc. $10,605,978
SEI Stable Asset GIC Fund 8,095,573
Washington Mutual Investors Fund 5,418,673
Federated Total Return Bond Fund 2,743,170

During 2002, the Plan's investments appreciated/(depreciated) in value as
follows:

Mutual Funds $(2,372,745)
Common Stock of Plan Sponsor 1,604,974
-----------
Total net depreciation in fair value of investments $ (767,771)
===========

D. Transactions with Parties-in-Interest

The assets of the Plan are managed by Benefit Plans Administrators
("BPA"), a subsidiary of Community Bank System, Inc. The Bank paid BPA
$73,338 and $73,791 for record keeping, trustee and other services in 2002
and 2001, respectively.

The Plan held 338,308 and 304,953 shares of the sponsor company common
stock at December 31, 2002 and 2001, respectively. The cost of these
shares at December 31, 2002 and 2001 is $5,915,539 and $4,844,351,
respectively, and their fair value at December 31, 2002 and 2001 is
$10,605,978 and $7,989,756, respectively. Dividends received on the
investment in Community Bank System, Inc. common stock amounted to
$349,520 and $305,946 for the years ended December 31, 2002 and 2001,
respectively. The Plan sold 44,674 and 54,620 shares of Community Bank
System, Inc. common stock during 2002 and 2001, respectively, and
purchased 52,935 and 83,301 shares of Community Bank System, Inc. common
stock during 2002 and 2001, respectively.

E. Income Tax Status

The Plan obtained its most recent determination letter on December 27,
1995, in which the Internal Revenue Service stated that the plan, as then
designed, was in compliance with Section 401(a) of the Internal Revenue
Code. The Plan has been amended since receiving the determination letter,
however, the Plan administrator and the Plan's tax counsel believe that
the Plan is currently designed and being operated in compliance with the
applicable requirements of the Internal Revenue Code.

Community Bank System, Inc.
Employee Savings and Retirement Plan
Schedule of Assets Held for Investment Purposes
December 31, 2002
--------------------------------------------------------------------------------

Par Value, Number of
Investment Shares or Interest Rate Fair Value

Community Bank System, Inc. Common Stock - 338,308 shares $ 10,605,978
SEI Stable Asset GIC Fund Guaranteed Investment
Contract - 8,095,573 shares 8,095,573
Washington Mutual Investors Fund Mutual Fund - 230,484 shares 5,418,673
Federated Total Return Bond Fund Mutual Fund - 254,233 shares 2,743,170
Manager Special Equity Fund Mutual Fund - 25,224 shares 1,389,311
Massachusetts Investors Growth Fund Mutual Fund - 135,491 shares 1,250,582
EuroPacific Growth Fund Mutual Fund - 49,066 shares 1,127,043
Dreyfus S&P 500 Index Fund Mutual Fund - 33,451 shares 856,354
Federated Mid-Cap Index Fund Mutual Fund - 12,098 shares 172,513
TD Waterhouse IDA Account 125,406
Participant loans Various 1,057,551
------------
$ 32,842,154
============

CONSENT OF INDEPENDENT AUDITORS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-61916, 333-61672, 333-17011, 333-16635, and
033-60607) of Community Bank System, Inc of our report dated June 19, 2003
relating to the financial statements of the Community Bank System, Inc. Employee
Savings and Retirement Plan which appears in this Form 11-K.

/s/ Pricewaterhousecoopers LLP

Syracuse, New York
June 19, 2003