Edgar Filing: COMMUNITY BANK SYSTEM INC

United States
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, 2003 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.
401(k) Employee Stock Ownership 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

REQUIRED INFORMATION

1. Not applicable

2. Not applicable

3. Not applicable

4. The Community Bank System, Inc. 401(k) Employee Stock Ownership Plan (the
"Plan") is subject to the requirements of the Employee Retirement Income
Security Act of 1974 ("ERISA"). Attached hereto as Appendix I is a copy of
the most recent financial statements of the Plan prepared in accordance
with the financial reporting requirements of ERISA.

Exhibits

(23) Consent of PricewaterhouseCoopers LLP.

Signatures

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.
401(k) Employee Stock Ownership Plan

Community Bank, N. A., Trustee

Dated: June 25, 2004
/s/ Mark E. Tryniski
---------------------------------------
Mark E. Tryniski
Treasurer, Chief Operating Officer and
Chief Financial Officer

Appendix I

Financial Statements

Community Bank System, Inc. 401(k) Employee Stock Ownership Plan

December 31, 2003 and 2002

Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
(formerly the Community Bank System, Inc.
Employee Savings and Retirement Plan)
Notes to Financial Statements
December 31, 2003 and 2002
--------------------------------------------------------------------------------

Page(s)

Report of Independent Auditors .............................................. 1

Financial Statements

Statements of Net Assets Available for Benefits, ............................ 2

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

Notes to Financial Statements ............................................... 4 -8

Supplemental Schedule

Schedule of Assets (Held at End of Year) (Schedule H, Part IV, Item (i)) .... 9

Note: All other schedules are omitted since they are not applicable or are not
required based on the disclosure requirements of the Employee Retirement
Income Security Act of 1974 and applicable regulations issued by the
Department of Labor.

Report of Independent Registered Public Accounting Firm

Compensation Committee and Participants of
Community Bank System, Inc.
401(k) Employee Stock Ownership 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. 401(k) Employee Stock Ownership Plan (formerly
the Community Bank System, Inc. Employee Savings and Retirement Plan) (the
"Plan") at December 31, 2003 and 2002, and the changes in net assets available
for benefits for the years ended December 31, 2003 and 2002 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 the
standards of the Public Company Accounting Oversight Board (United States) and
auditing standards generally accepted in the United States of America. 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, 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

Syracuse, New York
May 28, 2004

2003 2002
Assets
Investments at fair value
Mutual funds $ 27,105,195 $ 21,053,219
Common stock of Plan sponsor 16,552,974 10,605,978
Self directed brokerage 231,668 125,406
Loans to participants 1,336,423 1,057,551
------------ ------------
Total investments 45,226,260 32,842,154
Receivable from plan merger (Note F) 3,391,468 --
Contributions receivable - employee 81,547 --
Contributions receivable - employer 584,348 459,406
------------ ------------
Net assets available for benefits $ 49,283,623 $ 33,301,560
============ ============

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

2003 2002

Additions
Employee contributions $ 2,871,482 $ 3,158,388
Employer contributions 1,321,959 1,162,120
Interest income 138,073 18,818
Dividend income 1,115,367 1,044,084
Net appreciation (depreciation) in the fair value of investments 9,246,282 (767,771)
Transfer from merged plan (Note F) 3,391,468 --
------------ ------------
18,084,631 4,615,639
------------ ------------
Deductions
Benefits paid to participants 2,026,077 1,143,335
Administrative expenses 76,491 73,338
------------ ------------
2,102,568 1,216,673
------------ ------------
Net increase in plan assets 15,982,063 3,398,966
Net assets available for benefits
Beginning of year 33,301,560 29,902,594
------------ ------------
End of year $ 49,283,623 $ 33,301,560
============ ============

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

A. Description of the Plan

The following description of the Community Bank System, Inc. 401(k)
Employee Stock Ownership Plan (formerly 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 also qualifies as an employee stock
ownership plan under the meaning of Section 4975(e)(7) of the Internal
Revenue Code. 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 $12,000. Voluntary cash contributions of up to 6% of total eligible
compensation are matched 50% by the Company and such match was $765,430
and $702,714 in 2003 and 2002, respectively. Within certain maximum
limitations, the amount of the Company's annual discretionary
contributions are determined by the Board of Directors. In addition, the
Company may make discretionary profit sharing contributions to the Plan
which are allocated to individual participant accounts. Such voluntary
contributions were $556,529 and $459,406 in 2003 and 2002, respectively.

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 $8,980
and $9,087 for 2003 and 2002, 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 collateralized 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. If some or all of a
participant's account balance is allocated to the employee stock option
feature of the Plan, that portion of the Plan benefit may be paid in the
form of Company stock. Upon termination of employment, if the account
balance is less than $5,000, the participant will receive a single lump
sum amount equal to the value of his or her account, otherwise, the
participant may elect to defer payment up to age 65. Hardship withdrawals
of up to 100% of employee contributions are available if Internal Revenue
Service guidelines are met.

Plan Termination

Although it has not expressed any intent to do so, the Company 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, which approximates fair value.
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, which
approximates fair value.

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 trade 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.

Administrative Expenses

Certain administrative expenses are paid by the Company. These amounted to
approximately $173,000 and $141,000, including approximately $136,000 and
$104,000 paid to Benefit Plans Administrative Services ("BPA"), in 2003
and 2002, respectively. (See Note D).

Inactive Accounts

Account balances of individuals who have withdrawn from participation in
the Plan were on an accumulated basis of approximately $7,949,961 and
$5,540,627 at December 31, 2003 and 2002, respectively.

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 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. A brief description of these investment
options, as provided by the plan administrator, follows:

Community Bank System, Inc. Employee 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".

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, which approximates fair
value.

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 and 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 individual investment
securities, including equity securities, mutual funds, and bonds.

The fair value of individual investments which represent 5% or more of net
assets available for benefits at either December 31, 2003 or 2002 are as
follows:

2003 2002

Community Bank System, Inc. Common Stock $ 16,552,974 $ 10,605,978
SEI Stable Asset GIC Fund 9,011,419 8,095,573
Washington Mutual Investors Fund 7,130,530 5,418,673
Federated Total Return Bond Fund 2,843,347 2,743,170
Manager Special Equity Fund 2,586,283 1,389,311

The Plan's investments appreciated/(depreciated) in value as follows:

2003 2002

Mutual Funds $ 2,996,506 $ (1,840,959)
Common Stock of Plan Sponsor 6,249,776 1,073,188
------------ ------------
Total net depreciation in fair value of investments 9,246,282 $ (767,771)
============ ============

D. Transactions with Parties-in-Interest

The assets of the Plan are managed by BPA, a subsidiary of Community Bank
System, Inc. The Company paid BPA approximately $136,000 and $104,000 for
record keeping, trustee and other services in 2003 and 2002, respectively.

The Plan held 675,632 and 676,616 shares of the sponsor company common
stock at December 31, 2003 and 2002, respectively. The cost of these
shares at December 31, 2003 and 2002 is $6,814,388 and $5,915,539,
respectively, and their fair value at December 31, 2003 and 2002 is
$16,552,974 and $10,605,978, respectively. On January 21, 2004, the
Company announced a two-for-one stock split to be effected in the form of
a 100% stock dividend paid on April 12, 2004 to shareholders of record on
March 17, 2004. Accordingly, all share amounts have been adjusted to
reflect the stock split.

Dividends received on the investment in Community Bank System, Inc. common
stock amounted to $413,814 and $349,520 for the years ended December 31,
2003 and 2002, respectively. The Plan sold 602,196 and 89,348 shares of
Community Bank System, Inc. common stock during 2003 and 2002,
respectively, and purchased 608,478 and 105,870 shares of Community Bank
System, Inc. common stock during 2003 and 2002, respectively.

E. Income Tax Status

The Plan obtained its most recent determination letter in July 2003, 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 believes that the Plan is currently designed and
being operated in compliance with the applicable requirements of the
Internal Revenue Code.

F. Plan Merger

On November 24, 2003, the Company acquired Grange National Banc Corp.
Effective December 30, 2003, the Grange National Banc Corp. Employee Stock
Ownership Plan with 401(k) provisions was merged into the Plan.
Accordingly, total plan assets of $3,391,468 were transferred to the Plan
in 2004.

(c) Description of investment
including maturity date, rate of
(a) (b) Identify of issue, borrower, interest, collateral, par or (e) Current
lessor or similar party maturity value value

Mutual Funds
SEI Stable Asset GIC Fund Mutual Fund - 9,011,419 shares $ 9,011,419
Washington Mutual Investors Fund Mutual Fund - 247,760 shares 7,130,530
Federated Total Return Bond Fund Mutual Fund - 262,301 shares 2,843,347
Manager Special Equity Fund Mutual Fund - 32,950 shares 2,586,283
Massachusetts Investors Growth Fund Mutual Fund - 163,758 shares 1,853,740
EuroPacific Growth Fund Mutual Fund - 55,794 shares 1,685,537
Dreyfus S&P 500 Index Fund Mutual Fund - 44,561 shares 1,445,117
Federated Mid-Cap Index Fund Mutual Fund - 28,937 shares 549,222
------------
27,105,195
Common stock of plan sponsor
* Community Bank Systems, Inc. Common stock - 675,632 shares 16,552,974
Self directed brokerage
TD Waterhouse IDA Accounts Self-directed brokerage 231,668
Loan Fund
Participants loans 5% - 10-1/2% 1,336,423
------------
Total investments $ 45,226,260
============

* Denotes party-in-interest