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, 2004 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 001-13695

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 29, 2005
/s/ Scott Kingsley
-------------------------------------
Scott Kingsley
Executive Vice President and Chief
Financial Officer

Appendix I

Financial Statements

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

December 31, 2004 and 2003

Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Index
December 31, 2004 and 2003
--------------------------------------------------------------------------------

Page(s)

Report of Independent Registered Public Accounting Firm ................................. 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

To the Participants and Administrators of the
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 (the "Plan")
at December 31, 2004 and 2003, and the changes in net assets available for
benefits for the years ended December 31, 2004 and 2003 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).
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
June 16, 2005

Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Statements of Net Assets Available for Benefits
December 31, 2004 and 2003
--------------------------------------------------------------------------------

2004 2003
---- ----
Assets
Investments, at fair value:
Mutual funds $23,165,547 $18,093,776
Community Bank System, Inc. common stock 21,857,681 16,552,974
Collective trust fund 10,825,829 9,011,419
Participant loans 1,444,780 1,336,423
Self-directed brokerage 246,231 231,668
Money market fund 134,568 --
----------- -----------
Total investments 57,674,636 45,226,260

Receivable from plan merger (Note F) -- 3,391,468
Contributions receivable - employee -- 81,547
Contributions receivable - employer 657,991 584,348
----------- -----------

Net assets available for benefits $58,332,627 $49,283,623
=========== ===========

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

Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Statements of Changes in Net Assets Available for Benefits
Years Ended December 31, 2004 and 2003
--------------------------------------------------------------------------------

2004 2003
---- ----

Additions
Employee contributions $ 3,116,826 $ 2,871,482
Employer contributions 1,591,234 1,321,959
Interest income 74,615 138,073
Dividend income 1,365,073 1,115,367
Net appreciation in the fair value of investments 4,828,599 9,246,282
Transfer from merged plan (Note F) 884,184 3,391,468
----------- -----------
Total additions 11,860,531 18,084,631
----------- -----------

Deductions
Benefit payments 2,736,134 2,026,077
Administrative fees 75,393 76,491
----------- -----------
Total deductions 2,811,527 2,102,568
----------- -----------

Net increase in net assets available for benefits 9,049,004 15,982,063

Net assets available for benefits
Beginning of Year 49,283,623 33,301,560
----------- -----------

End of Year $58,332,627 $49,283,623
=========== ===========

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

Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Notes to Financial Statements
December 31, 2004 and 2003
--------------------------------------------------------------------------------

A. Description of the Plan

The following description of the Community Bank System, Inc. 401(k)
Employee Stock Ownership 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 covering substantially all
employees of Community Bank System, Inc. (the "Company") who are age 18 or
older. Employees must have one 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 $13,000. Voluntary cash contributions of up to 6% of total eligible
compensation are matched 50% by the Company and such match was $933,211
and $765,430 in 2004 and 2003, respectively. The amount of the Company's
annual discretionary contribution is determined by the Board of Directors,
within certain maximum limitations. In addition, the Company may make
discretionary profit sharing contributions to the Plan, which are
allocated to individual participant accounts. Such voluntary contributions
were $658,023 and $556,529 in 2004 and 2003, respectively.

Participant Accounts

Each participant's account is credited with the participant's contribution
and allocations of the Company's contribution as well as 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 $7,236 and $8,980 for 2004 and 2003,
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.

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 provisions set forth in ERISA. In the
event the Plan terminates, 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 accompanying financial statements are 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 that are traded on a national securities exchange are valued at
the last reported sales price on the last business day of the Plan year.
Shares of mutual funds are valued at the net asset value of shares held by
the Plan at year-end. 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 as well as 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 $258,000 and $173,000, including approximately $185,000 and
$136,000 paid to Benefit Plans Administrative Services, Inc. ("BPA"), in
2004 and 2003, 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 $9,889,437 and
$7,949,961 at December 31, 2004 and 2003, 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
amount 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 Benefits and the Statement of Changes in Net
Assets Available for 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 collective trust 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.

American Funds Washington Mutual Investors Fund Class A - 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.

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

American Funds EuroPacific Growth Fund Class A - 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.

T. Rowe Price Blue Chip Growth 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, 2004 or 2003 are as
follows:

2004 2003
---- ----

Community Bank System, Inc. common stock $21,857,681 $16,552,974
SEI Stable Asset GIC Fund 10,825,829 9,011,419
American Funds Washington Mutual Investors Fund Class A 8,166,459 7,130,530
Federated Total Return Bond Fund 2,998,040 2,843,347
Manager Special Equity Fund 3,226,693 2,586,283

The Plan's investments appreciated in value as follows:

2004 2003
---- ----

Community Bank System, Inc. common stock $ 2,602,117 $ 6,249,776
Mutual funds 2,226,482 2,996,506
----------- -----------
Total net appreciation in fair value of investments $ 4,828,599 $ 9,246,282
=========== ===========

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 $185,000 and $136,000 for
record keeping, trustee and other services in 2004 and 2003, respectively.

The Plan held 773,723 and 675,632 shares of the Plan sponsor's common
stock at December 31, 2004 and 2003, respectively. The cost of these
shares at December 31, 2004 and 2003 is $9,558,394 and $6,814,388,
respectively, and their fair value at December 31, 2004 and 2003 is
$21,857,681 and $16,552,974, respectively. The Company enacted a
two-for-one stock split in the form of a 100% stock dividend paid on April
12, 2004 to shareholders of record on March 17, 2004. Accordingly, all
2003 share amounts have been adjusted to reflect the stock split.

Dividends received on the investment in Community Bank System, Inc. common
stock amounted to $525,798 and $413,814 for the years ended December 31,
2004 and 2003, respectively. The Plan sold 164,375 and 602,196 shares of
Community Bank System, Inc. common stock during 2004 and 2003,
respectively, and purchased 191,968 and 608,478 shares of Community Bank
System, Inc. common stock during 2004 and 2003, 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 May 14, 2004, the Company acquired First Heritage Bank and merged the
First Heritage Bank 401(k) Plan into the Plan. Accordingly, total plan
assets of $884,184 were transferred to the Plan.

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.

Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Schedule of Assets (Held at End of Year)
(Schedule H, Part IV, Item (i))
December 31, 2004
--------------------------------------------------------------------------------

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

Mutual Funds
American Funds Washington Mutual Investors Fund
Class A Mutual fund - 265,317 shares 8,166,459
Managers Special Equity Fund Mutual fund - 35,690 shares 3,226,693
Federated Total Return Bond Fund Mutual fund - 276,572 shares 2,998,040
T. Rowe Price Blue Chip Growth Fund Mutual fund - 84,768 shares 2,621,016
American Funds EuroPacific Growth Fund Class A Mutual fund - 69,890 shares 2,490,186
Dreyfus S&P 500 Index Fund Mutual fund - 60,720 shares 2,141,594
Federated Mid-Cap Index Fund Mutual fund - 72,317 shares 1,521,559
-----------
23,165,547

Common stock of plan sponsor
* Community Bank System, Inc. Common stock - 773,723 shares 21,857,681

Collective Trust Fund
SEI Stable Asset GIC Fund Collective trust fund - 10,825,829 shares $10,825,829

Loan Fund
Participant loans Loan, 5.0% - 10.5% 1,444,780

Self Directed brokerage
TD Waterhouse IDA Account Self-directed brokerage 246,231

Money Market Fund
ReservePlus Money Market Money market fund - 134,568 shares 134,568
-----------
Total investments $57,674,636
-----------

* - Denotes party-in-interest