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
For the fiscal year ended December 31, 2006 or
|_| TRANSACTION REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
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 Dannible & McKee, LLP.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the trustee
(or other persons who administer the employee benefit plan) have duly caused
this annual report to be signed on its behalf by the undersigned, hereunto duly
authorized.
Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Community Bank, N. A., Trustee
Dated: June 28, 2007
/s/ Scott Kingsley
-----------------------------
Scott Kingsley
Executive Vice President and Chief
Financial Officer
Appendix I
COMMUNITY BANK SYSTEM, INC.
401(K) EMPLOYEE STOCK OWNERSHIP PLAN
FINANCIAL STATEMENTS
AND
SUPPLEMENTAL SCHEDULE
* * *
DECEMBER 31, 2006 AND 2005
Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Index
December 31, 2006 and 2005
--------------------------------------------------------------------------------
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
June 26, 2007
To the Participants and Administrators of Community Bank
System, Inc. 401(k) Employee Stock Ownership Plan
We have audited the accompanying statements of net assets available for
benefits of Community Bank System, Inc. 401(k) Employee Stock Ownership Plan
("the Plan") as of December 31, 2006 and 2005 and the related statements of
changes in net assets available for benefits for the years then ended. 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 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. The Plan is not required
to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Plan's internal control over financial
reporting. Accordingly, we express no such opinion. 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, the financial statements referred to above present fairly,
in all material respects, the net assets available for benefits of the Plan as
of December 31, 2006 and 2005, and the changes in net assets available for
benefits for the years then ended in conformity with generally accepted
accounting principles (United States).
Our audits were performed 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 at End of Year as of December 31, 2006, 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 audit 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/ Dannible & McKee, LLP
Dannible & McKee, LLP
Syracuse, New York
Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Statements of Net Assets Available for Benefits
December 31, 2006 and 2005
--------------------------------------------------------------------------------
2006 2005
---- ----
Assets
Investments, at fair value (Notes B and C):
Mutual funds $ 29,648,801 $ 25,795,311
Community Bank System, Inc. common stock 17,216,217 16,199,821
Collective trust fund 14,222,419 12,065,124
Participant loans 1,927,513 1,751,673
Self-directed brokerage 620,068 294,358
Money market fund 360,048 288,273
------------ ------------
Total investments 63,995,066 56,394,560
Contributions receivable - employer 672,285 761,438
------------ ------------
Net assets available for benefits at fair value 64,667,351 57,155,998
Adjustment from fair value to contract value for fully
benefit-responsive investments 374,339 30,768
------------ ------------
Net assets available for benefits $ 65,041,690 $ 57,186,766
============ ============
The accompanying notes are an integral part of the financial statements.
2
Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Statements of Changes in Net Assets Available for Benefits
Years Ended December 31, 2006 and 2005
--------------------------------------------------------------------------------
2006 2005
---- ----
Additions
Employee contributions $ 3,735,218 $ 3,849,739
Employer contributions 1,726,158 1,777,691
Interest income 154,210 87,924
Dividend income 2,718,538 2,060,356
Net appreciation (depreciation) in the fair value of investments 2,298,048 (3,813,500)
Transfer from merged plan (Note F) 5,172,272 --
------------ ------------
Total additions 15,804,444 3,962,210
------------ ------------
Deductions
Benefit payments 7,860,236 5,035,353
Administrative fees 89,284 72,718
------------ ------------
Total deductions 7,949,520 5,108,071
------------ ------------
Net increase (decrease) in net assets available for benefits 7,854,924 (1,145,861)
Net assets available for benefits
Beginning of Year 57,186,766 58,332,627
------------ ------------
End of Year $ 65,041,690 $ 57,186,766
============ ============
The accompanying notes are an integral part of the financial statements.
3
Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Notes to Financial Statements
December 31, 2006 and 2005
--------------------------------------------------------------------------------
A. Description of the Plan
The following description of the Community Bank System, Inc. 401(k)
Employee Stock Ownership 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 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 $15,000 for 2006. Voluntary cash contributions of up to 6% of total
eligible compensation are matched 50% by the Company and such match was
$1,043,113 and $1,016,253 in 2006 and 2005, respectively. The amount of
the Company's annual discretionary profit sharing contribution is
determined by the Board of Directors, within certain maximum limitations.
These discretionary profit sharing contributions to the Plan are allocated
to individual participant accounts. Such discretionary profit sharing
contributions were $683,045 and $761,438 in 2006 and 2005, 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 $2,896 and $27,626 for 2006 and 2005,
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.
4
Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Notes to Financial Statements
December 31, 2006 and 2005
--------------------------------------------------------------------------------
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.
Valuation of Investments
Investments are stated at aggregate fair value, except for the SEI Stable
Asset GIC Fund, which is stated at contract 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.
The SEI Stable Asset GIC Fund is stated according to the Financial
Accounting Standards Board Staff Position, FSP AAG INV-1 and SOP 94-4-1,
Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain
Investment Companies Subject to the AICPA Investment Company Guide and
Defined-Contribution Health and Welfare and Pension Plans ("FSP"), which
states that contract value is the relevant measurement attribute for that
portion of the net assets available for benefits of a defined-contribution
plan attributable to fully benefit-responsive
5
Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Notes to Financial Statements
December 31, 2006 and 2005
--------------------------------------------------------------------------------
investment contracts because contract value is the amount participants
would receive if they were to initiate permitted transactions under the
terms of the plan. As required by the FSP, the accompanying Statements of
Net Assets Available for Benefits presents the fair value of the
investment contracts as well as the adjustment of the fully
benefit-responsive investment contracts from fair value to contract value.
The presentation of the 2005 Statement of Net Assets Available for
Benefits has been reclassified to comply with the requirements of the FSP.
The accompanying Statement of Changes in Net Assets Available for Benefits
is prepared on a contract value basis. Contract value represents
contributions made under the contract, plus earnings, less participant
withdrawals and administrative expenses. Participants may ordinarily
direct the withdrawal or transfer of all or a portion of their investments
at contract value. There are no reserves against contract value for credit
risk of the contract issuer or otherwise. If an event occurs that may
impair the ability of the contract issuer to perform in accordance with
the contract terms, fair value may be less than contract value. For the
year ended December 31, 2006 the average yield utilized was 5.71% and the
crediting interest rate to the fund was 4.95%.
Payment of Benefits
Benefits are recorded when paid.
Administrative Expenses
Certain administrative expenses are paid by the Company. These amounted to
approximately $260,000 and $280,000, including approximately $216,000 and
$208,000 paid to Benefit Plans Administrative Services, Inc. ("BPA"), in
2006 and 2005, respectively. (See Note D).
Inactive Accounts
Account balances of individuals who have withdrawn from participation in
the Plan had an accumulated basis of approximately $12,473,617 and
$10,553,610 at December 31, 2006 and 2005, 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 Statements
of Net Assets Available for Benefits and the Statements of Changes in Net
Assets Available for Benefits.
6
Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Notes to Financial Statements
December 31, 2006 and 2005
--------------------------------------------------------------------------------
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 contract 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 ($3,252,084 for 2006 and $2,859,338 for
2005) at either December 31, 2006 or 2005 are as follows:
7
Community Bank System, Inc.
401(k) Employee Stock Ownership Plan
Notes to Financial Statements
December 31, 2006 and 2005
--------------------------------------------------------------------------------
2006 2005
---- ----
Community Bank System, Inc. common stock $ 17,216,217 $ 16,199,821
SEI Stable Asset GIC Fund 14,222,419 12,065,124
American Funds Washington Mutual Investors Fund Class A 8,438,585 8,024,306
American Funds EuroPacific Growth Fund Class A 4,633,176 3,638,884
Manager Special Equity Fund 3,803,606 3,430,912
Federated Total Return Bond Fund 3,685,093 3,204,861
T. Rowe Price Blue Chip Growth Fund 3,525,900 3,055,382
The Plan's investments appreciated (depreciated) in value as follows:
2006 2005
---- ----
Community Bank System, Inc. common stock $ 392,660 $ (4,335,817)
Mutual funds 1,905,388 522,317
Total net appreciation (depreciation) in fair value of
investments
------------ ------------
$ 2,298,048 $ (3,813,500)
============ ============
D. Transactions with Parties-in-Interest
The assets of the Plan are administered by BPA, a subsidiary of Community
Bank System, Inc. The Company paid BPA approximately $216,000 and $208,000
for record keeping, trustee and other services in 2006 and 2005,
respectively.
The Plan held 748,531 and 718,396 shares of the Plan sponsor's common
stock at December 31, 2006 and 2005, respectively. The cost of these
shares at December 31, 2006 and 2005 is $10,790,133 and $9,696,141,
respectively, and their fair value at December 31, 2006 and 2005 is
$17,216,217 and $16,199,821, respectively.
Dividends received on the investment in Community Bank System, Inc. common
stock amounted to $554,819 and $577,893 for the years ended December 31,
2006 and 2005, respectively. The Plan sold 198,641 and 212,964 shares of
Community Bank System, Inc. common stock during 2006 and 2005,
respectively, and purchased 235,325 and 191,567 shares of Community Bank
System, Inc. common stock during 2006 and 2005, 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 August 11, 2006, the Company acquired ES&L Bancorp, the parent company
of Elmira Savings and Loan and merged the Elmira Savings and Loan ESOP
Plan into the Plan. Accordingly, total plan assets of $5,172,272 were
transferred to the Plan.
8
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, 2005
--------------------------------------------------------------------------------
(a) (b) Identify of issue, borrower, lessor or (c) Description of investment including (e) Current
similar party maturity date, rate of interest, value
collateral, par or maturity value
Mutual Funds
American Funds Washington Mutual Investors Fund
Class A Mutual fund - 242,071 shares $ 8,438,585
American Funds EuroPacific Growth Fund Class A Mutual fund - 99,510 shares 4,633,176
Managers Special Equity Fund Mutual fund - 45,849 shares 3,803,606
Federated Total Return Bond Fund Mutual fund - 349,629 shares 3,685,093
T. Rowe Price Blue Chip Growth Fund Mutual fund - 98,682 shares 3,525,900
Dreyfus S&P 500 Index Fund Mutual fund - 72,430 shares 2,897,196
Federated Mid-Cap Index Fund Mutual fund - 116,183 shares 2,665,245
-----------
29,648,801
Common stock of plan sponsor
* Community Bank System, Inc. Common stock - 748,531 shares 17,216,217
Collective Trust Fund
Collective trust fund - 14,596,758
** SEI Stable Asset GIC Fund shares 14,596,758
Loan Fund
Participant loans Loan, 5.0% - 10.5% 1,927,513
Self Directed brokerage
TD Waterhouse IDA Account Self-directed brokerage 620,068
Money Market Fund
ReservePlus Money Market Money market fund - 360,048 shares 360,048
-----------
Total investments $64,369,405
===========
* - Denotes party-in-interest
** - Investment stated at Contract Value. The fair value of the investment
was $14,222,419.
9