NOTE K: BENEFIT PLANS

Pension and post-retirement plans

The Company provides a qualified defined benefit pension to qualified employees and retirees, and other post-retirement health and life insurance benefits to certain retirees, an unfunded supplemental pension plan for certain key executives, and an unfunded stock balance plan for certain of its nonemployee directors. Using a measurement date of December 31, the following table shows the funded status of the Company's plans reconciled with amounts reported in the Company's consolidated statements of condition:

	Pension Benefits		Post-retirement Benefits
(000's omitted)	2011	2010	2011	2010
Change in benefit obligation:
Benefit obligation at the beginning of year	$81,321	$72,350	$3,594	$4,449
Service cost	2,959	2,780	0	0
Interest cost	4,497	3,909	153	195
Participant contributions	0	0	706	529
Plan acquisition/amendment	17,511	882	0	0
Deferred actuarial loss (gain)	11,713	4,971	46	(706)
Benefits paid	(5,144)	(3,571)	(1,147)	(873)
Benefit obligation at end of year	112,857	81,321	3,352	3,594
Change in plan assets:
Fair value of plan assets at beginning of year	96,439	74,628	0	0
Actual return of plan assets	1,479	9,758	0	0
Participant contributions	0	0	706	529
Employer contributions	11,623	15,624	441	344
Plan acquisition	21,912	0	0	0
Benefits paid	(5,144)	(3,571)	(1,147)	(873)
Fair value of plan assets at end of year	126,309	96,439	0	0
Funded status at year end	$13,452	$15,118	($3,352)	($3,594)

Amounts recognized in the consolidated balance sheet were:
Other assets	$22,929	$23,777	$0	$0
Other liabilities	(9,477)	($8,659)	($3,352)	($3,594)

Amounts recognized in accumulated other
comprehensive income (“AOCI”) were:
Net loss	$44,119	$28,152	$371	$333
Net prior service credit	(674)	(824)	(3,339)	(4,397)
Pre-tax AOCI	43,445	27,328	(2,968)	(4,064)
Taxes	(16,738)	(10,529)	1,135	1,557
AOCI at year end	$26,707	$16,799	($1,833)	($2,507)

The benefit obligation for the defined benefit pension plan was $103.4 million and $72.7 million as of December 31, 2011 and 2010, respectively, and the fair value of plan assets as of December 31, 2011 and 2010 was $126.3 million and $96.4 million, respectively. Effective January 1, 2010, the defined benefit pension plan was modified to a new plan design, which combines service credits in the defined benefit plan with additional interest credit contributions to be made to the 401(k) Plan. Effective September 30, 2011, the Wilber National Bank Retirement Plan was merged into the Community Bank System, Inc. Pension Plan and the combined plan was revalued.

The Company has unfunded supplemental pension plans for certain key active and retired executives. The projected benefit obligation for the unfunded supplemental pension plan for certain key executives was $9.3 million for 2011 and $8.5 million for 2010, respectively. The Company also has an unfunded stock balance plan for certain of its nonemployee directors. The projected benefit obligation for the unfunded stock balance plan was $0.2 million for 2011 and $0.1 million for 2010, respectively. The plan was frozen effective December 31, 2009.

Effective December 31, 2009, the Company terminated its post-retirement medical program for current and future employees. Remaining plan participants will include only existing retirees as of December 31, 2010. This change was accounted for as a negative plan amendment and a $3.5 million, net of income taxes, benefit for prior service was recognized in AOCI in 2009. This negative plan amendment is being amortized over the expected benefit utilization period of remaining plan participants.

Amounts recognized in accumulated other comprehensive income, net of tax, for the year ended December 31, are as follows:

	Pension Benefits		Post-retirement Benefits
(000's omitted)	2011	2010	2011	2010
Prior service cost	$92	$96	$650	$651
Net (gain) loss	9,816	(307)	24	(445)
Total	$9,908	($211)	$674	$206

The estimated costs, net of tax, that will be amortized from accumulated other comprehensive (income) loss into net periodic (income) cost over the next fiscal year are as follows:

	Pension	Post-retirement
(000's omitted)	Benefits	Benefits
Prior service credit	($147)	($823)
Net loss	3,681	12
Total	$3,534	($811)

The weighted-average assumptions used to determine the benefit obligations as of December 31 are as follows:

	Pension Benefits		Post-retirement Benefits
	2011	2010	2011	2010
Discount rate	4.10%	5.00%	3.90%	4.50%
Expected return on plan assets	7.50%	7.50%	N/A	N/A
Rate of compensation increase	4.00%	4.00%	N/A	N/A

The net periodic benefit cost as of December 31 is as follows:

	Pension Benefits			Post-retirement Benefits
(000's omitted)	2011	2010	2009	2011	2010	2009
Service cost	$2,959	$2,780	$3,496	$0	$0	$575
Interest cost	4,497	3,909	3,676	153	195	494
Expected return on plan assets	(8,097)	(6,470)	(4,686)	0	0	0
Amortization of unrecognized net loss	2,362	2,421	2,761	8	17	0
Amortization of prior service cost	(149)	(189)	(123)	(1,057)	(1,057)	54
Amortization of transition obligation	0	0	0	0	0	41
Net periodic benefit cost	$1,572	$2,451	$5,124	($896)	($845)	$1,164

Prior service costs in which all or almost all of the plan's participants are fully eligible for benefits under the plan are amortized on a straight-line basis over the expected future working years of all active plan participants. Prior service costs associated with transferring individual nonqualified plans are amortized on a straight-line basis over a three-year period. Unrecognized gains or losses are amortized using the “corridor approach”, which is the minimum amortization required. Under the corridor approach, the net gain or loss in excess of 10 percent of the greater of the projected benefit obligation or the market-related value of the assets is amortized on a straight-line basis over the expected future working years of all active plan participants.

The weighted-average assumptions used to determine the net periodic pension cost for the years ended December 31 are as follows:

	Pension Benefits			Post-retirement Benefits
	2011	2010	2009	2011	2010	2009
Discount rate	4.40%	5.60%	6.10%	4.50%	5.15%	6.10%
Expected return on plan assets	7.50%	7.50%	8.00%	N/A	N/A	N/A
Rate of compensation increase	4.00%	4.00%	4.00%	N/A	N/A	N/A

The amount of benefit payments that are expected to be paid over the next ten years are as follows:

	Pension	Post-retirement
(000's omitted)	Benefits	Benefits
2012	6,259	390
2013	6,850	360
2014	7,224	284
2015	6,926	268
2016	7,555	229
2017-2021	42,873	1,009

The payments reflect future service and are based on various assumptions including retirement age and form of payment (lump-sum versus annuity). Actual results may differ from these estimates.

The assumed discount rate is used to reflect the time value of future benefit obligations. The discount rate was determined based upon the yield on high-quality fixed income investments expected to be available during the period to maturity of the pension benefits. This rate is sensitive to changes in interest rates. A decrease in the discount rate would increase the Company's obligation and future expense while an increase would have the opposite effect. The expected long-term rate of return was estimated by taking into consideration asset allocation, reviewing historical returns on the type of assets held and current economic factors. The appropriateness of the assumptions is reviewed annually.

Plan Assets

The investment objective for the defined benefit pension plan is to achieve an average annual total return over a five-year period equal to the assumed rate of return used in the actuarial calculations. At a minimum performance level, the portfolio should earn the return obtainable on high quality intermediate-term bonds. The Company's perspective regarding portfolio assets combines both preservation of capital and moderate risk-taking. Asset allocation favors equities, with a target allocation of approximately 60% equity securities and 40% fixed income securities. In order to diversify the risk within the pension portfolio, the pension committee authorized that up to 15% of the assets may be in alternative investments, which are primarily hedge funds. No more than 10% of the portfolio can be in stock of the Company. Due to the volatility in the market, the target allocation is not always desirable and asset allocations will fluctuate between acceptable ranges. Prohibited transactions include purchase of securities on margin, uncovered call options, and short sale transactions.

The fair values of the Company's defined benefit pension plan assets at December 31, 2011 by asset category are as follows:

Asset category (000's omitted)	Quoted Prices in Active Markets for Identical Assets Level 1	Significant Observable Inputs Level 2	Significant Unobservable Inputs Level 3	Total

Cash	$31,389	$0	$0	31,389
Equity securities:
U.S. large-cap	26,468	0	0	26,468
U.S mid/small cap	6,004	0	0	6,004
CBSI stock	10,512	0	0	10,512
International	10,923	0	0	10,923
Global (a)	2,936	0	0	2,936
Commodities (b)	1,837	0	0	1,837
	58,680	0	0	58,680

Fixed income securities:
Government securities	8,600	8,000	0	16,600
Investment grade bonds	4,965	0	0	4,965
High yield(c)	9,401	496	0	9,897
	22,966	8,496	0	31,462

Other types of investments:
Alternative investments (d)	4,684	94	0	4,778

Total (e)	$117,719	$8,590	$0	$126,309

The fair values of the Company's defined benefit pension plan assets at December 31, 2010 by asset category are as follows:

Asset category (000's omitted)	Quoted Prices in Active Markets for Identical Assets Level 1	Significant Observable Inputs Level 2	Significant Unobservable Inputs Level 3	Total

Cash	$10,851	$0	$0	$10,851
Equity securities:
U.S. large-cap	30,547	0	0	30,547
U.S mid/small cap	6,130	0	0	6,130
CBSI stock	8,728	0	0	8,728
International	12,866	0	0	12,866
Global (a)	3,153	0	0	3,153
Commodities (b)	694	0	0	694
	62,118	0	0	62,118

Fixed income securities:
Government securities	4,900	7,212	0	12,112
Investment grade bonds	5,367	0	0	5,367
High yield(c)	5,509	0	0	5,509
	15,776	7,212	0	22,988

Other types of investments:
Alternative investments (d)	0	482	0	482

Total (e)	$88,745	$7,694	$0	$96,439

(a) This category includes securities that invest approximately 50% in

U.S. equity securities and 50% international equity securities.

(b) This category includes investments in exchange traded funds reflecting

the performance of an underlying commodity index.

of high yield corporate bonds.

(d) This category is comprised of non-traditional investment classes

including private equity funds and alternative exchange funds.

(e) Excludes dividends and interest receivable totaling $306,000 and

$317,000 at December 31, 2011 and 2010, respectively

The Company makes contributions to its funded qualified pension plan as required by government regulation or as deemed appropriate by management after considering the fair value of plan assets, expected return on such assets, and the value of the accumulated benefit obligation. The Company made a contribution to its defined benefit pension plan of $11 million during the fourth quarter of 2011. The Company funds the payment of benefit obligations for the supplemental pension and post-retirement plans because such plans do not hold assets for investment.

Tupper Lake National Bank (“TLNB”) participated in the Pentegra Defined Benefit Plan for Financial Institutions (“Pentegra DB Plan”), a multi-employer tax qualified defined benefit pension plan. The identification number and plan number of the Pentegra DB Plan are 13-5645888 and 333, respectively. All employees of TLNB who met minimum service requirements participated in the plan. As of June 30, 2010, the Pentegra DB Plan had total assets of $2.4 billion, actuarial present value of accumulated benefits of $2.7 billion and was at least 80 percent funded. The assets of the multi-employer plan may be used to satisfy obligations of any of the employers participating in the plan. As a result, contributions made by the Company may be used to provide benefits to participants of other participating employers. Contributions for 2011, 2010 and 2009 were $131,000, $39,000 and $21,000, respectively. Contributions made by the Company to the Pentegra DB Plan do not represent more than 5% of contributions made to the Pentegra DB Plan.

The assumed health care cost trend rate used in the post-retirement health plan at December 31, 2011 was 8.50% for the pre-65 participants and 6.75% for the post-65 participants for medical costs and 8.50% for prescription drugs. The rate to which the cost trend rate is assumed to decline (the ultimate trend rate) and the year that the rate reaches the ultimate trend rate is 5.0% and 2018, respectively.

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage-point increase in the trend rate would increase the service and interest cost components by $600 and increase the benefit obligation by $14,000. A one-percentage-point decrease in the trend rate would decrease the service and interest cost components by $600 and decrease the benefit obligation by $13,000.

401(k) Employee Stock Ownership Plan

The Company has a 401(k) Employee Stock Ownership Plan in which employees can contribute from 1% to 90% of eligible compensation, with the first 3% being eligible for a 100% matching contribution in the form of Company common stock and the next 3% being eligible for a 50% matching contributions in the form of Company common stock. The expense recognized under this plan for the years ended December 31, 2011, 2010 and 2009 was $2,752,000, $2,536,000, and $2,342,000, respectively. Effective January 1, 2010 the defined benefit pension plan was modified to a new plan design that includes an interest credit contribution to be made to the 401(k) plan. The expense recognized for this interest credit contribution for the year ended December 31, 2011 was $203,000.

Other Deferred Compensation Arrangements

In addition to the supplemental pension plans for certain executives, the Company has nonqualified deferred compensation arrangements for several former directors, officers and key employees. All benefits provided under these plans are unfunded and payments to plan participants are made by the Company. At December 31, 2011 and 2010, the Company has recorded a liability of $4,734,000 and $3,693,000, respectively. The expense recognized under these plans for the years ended December 31, 2011, 2010, and 2009 was $584,000, $546,000, and $616,000, respectively.

Deferred Compensation Plan for Directors

Directors may defer all or a portion of their director fees under the Deferred Compensation Plan for Directors. Under this plan, there is a separate account for each participating director which is credited with the amount of shares that could have been purchased with the director's fees as well as any dividends on such shares. On the distribution date, the director will receive common stock equal to the accumulated share balance in his account. As of December 31, 2011 and 2010 there were 140,029 and 127,761 shares credited to the participants' accounts, for which a liability of $2,863,000 and $2,519,000 was accrued, respectively. The expense recognized under the plan for the years ended December 31, 2011, 2010 and 2009, was $125,000, $107,000, and $89,000, respectively.