Charter of the Audit Committee of the Board of Directors
January 2004


I. Audit Committee Purpose

The Audit Committee (the “Committee”) is appointed by the Board of Directors of Partners Trust Financial Group, Inc (the “Company”) to assist the Board of Directors in fulfilling its oversight responsibilities. In addition to the other duties and responsibilities included in this Charter, the Audit Committee’s primary duties and responsibilities are to:

·         Monitor the integrity of the Company’s financial reporting process and internal control systems.

·         Monitor the independence and performance of the Company’s independent auditors and internal audit department.

·         Provide an avenue of communication among the independent auditors, management, the internal audit department, and the Board of Directors.

The Committee has the authority to conduct any investigation appropriate to fulfilling its responsibilities, and it has direct access to the independent auditors, the Internal Audit Department, as well as all necessary books, records, facilities and personnel of the Company. The Committee has the authority to retain, at the Company’s expense, independent accounting, legal, or other consultants or experts it deems necessary in the performance of its duties. It is not the duty or responsibility of the Committee or its members to conduct auditing or accounting reviews or procedures, and, to the fullest extent permissible under applicable law, each member of the Committee shall be entitled to rely on the integrity of those persons and organizations within and outside the Company that it receives information from and the accuracy of the financial and other information provided to the Committee by such persons or organizations, absent actual knowledge to the contrary (which shall promptly be reported to the Board of Directors).


II. Audit Committee Composition and Meetings

The Committee shall be comprised of three or more directors as determined by the Board, each of whom shall meet the independence, experience, finance and accounting knowledge and other qualifications established by applicable laws, rules and regulations and by the Nasdaq Stock Market (“Nasdaq”), and shall be free from any relationship that, in the opinion of the Board, would interfere with the exercise of his or her independent judgment as a member of the Committee. All members of the Committee shall be familiar with basic finance and accounting practices and be able to read and understand fundamental financial statements. It is desirable that at least one member of the Committee be an audit committee financial expert, as defined by Securities and Exchange Commission (“SEC”) rules and regulations. The members of the Committee shall be appointed annually by the Board of Directors, and the Board of Directors shall determine which Committee members, if any, are audit committee financial experts, as defined by SEC rules and regulations. In addition, the Board of Directors shall also determine that the members of the Committee meet the requirements of Section 36 of the Federal Deposit Insurance Act and Part 363 of the FDIC rules and regulations thereunder, including, to the extent applicable, a determination that at least two members of the Committee have banking or related financial management expertise. If a Committee Chairperson is not designated or present, the members of the Committee may designate a Chairperson by majority vote of the Committee membership.

The Committee shall meet at least four times annually, or more frequently as circumstances dictate. An agenda should be prepared and/or approved in advance of each meeting. The Committee should meet privately in executive session at least annually with management, the VP/Internal Audit, the independent auditors, and as a committee to discuss any matters that the Committee or each of these groups believes should be discussed. The Committee shall have direct access to management, the persons performing the internal audit function, the independent auditors, and the Company’s internal and outside legal counsel, both at meetings and otherwise.


III. Audit Committee Responsibilities and Duties

1.       Be directly responsible, and have the sole authority, for the appointment of the independent auditors to be retained by the Company, approve the compensation of the independent auditors, be directly responsible for oversight of the work of the independent auditors for the purpose of preparing or issuing an audit report or related work, and be directly responsible, and have the sole authority, for the discharge or replacement of the independent auditors. The independent auditors shall report directly to the Committee.

2.       On an annual basis, the Committee should review and discuss with the independent auditors all significant relationships they have with the Company that could impair the auditors’ independence. Each year, the Committee should receive from the independent auditors a formal written statement (Independence Standards Board Standard No. 1) describing all relationships between the independent auditors and the Company, and confirming the independent auditors’ independence.

3.       Ensure that the auditors comply with the partner rotation requirements and that the hiring of employees that are employed by or were formerly employed by the auditors complies with regulatory requirements of all applicable authorities.

4.       Review activities, organizational structure, and qualifications of the internal audit department. Ensure through discussion with the VP/Internal Audit that there are no unreasonable restrictions or limitations. Review and concur in the appointment, replacement, or dismissal of the VP/Internal Audit. Review performance of and related compensation for the VP/Internal Audit annually.

5.       Review and approve the overall plans of the independent auditors and the internal audit department, and scope of, their annual audit, other reviews of the Company’s quarterly, annual and other financial information, and other examinations of the Company. Advise the internal audit department and the independent auditors of any areas the Committee believes require special attention.

6.       Approve, in advance, the provision by the independent auditors of all services whether or not related to the audit. Ensure that prohibited non-audit services are not performed. Establish pre-approval policies and procedures with respect to the approval of audit or non-audit services consistent with applicable laws, rules and regulations and Nasdaq requirements. As part of and not in limitation of the foregoing, the Committee may delegate to a Committee member or members the authority to pre-approve certain auditing services and non-audit services, which member or members shall report any pre-approval decisions to the Committee at its next scheduled meeting.

7.       Review the Company’s annual audited financial statements prior to the filing of the financial statements with the appropriate regulatory agencies in accordance with the FDIC Improvement Act. Review should include discussion with management and independent auditors of accounting principles, practices, and significant judgments and accounting estimates. Discuss with management and the independent auditors the quality and appropriateness of the Company’s accounting principles as applied in the Company’s financial reporting. Review the information required by Statement on Auditing Standards (SAS) No. 61 on an annual basis with the independent auditors. Require that the independent auditors review, in accordance with SAS No. 100, the SEC Form 10-Q’s and update any material changes in SAS No. 61 information on a quarterly basis. Such updates to SAS No. 61 will be communicated to the Audit Committee Chair.

8.       Review separately with each of management, the independent auditors and the internal auditing department any significant difficulties, disagreements or restrictions encountered during the course of the annual audit.

9.       Annually prepare an Audit Committee Report as required by the SEC. The report shall be included in the Company’s annual proxy statement.

10.   Review assessments of management, the internal audit department, the independent auditors (i.e. management letter), and any regulatory agencies concerning accounting and financial reporting issues, control weaknesses, regulatory compliance issues, and/or underwriting and credit administration weaknesses, and determine, if appropriate, whether corrective action has been taken by management.

11.   Establish a procedure, incorporated into the Code of Business Conduct and Ethics, for (a) the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls and auditing matters and (b) the confidential, anonymous submission by employees of the Company of concerns regarding questionable accounting or auditing matters. The Committee will investigate all such complaints and report to the Board.

12.   Review with management and the Company’s legal counsel, if considered necessary, any legal matters that could have a significant impact on the Company’s financial statements.

13.   To the extent not otherwise reviewed by a committee of independent directors, review all related party transactions for potential conflict of interest situations on an ongoing basis, with all such transactions being subject to approval by the Committee in accordance with Nasdaq rules and requirements. For purposes of this paragraph, “related party transactions” refers to transactions that would be required to be disclosed by the Company pursuant to Item 404 of Regulation S-K. Item 404(a) of Regulation S-K generally requires, among other things, companies to disclose transactions, currently proposed transactions, or series of similar transactions to which a company or any of its subsidiaries was or is a party, in which the amount involved exceeds $60,000 and in which any of the following persons had, or will have, a direct or indirect material interest: (a) any director or executive officer of such company; (b) any nominee for election as a director; (c) any security holder who is known to such company to own of record or beneficially more than five percent of the Company’s voting securities; or (d) any member of the immediate family of any of the foregoing persons. (A person’s immediate family shall include such person’s spouse; parents; children; siblings, mothers and fathers-in-law, sons and daughters-in-law; and brothers and sisters-in-law.)

14.   Review annually the independence of each Audit Committee member in accordance with the FDICIA and applicable laws, rules and regulations and Nasdaq requirements.

15.   Determine appropriate funding, for payment of (a) compensation to the independent auditors engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for the Company, (b) compensation to any advisers employed by the Committee, and (c) ordinary administrative expenses of the Committee that are necessary or appropriate in carrying out the Committee’s duties.

16.   Perform any other activities consistent with this Charter, the Company’s by-laws, and governing law, as the Committee or the Board of Directors deems necessary or appropriate.

17.   Maintain minutes of meetings and periodically report to the Board of Directors on significant results of the foregoing activities.

18.   Review and reassess the adequacy of this Charter at least annually and submit recommended changes to the Board of Directors for approval.