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		MERCHANTS BANCSHARES, INC. 275 Kennedy Drive South Burlington, Vermont 05403

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [•]

 

NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of Merchants Bancshares, Inc. (“Merchants”) will be held on [•], at [•], Eastern time, at [•], to consider and vote upon the following matters:

The Merger is described in more detail in this Proxy Statement/Prospectus, which you should read carefully in its entirety before you vote. A copy of the Merger Agreement is attached as Annex A to this Proxy Statement/Prospectus. Only holders of record of Merchants common stock at the close of business on [•] are entitled to notice of and to vote at the special meeting and any adjournments or postponements of the special meeting.

Under Delaware law, Merchants stockholders who do not vote in favor of adoption of the Merger Agreement will have the right to seek appraisal of the fair value of their Merchants common stock as determined by the Delaware Court of Chancery if the Merger is completed, but only if they submit a written demand for such an appraisal prior to the vote on adoption of the Merger Agreement and strictly comply with the other Delaware law procedures explained in this Proxy Statement/Prospectus. See the section entitled “Proposal I — The Merger — Appraisal or Dissenters’ Rights” beginning on page 58. The applicable Delaware law is reproduced in its entirety in Annex C to this Proxy Statement/Prospectus.

Please vote as soon as possible. The affirmative vote of two-thirds of the outstanding shares of Merchants common stock entitled to vote at the special meeting of stockholders is required for the adoption of the Merger Agreement. Approval of the non-binding, advisory Merger-Related Executive Compensation proposal requires the affirmative vote of a majority of the votes cast on the proposal. Approval of the adjournment proposal requires the affirmative vote of a majority of the votes cast on the proposal.

If you fail to vote, or you do not instruct your broker how to vote any shares held for you in “street name,” it will have same effect as voting “AGAINST” the Merger Agreement.

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To ensure your representation at the special meeting of stockholders, please follow the voting procedures described in the accompanying Proxy Statement/Prospectus and on the enclosed proxy card. This will not prevent you from voting in person, but it will help to secure a quorum and avoid added solicitation costs. Your proxy may be revoked at any time before it is voted by following the instructions provided in the Proxy Statement/Prospectus.

THE MERCHANTS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” ALL PROPOSALS.

BY ORDER OF THE BOARD OF DIRECTORS

Jamie Oberle
Secretary

South Burlington, Vermont
[•], 2017

YOUR VOTE IS IMPORTANT!

Whether or not you plan to attend the special meeting in person, Merchants urges you to submit your proxy as soon as possible by (1) calling the toll free telephone number specified on the enclosed proxy card, (2) accessing the Internet website specified on the enclosed proxy card, or (3) completing, signing and dating the enclosed proxy card and returning it in the postage paid envelope provided. If your shares are held in the name of a bank, broker or other fiduciary, please follow the instructions on the voting card provided by such entity.

If you have any questions concerning the Merger or other matters to be considered at the Merchants special meeting, would like additional copies of this Proxy Statement/Prospectus or need help voting your shares, please contact Innisfree M&A Incorporated, Merchants’ proxy solicitor, by calling (212) 750-5833.

PLEASE DO NOT SEND STOCK CERTIFICATES WITH THE PROXY CARD. YOU WILL BE SENT SEPARATE INSTRUCTIONS REGARDING MAKING ELECTIONS AS TO THE FORM OF MERGER CONSIDERATION YOU WOULD LIKE TO RECEIVE AND THE SURRENDER OF YOUR STOCK CERTIFICATES.

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		Page
QUESTIONS AND ANSWERS ABOUT THE MERGER			iv
WHO CAN HELP ANSWER YOUR QUESTIONS			xi
SUMMARY			1
SELECTED HISTORICAL FINANCIAL DATA			9
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL INFORMATION			13
COMPARATIVE UNAUDITED PER SHARE DATA			14
RISK FACTORS			15
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			21
THE COMPANIES			22
Community Bank System			22
Merchants			23
SPECIAL MEETING OF MERCHANTS STOCKHOLDERS			24
Time, Date and Place of the Special Meeting			24
Actions to be Taken at the Special Meeting			24
Record Date; Outstanding Shares; Shares Entitled to Vote			24
Recommendation of the Merchants Board of Directors			24
Broker Non-Votes			24
Quorum; Vote Required			24
Share Ownership of Management; Voting Agreements			25
Voting and Revocation of Proxies			25
Solicitation of Proxies			26
Other Matters			26
PROPOSAL I — THE MERGER			27
General			27
Background of the Merger			27
Merchants’ Reasons for the Merger			34
Recommendation of the Merchants Board of Directors			36
Community Bank System’s Reasons for the Merger			37
Opinion of Merchants’ Financial Advisor			38
Certain Prospective Financial Information			47
Stockholder Support Agreements with Directors and Another Principal Stockholder of Merchants			48
Interests of Merchants Directors and Executive Officers in the Merger			48
Material U.S. Federal Income Tax Consequences of the Merger			54
Accounting Treatment of the Merger			57
Restrictions on Sales of Community Bank System Common Stock by Certain Affiliates			57
New York Stock Exchange Listing			57
Regulatory Approvals and Notices for the Merger			57
Appraisal or Dissenters’ Rights			58

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		Page
THE MERGER AGREEMENT			62
The Merger and the Bank Merger			62
Closing and Effective Time of the Merger			62
Board of Directors			62
Merger Consideration			62
Election and Proration Procedures			63
Procedures for Converting Shares of Merchants Common Stock into Merger Consideration			67
Treatment of Merchants Equity Awards and Warrants			67
Conduct of Business Pending the Merger			68
Regulatory Matters			71
NYSE Listing			72
Merchants Debt			72
Employee Matters			72
Indemnification and Directors’ and Officers’ Insurance			73
No Solicitation			73
Representations and Warranties			76
Conditions to Completion of the Merger			78
Termination			78
Termination Fee			80
Amendment; Waiver			80
Expenses			80
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			81
MARKET PRICE AND DIVIDEND INFORMATION			90
PROPOSAL II — MERGER-RELATED EXECUTIVE COMPENSATION			92
PROPOSAL III — ADJOURNMENT OF THE MEETING			93
DESCRIPTION OF CAPITAL STOCK OF COMMUNITY BANK SYSTEM			94
General			94
Common Stock			94
Certain Certificate of Incorporation and Bylaws Provisions			94
COMPARISON OF RIGHTS OF HOLDERS OF MERCHANTS COMMON STOCK AND COMMUNITY BANK SYSTEM COMMON STOCK			96
Authorized Capital Stock			96
Quorum of Stockholders			96
Nomination of Directors and Stockholder Proposals			96
Election of Directors			97
Qualification of Directors			97
Number of Directors			98
Removal of Directors			98
Vacancies on the Board of Directors			98
Voting and Proxies			98
Payment of Dividends			99

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		Page
Special Meeting of Stockholders			99
Rights of Stockholders to Dissent			99
Indemnification and Limitation of Liability			100
Certain Voting Rights and Restrictions with Respect to Mergers			101
Amendment to Certificate of Incorporation			102
Amendment to Bylaws			102
Stockholder Action Without a Meeting			103
Preemptive Rights			103
Exclusive Forum Provision			103
EXPERTS			103
SUBMISSION OF STOCKHOLDER NOMINATIONS AND PROPOSALS			103
LEGAL MATTERS			104
WHERE YOU CAN FIND MORE INFORMATION			104
ANNEX A AGREEMENT AND PLAN OF MERGER			A-1
ANNEX B OPINION OF PIPER JAFFRAY & CO.			B-1
ANNEX C PROVISIONS OF THE DELAWARE GENERAL CORPORATION LAW RELATING TO APPRAISAL RIGHTS			C-1

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QUESTIONS AND ANSWERS ABOUT THE MERGER

The following are answers to certain questions that you may have regarding the merger and the special meeting. We urge you to read carefully the remainder of this Proxy Statement/Prospectus because the information in this section may not provide all the information that might be important to you in determining how to vote. Additional important information is also contained in the annexes to, and the documents incorporated by reference in, this Proxy Statement/Prospectus.

We are delivering this Proxy Statement/Prospectus to you as both a Proxy Statement of Merchants and a Prospectus of Community Bank System. It is a Proxy Statement because the Merchants board of directors is soliciting proxies from its stockholders. It is a Prospectus because Community Bank System will issue Community Bank System common stock to the Merchants stockholders who receive stock consideration in the Merger, and this Prospectus contains information about Community Bank System common stock. This Proxy Statement/Prospectus contains important information about the Merger, the Merger Agreement, the special meeting of Merchants stockholders, and other related matters, and we encourage you to read it carefully.

The above consideration is subject to proration procedures that are designed to ensure that the total amount of cash paid, and the total number of shares of Community Bank System common stock issued, in the Merger will equal as nearly as practicable the total amount of cash and number of shares that would have been paid and issued if all of the Merchants stockholders received the mixed election consideration.

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You may elect to receive the cash election consideration, the stock election consideration, or the mixed election consideration. However, the ability to receive the consideration of your choice will depend on the elections of other Merchants stockholders. The proration of the consideration payable to Merchants stockholders in the Merger will not be known until Community Bank System tallies the results of the elections made by Merchants stockholders, which will not occur until near or after the closing of the Merger.

It is currently estimated that, if the Merger is completed, Community Bank System will issue, in the aggregate, approximately [•] million shares of Community Bank System common stock and pay approximately $[•] million in cash to Merchants stockholders. Under the proration procedures in the Merger Agreement, the total amount of cash paid, and the total number of shares of Community Bank System common stock issued, in the Merger to the holders of shares of Merchants common stock (other than excluded shares), as a whole, will equal as nearly as practicable the total amount of cash and number of shares that would have been paid and issued if all of such shares of Merchants common stock were converted into the mixed election consideration.

Whether you receive the amount of cash and/or stock you request in your election form will depend in part on the elections of other Merchants stockholders. You may not receive the form of consideration that you elect in the Merger, and you may instead receive a pro-rata amount of cash and/or Community Bank System common stock.

The greater the oversubscription of the stock election consideration, the less stock and more cash a Merchants stockholder making the stock election will receive. Reciprocally, the greater the oversubscription of the cash election consideration, the less cash and more stock a Merchants stockholder making the cash election will receive. However, in no event will a Merchants stockholder who makes the cash election or the stock election receive less cash and more shares of Community Bank System common stock, or fewer shares of Community Bank System common stock and more cash, respectively, than a stockholder who elects the mixed election consideration. See “The Merger Agreement — Election and Proration Procedures” beginning on page 63 of this Proxy Statement/Prospectus.

The proration of the consideration payable to Merchants stockholders who elect to receive the cash election consideration and/or the stock election consideration will not be known until Community Bank System tallies the results of the elections, which will not occur until near or after the closing of the Merger.

Each share of Merchants common stock subject to vesting or forfeiture restrictions and granted under any Merchants benefit plan that is outstanding immediately prior to the effective time, whether or not then vested, will automatically vest in full, and any restrictions thereon will lapse, and such

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stock will be converted into the right to receive an amount of cash equal to the value of the mixed election consideration plus dividends, if any, accrued but unpaid as of the effective time with respect to such restricted share.

Each warrant that was originally issued on April 30, 2013 by NUVO Bank & Trust Company (with respect to which Merchants issued replacement warrants on December 4, 2015), which we refer to as “2013 warrants,” to purchase Merchants common stock outstanding as of the effective time will be converted into the right to receive, at the holder’s election, either (i) a cash payment in cancellation of such 2013 warrant equal to the number of shares of Merchants common stock which may be acquired upon exercise of such 2013 warrant multiplied by the excess, if any, of the cash election consideration of $40.00 over the per share 2013 warrant exercise price immediately prior to the effective time or (ii) a replacement 2013 warrant certificate issued by Community Bank System and representing the right to acquire prior to the expiration date of the original 2013 warrant, upon payment of the amount determined by dividing the per share exercise price immediately prior to the effective time by the stock election consideration of 0.9630, that number of shares of Community Bank System common stock equal to the number of shares of Merchants common stock which may be acquired upon exercise of such 2013 warrant immediately prior to the effective time multiplied by the stock election consideration of 0.9630.

Community Bank is a community retail bank committed to the philosophy of serving the financial needs of customers in local communities. Community Bank emphasizes the local character of business, knowledge of the customer and customer needs, comprehensive retail and small business products, and responsive decision-making at the branch and regional levels. Community Bank and its subsidiaries offer a range of commercial and retail banking and financial services in their market areas to business, individual, agricultural and government customers. Community Bank and its employees strive to support and to actively engage in important initiatives in local communities within the market areas it serves.

Community Bank System common stock is publicly traded on the NYSE under the symbol “CBU.” At September 30, 2016, Community Bank System had on a consolidated basis approximately $8.7 billion in total assets, $7.1 billion in total deposits, $4.9 billion in total loans and stockholders’ equity of $1.2 billion. For additional information about Community Bank System, please see “Where You Can Find More Information” beginning on page 104 of this Proxy Statement/Prospectus.

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If you sign and send in your proxy and do not indicate how you want to vote, your proxy will be voted in favor of the Merger Agreement, the approval, on an advisory basis, of the Merger-Related Executive Compensation, and, if necessary, the adjournment proposal.

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Any written notices of revocation and other communications with respect to revocation of proxies should be addressed to Merchants as follows: Merchants Bancshares, Inc., Corporate Secretary, 275 Kennedy Drive, South Burlington, Vermont, 05403, which must be received by [•], Eastern time, on [•].

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The U.S. federal income tax consequences described above may not apply to all holders of Merchants common stock. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your own tax advisor to determine the particular tax consequences of the Merger to you.

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WHO CAN HELP ANSWER YOUR QUESTIONS

If you want to ask any questions about the Merger or the merger consideration to be issued in the Merger, you should contact:

Innisfree M&A Incorporated
501 Madison Avenue
New York, New York 10022
(212) 750-5833

You may also contact:

Community Bank System, Inc.		Merchants Bancshares, Inc.
Scott A. Kingsley E.V.P. and Chief Financial Officer Community Bank System, Inc. 5790 Widewaters Parkway DeWitt, New York 13214 (315) 445-7378		Geoffrey R. Hesslink President and Chief Executive Officer Merchants Bancshares, Inc. 275 Kennedy Drive South Burlington, Vermont 05403 (800) 322-5222

Both Community Bank System and Merchants file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information that Community Bank System or Merchants files at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1 800-SEC-0330 for further information on the Public Reference Room. Community Bank System’s and Merchants’ public filings are also available at the Internet site maintained by the SEC at “http://www.sec.gov.” Community Bank System’s and Merchants’ public filings are also available from Community Bank System and Merchants, respectively, at the address shown below or at their respective websites: www.communitybankna.com or www.mbvt.com. Please note that Community Bank System’s and Merchants’ Internet addresses are included in this Proxy Statement/Prospectus as inactive textual references only. The information contained on Community Bank System’s and Merchants’ websites are not incorporated by reference in this Proxy Statement/Prospectus and should not be considered part of this document.

Community Bank System has filed a registration statement to register with the SEC the shares of Community Bank System common stock to be issued to Merchants stockholders in the Merger. This document is a part of the registration statement and constitutes a Prospectus of Community Bank System and a Proxy Statement of Merchants for its special meeting of stockholders. As allowed by SEC rules, this document does not contain all the information that stockholders can find in the registration statement or the exhibits to the registration statement. The SEC allows Community Bank System and Merchants to “incorporate by reference” certain information into this document, which means that Community Bank System and Merchants can disclose important information to you by referring you to another document filed separately with the SEC. The information incorporated by reference is deemed to be a part of this document, except for any information which contradicts information contained directly in this document. Please see “Where You Can Find More Information” beginning on page 104 of this Proxy Statement/Prospectus to find out where you can find more information about the documents incorporated by reference.

If you wish to obtain an additional copy of this document, or any other information, without charge upon written or oral request, please see “Where You Can Find More Information” beginning on page 104 of this Proxy Statement/Prospectus to find out where you can find more information about Community Bank System and Merchants, or contact:

Community Bank System, Inc.		Merchants Bancshares, Inc.
Donna J. Drengel Investor Relations Community Bank System, Inc. 5790 Widewaters Parkway DeWitt, New York 13214 (315) 445-7313		Geoffrey R. Hesslink President and Chief Executive Officer Merchants Bancshares, Inc. 275 Kennedy Drive South Burlington, Vermont 05403 (800) 322-5222

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To obtain timely delivery of these documents, you must request the information no later than [•] in order to receive them before the special meeting.

You should rely only on the information contained in, or incorporated by reference into, this Proxy Statement/Prospectus. No one has been authorized to give any information or make any representation about the Merger or Community Bank System or Merchants that differs from, or adds to, the information in this Proxy Statement/Prospectus or in documents that are incorporated by reference herein and publicly filed with the SEC. Therefore, if anyone does give you different or additional information, you should not rely on it. You should not assume that the information contained in this Proxy Statement/Prospectus is accurate as of any date other than the date of this Proxy Statement/Prospectus, and you should not assume that any information incorporated by reference into this document is accurate as of any date other than the date of such other document, and neither the mailing of this Proxy Statement/Prospectus to Merchants stockholders nor the issuance of Community Bank System common stock in the Merger shall create any implication to the contrary.

This Proxy Statement/Prospectus does not constitute an offer to sell, or a solicitation of an offer to purchase, the securities offered by this Proxy Statement/Prospectus, or the solicitation of a proxy, in any jurisdiction to or from any person to whom or from whom it is unlawful to make such offer, solicitation of an offer or proxy solicitation in such jurisdiction.

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SUMMARY

This summary highlights selected information from this document and may not contain all of the information that is important to you. For a more complete understanding of the Merger and for a more complete description of the legal terms of the Merger, we encourage you to read this entire Proxy Statement/Prospectus and its annexes carefully, as well as the additional documents referred to in this Proxy Statement/Prospectus. See “Where You Can Find More Information” beginning on page 104 of this Proxy Statement/Prospectus.

The Merger Agreement is attached to this document as Annex A. Please read that document carefully. It is the legal document that governs the Merger and your rights in the Merger.

Information about the Companies (Page 22)

Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, New York 13214
(315) 445-2282

Community Bank System is a bank holding company operating Community Bank, which currently has more than 200 customer facilities and 202 ATMs in 36 counties in Upstate New York: Allegany, Broome, Cattaraugus, Cayuga, Chautauqua, Chenango, Chemung, Clinton, Delaware, Erie, Essex, Franklin, Hamilton, Herkimer, Jefferson, Lewis, Livingston, Madison, Oneida, Onondaga, Ontario, Oswego, Otsego, St. Lawrence, Saratoga, Schoharie, Schuyler, Seneca, Steuben, Tioga, Tompkins, Ulster, Warren, Washington, Wayne, and Yates, and six counties in Northern Pennsylvania: Bradford, Carbon, Lackawanna, Luzerne, Susquehanna and Wyoming. Community Bank and its subsidiaries offer a broad range of commercial banking, trust, pension administration, investment and financial services to business, individual, agricultural and government customers.

Community Bank is Community Bank System’s principal operating subsidiary. At September 30, 2016, Community Bank System had on a consolidated basis approximately $8.7 billion in total assets, $7.1 billion in total deposits, $4.9 billion in total loans and stockholders’ equity of $1.2 billion.

Community Bank System common stock is currently listed on the NYSE under the symbol “CBU.”

Community Bank System announced on December 5, 2016 that is has entered into an agreement to acquire Northeast Retirement Services, Inc. (“NRS”), a leading institutional provider of plan accounting, transfer agency, fund administration, trust and retirement plan services. Upon the closing of the transaction, NRS will become a subsidiary of Benefit Plans Administrative Services, Inc. (“BPAS”), a wholly-owned subsidiary of Community Bank System. The cash and stock transaction is valued at approximately $140 million and is expected to close in the first quarter of 2017, subject to certain shareholder and regulatory approvals. The foregoing transaction is referred to in this Proxy Statement/Prospectus as the “NRS acquisition.”

Merchants Bancshares, Inc.
275 Kennedy Drive
South Burlington, Vermont 05403
(802) 658-3400

Merchants is a publicly-held bank holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Merchants is incorporated under the laws of the State of Delaware and headquartered in South Burlington, Vermont. At September 30, 2016, Merchants had total consolidated assets of approximately $1.99 billion (including loans of approximately $1.47 billion), deposits of approximately $1.50 billion and stockholders’ equity of approximately $158 million.

Merchants conducts substantially all of its business through its subsidiary, Merchants Bank. Merchants Bank is a Vermont-chartered nonmember stock bank organized in 1849 with 31 full-service banking offices located throughout the State of Vermont and one full-service banking office in Massachusetts. The primary business of Merchants Bank is to attract deposits from and extend loans to consumer, institutional, municipal,

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non-profit and commercial customers. Merchants also provides wealth management and trust services through the Merchants Trust Company Division of Merchants Bank.

Merchants common stock is currently listed on the NASDAQ Global Select Market under the symbol “MBVT.”

Information about the Special Meeting

Date, Time and Place of the Special Meeting (Page 24)

A special meeting of Merchants stockholders will be held on [•], at [•].m., Eastern time, at [•].

Actions to be Taken at the Special Meeting (Page 24)

At the special meeting, Merchants stockholders as of [•], the record date, will be asked to vote on a proposal to adopt the Merger Agreement, a non-binding, advisory proposal to approve the Merger-Related Executive Compensation, and if necessary, the adjournment proposal.

Record Date; Outstanding Shares; Shares Entitled to Vote (Page 24)

Only holders of record of Merchants common stock at the close of business on the record date of [•] are entitled to notice of and to vote at the special meeting. As of the record date, there were [•] shares of Merchants common stock outstanding, held of record by approximately [•] stockholders.

Quorum; Vote Required (Page 24)

The presence in person or by proxy of the holders of a majority of the shares of Merchants common stock outstanding on the record date will constitute a quorum for the transaction of business at the special meeting.

The adoption of the Merger Agreement requires the affirmative vote of the holders of two-thirds of the outstanding shares of Merchants common stock entitled to vote at the special meeting of stockholders. Approval of the Merger-Related Executive Compensation proposal requires the affirmative vote of a majority of the votes cast on the proposal. Approval of the adjournment proposal, if necessary to solicit additional proxies if there are not sufficient votes to adopt the Merger Agreement, requires the affirmative vote of a majority of the votes cast on the proposal.

Broker non-votes and abstentions will have the same effect as a vote “AGAINST” the Merger Agreement, but they will have no effect on the Merger-Related Executive Compensation proposal or the adjournment proposal.

Share Ownership of Management; Voting Agreements (Page 25)

On the record date, the directors and another principal stockholder of Merchants had voting power with respect to an aggregate of [•] shares of Merchants common stock, or approximately [•]% of the shares of the Merchants common stock then outstanding. Each such person executed an agreement that generally commits such person to vote all of his or her shares of Merchants common stock in favor of the Merger Agreement.

Recommendation of the Merchants Board of Directors (Page 24)

Merchants’ board of directors has unanimously approved the Merger Agreement, and recommends a vote “FOR” the adoption of the Merger Agreement, “FOR” the approval, on an advisory basis, of the Merger-Related Executive Compensation, and “FOR” the adjournment proposal, if necessary.

Appraisal Rights (Page 58)

Under Delaware law, Merchants stockholders who do not vote in favor of adoption of the Merger Agreement will have the right to seek appraisal of the fair value of their Merchants common stock as determined by the Delaware Court of Chancery if the Merger is completed, but only if they submit a written demand for such an appraisal prior to the vote on adoption of the Merger Agreement and strictly comply with the other Delaware law procedures explained in this Proxy Statement/Prospectus. See the section entitled “Proposal 1 — The Merger — Appraisal or Dissenters’ Rights” beginning on page 58 of this Proxy Statement/Prospectus. The applicable Delaware law is reproduced in its entirety in Annex C to this Proxy Statement/Prospectus.

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The Merger

Structure of the Merger (Page 62)

Merchants and Community Bank System are proposing a merger of Merchants with and into Community Bank System, with Community Bank System as the surviving company. Immediately following the Merger, the parties will merge Merchants Bank, a wholly-owned banking subsidiary of Merchants, with and into Community Bank, a wholly-owned banking subsidiary of Community Bank System, with Community Bank as the surviving entity (the “Bank Merger”).

The Merger Agreement is attached to this document as Annex A. We encourage you to read the Merger Agreement carefully and in its entirety as it is the legal document that governs the Merger and your rights in it. You are also encouraged to read the risk factors beginning on page 15.

Merger Consideration (Page 62)

If the Merger proposal is approved and the Merger is subsequently completed, you may elect to receive (subject to the proration procedures described below), in exchange for each outstanding share of Merchants common stock that you own, either:

Election Procedures (Page 63)

Community Bank System will mail separately an election form/letter of transmittal. Please read the instructions to the election form/letter of transmittal, and complete, sign and return it with your Merchants stock certificates or appropriate guarantee of delivery before the election deadline. Merchants and Community Bank System expect the election deadline will be 5:00 p.m., Eastern time, on [•], but they will notify you if this date changes. If you do not make a valid election as to the form of merger consideration before the election deadline, all of your shares of Merchants common stock will be converted into the right to receive the mixed election consideration.

Proration Procedures (Page 63)

The merger consideration to be paid to Merchants stockholders is subject to allocation procedures that are designed to ensure that the total amount of cash paid, and the total number of shares of Community Bank System common stock issued in the Merger, as a whole, will equal as nearly as practicable the total amount of cash and number of shares that would have been paid and issued if all of the Merchants stockholders received the mixed election consideration.

Whether you receive the amount of cash and/or stock you request in your election form will depend in part on the elections of other Merchants stockholders. You may not receive the form of consideration that you elect in the Merger, and you may instead receive a pro-rata amount of cash and/or Community Bank System common stock.

The greater the oversubscription of the stock election, the less stock and more cash a Merchants stockholder making the stock election will receive. Reciprocally, the greater the oversubscription of the cash election, the less cash and more stock a Merchants stockholder making the cash election will receive. However, in no event will a Merchants stockholder who makes the cash election or the stock election receive less cash and more shares of Community Bank System common stock, or fewer shares of Community Bank System common stock and more cash, respectively, than a stockholder who makes the mixed election.

For additional detail and for illustrative examples, see “The Merger Agreement — Election and Proration Procedures” beginning on page 63 of this Proxy Statement/Prospectus.

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Treatment of Merchants Equity Awards and Warrants (Page 67)

At the effective time of the Merger, each option granted under Merchants’ equity plans outstanding and unexercised, whether or not then vested or exercisable, will be cancelled and converted into the right to receive a cash payment in an amount equal to the product of the number of shares of Merchants common stock underlying the option and the excess of the value of the mixed election consideration over the exercise price of the option.

At the effective time of the Merger, each restricted stock award granted under Merchants’ equity plans will automatically vest in full, and any restrictions thereon will lapse, and such stock will be cancelled and converted into the right to receive a cash payment equal to the value of the mixed election consideration, plus all dividends, if any, accrued but unpaid as of the effective time of the Merger with respect to such restricted share.

At the effective time of the Merger, each organizers’ warrant will be converted into a warrant to acquire, upon payment of the amount determined by dividing the per share exercise price immediately prior to the effective time by the stock election consideration of 0.9630, the number of shares of Community Bank System common stock determined by multiplying (i) the number of shares of Merchants common stock which may be acquired upon exercise of such organizers’ warrant immediately prior to the effective time by (ii) the stock election consideration of 0.9630.

At the effective time of the Merger, each 2013 warrant will be converted into the right to receive, at the holder’s election, either (i) a cash payment in cancellation of such 2013 warrant equal to the number of shares of Merchants common stock which may be acquired upon exercise of such 2013 warrant multiplied by the excess, if any, of the cash election consideration of $40.00 over the per share 2013 warrant exercise price immediately prior to the effective time or (ii) a replacement 2013 warrant certificate issued by Community Bank System representing the right to acquire prior to the expiration date of the original 2013 warrant, upon payment of the amount determined by dividing the per share exercise price immediately prior to the effective time by the stock election consideration of 0.9630, that number of shares of Community Bank System common stock equal to the number of shares of Merchants common stock which may be acquired upon exercise of such 2013 warrant immediately prior to the effective time multiplied by the stock election consideration of 0.9630.

Opinion of Merchants’ Financial Advisor (Page 38)

In connection with the Merger, Merchants’ financial advisor, Piper Jaffray & Co. (“Piper”), delivered a written opinion to the Merchants board of directors, dated October 22, 2016, that, as of such date, and based upon and subject to the various factors, assumptions and limitations set forth in its opinion, the consideration offered in the Merger was fair, from a financial point of view, to the holders of Merchants common stock. The full text of Piper’s written opinion dated October 22, 2016, which sets forth, among other things, the procedures followed, assumptions made, matters considered and qualifications and limitations on the scope of review undertaken in rendering its opinion, is attached as Annex B to this Proxy Statement/Prospectus and is incorporated herein by reference. Piper’s opinion was addressed to, and provided for the information and benefit of, the Merchants board of directors (in its capacity as such) in connection with its evaluation of the fairness of the merger consideration from a financial point of view, and did not address any other aspects or implications of the Merger. The opinion does not constitute a recommendation to the Merchants board of directors or to any other persons in respect of the Merger, including as to how any holder of Merchants common stock should vote at any stockholders’ meeting held in connection with the Merger or take, or not to take, any action in respect of the Merger. Piper’s opinion does not address the relative merits of the Merger as compared to any other business or financial strategies that might be available to Merchants, nor does it address the underlying business decision of Merchants to engage in the Merger.

Share Information and Market Price (Page 90)

Community Bank System common stock is traded on the NYSE under the symbol “CBU.” Merchants common stock is traded on the NASDAQ Global Select Market under the symbol “MBVT.” The following table shows the closing or last sale prices of Community Bank System common stock and Merchants common

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stock on October 21, 2016 and [•]. October 21, 2016 is the last full trading day prior to the announcement of the signing of the Merger Agreement. [•] was the last practicable trading day for which information was available prior to the date of this document. The equivalent price per share of Merchants common stock is determined by multiplying the closing price of Community Bank System common stock by the 0.6741 mixed stock consideration and adding $12.00 to such amount.

		Community Bank System				Merchants
		Historical				Historical				Equivalent Market Value Per Share
Closing Sale Prices Per Share on:
October 21, 2016		$	47.50			$	32.85			$	44.02
[•]

The market prices of both Community Bank System common stock and Merchants common stock will fluctuate before the Merger. Merchants and Community Bank System encourage you to obtain current market prices.

Required Regulatory Approvals (Page 57)

Community Bank System must make filings with or obtain approvals from certain regulatory authorities to effect the Merger. In addition, before Merchants and Community Bank System can complete the Merger, they will make all filings and obtain all regulatory approvals required for the merger of their banking subsidiaries, Community Bank and Merchants Bank. These include the approvals of the Federal Reserve Board and the Office of the Comptroller of the Currency (the “OCC”). In addition, Community Bank System must apply to list the common stock to be issued in the Merger on the NYSE.

Limitations on Considering Other Acquisition Proposals (Page 73)

Merchants has agreed to a number of limitations with respect to soliciting, negotiating and discussing acquisition proposals involving persons other than Community Bank System, and to certain related matters. The Merger Agreement does not, however, prohibit Merchants from considering an unsolicited bona fide acquisition proposal from a third party if certain specified conditions are met.

Conditions to Completion of the Merger (Page 78)

Each party’s obligation to complete the Merger is subject to the satisfaction or waiver (to the extent permitted under applicable law) of certain other conditions, including:

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Fees and Expenses; Termination Fee (Page 80)

Merchants and Community Bank System will each pay its own expenses in connection with the Merger, except that the parties will share equally all costs associated with the printing and mailing of this document. If, however, the Merger Agreement is terminated under certain circumstances, Merchants must pay a termination fee of $10.72 million as set forth in the Merger Agreement. Generally, the termination fee will become payable in connection with Merchants accepting a competing third party acquisition offer.

Terminating the Merger Agreement (Page 78)

Either Merchants or Community Bank System may terminate the Merger Agreement under certain circumstances, including if:

Merchants may terminate the Merger Agreement (i) if Community Bank System’s stock price falls below thresholds set forth in the Merger Agreement and Community Bank System does not increase the stock consideration in the Merger pursuant to a prescribed formula in the Merger Agreement, or (ii) in order to enter into a definitive agreement with respect to a “superior proposal,” as defined in the Merger Agreement, subject to payment of a $10.72 million termination fee to Community Bank System.

Community Bank System may terminate the Merger Agreement if the Merchants board of directors effects an adverse recommendation change (i.e., (i) withdrawing, modifying or qualifying in a manner adverse to Community Bank System the approval, recommendation or declaration of advisability by the Merchants board of directors set forth in this Proxy Statement/Prospectus that the Merchants stockholders vote to adopt the Merger Agreement, (ii) recommending, endorsing or otherwise declaring as advisable the adoption of any acquisition proposal, (iii) resolving, agreeing or proposing to take any such actions or (iv) submitting the Merger Agreement to Merchants stockholders without recommendation).

Community Bank System may terminate the Merger Agreement if any governmental authority has denied or rescinded any required regulatory approval or imposed a materially burdensome regulatory condition on Community Bank System in connection with granting any regulatory approval.

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Termination Fee (Page 80)

Merchants will owe Community Bank System a $10.72 million termination fee if:

The payment of the termination fee will fully discharge Merchants from any losses that may be suffered by Community Bank System based upon, resulting from or arising out of the termination of the Merger Agreement.

Interests of Merchants Directors and Executive Officers in the Merger (Page 48)

Merchants’ stockholders should be aware that some of Merchants’ directors and executive officers have interests in the Merger and have arrangements that are different from, or in addition to, those of Merchants stockholders in general. These interests include:

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The Merchants board of directors was aware of these interests and considered them in recommending that Merchants stockholders approve the Merger Agreement.

Differences Between Rights of Holders of Community Bank System and Merchants Stock (Page 96)

Both Merchants and Community Bank System are Delaware corporations. The rights of Merchants stockholders are currently governed by Merchants’ certificate of incorporation and bylaws. If the Merger is completed, certain Merchants stockholders will become stockholders of Community Bank System and their rights will be governed by Community Bank System’s certificate of incorporation and bylaws. Merchants stockholders will have different rights when they become holders of Community Bank System common stock than they currently have as holders of Merchants common stock.

Material U.S. Federal Income Tax Consequences of the Merger (Page 54)

It is a condition to the respective obligations of Merchants and Community Bank System to complete the Merger that each of Merchants and Community Bank System receives a legal opinion to the effect that the Merger qualifies as a “reorganization” within the meaning of Section 368(a) of the Code. If, as expected, the Merger qualifies as a “reorganization”, the specific tax consequences to a U.S. holder (as defined in “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 54 of this Proxy Statement/Prospectus) exchanging Merchants common stock in the Merger will generally depend upon the form of consideration such U.S. holder receives in the Merger.

The U.S. federal income tax consequences described above may not apply to all holders of Merchants common stock. Your tax consequences will depend on your individual situation. Accordingly, we strongly urge you to consult your own tax advisor to determine the particular tax consequences of the Merger to you.

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SELECTED HISTORICAL FINANCIAL DATA

The following tables summarize selected historical consolidated financial data for Community Bank System and Merchants. The following selected historical consolidated financial data as of and for the twelve months ended December 31, 2015, 2014, 2013, 2012 and 2011 has been derived from each company’s audited consolidated financial statements. The following selected historical consolidated financial data as of and for the nine months ended September 30, 2016 and 2015 is derived from the unaudited consolidated financial statements of each company and has been prepared on the same basis as the selected historical consolidated financial data derived from the audited consolidated financial statements and, in the opinion of each company’s management, reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data for those dates.

The information is only a summary and should be read in conjunction with each company’s financial statements and related notes and management’s discussions and analyses contained in the annual, quarterly and other reports filed with the SEC. See “Where You Can Find More Information” beginning on page 104 of this Proxy Statement/Prospectus.

Community Bank System, Inc.
Selected Historical Financial Data

		Nine months ended September 30,								Years Ended December 31,
(In thousands except per share data and ratios)		2016				2015				2015				2014				2013				2012				2011
Income Statement Data:
Loan interest income		$	157,865			$	138,422			$	187,743			$	185,527			$	188,197			$	192,710			$	192,981
Investment interest income			54,323				53,196				71,879				70,693				75,962				88,690				77,988
Interest expense			8,538				8,187				11,202				11,792				26,065				50,976				61,556
Net interest income			203,650				183,431				248,420				244,428				238,094				230,424				209,413
Provision for loan losses			5,436				3,120				6,447				7,178				7,992				9,108				4,736
Noninterest income			117,005				90,151				123,303				119,020				108,748				98,955				89,283
Gain (loss) on investment securities & early retirement of long-term borrowings, net			0				0				(4	)			0				(6,568	)			291				(61	)
Acquisition expenses, litigation settlement, and contract termination charges			342				1,318				7,037				2,923				2,181				8,247				4,831
Other noninterest expenses			199,909				166,757				226,018				223,657				219,074				203,510				185,541
Income before income taxes			114,968				102,387				132,217				129,690				111,027				108,805				103,527
Net income		$	77,420			$	71,159			$	91,230			$	91,353			$	78,829			$	77,068			$	73,142
Diluted earnings per share		$	1.74			$	1.72			$	2.19			$	2.22			$	1.94			$	1.93			$	2.01
Balance Sheet Data:
Cash equivalents		$	19,110			$	12,395			$	21,931			$	12,870			$	11,288			$	84,415			$	203,082
Investment securities			2,877,644				2,917,263				2,847,940				2,512,974				2,218,725				2,818,527				2,151,370
Loans, net of unearned discount			4,940,621				4,313,547				4,801,375				4,236,206				4,109,083				3,865,576				3,471,025
Allowance for loan losses			(46,789	)			(45,588	)			(45,401	)			(45,341	)			(44,319	)			(42,888	)			(42,213	)
Intangible assets			482,119				384,525				484,146				386,973				390,499				387,134				360,564
Total assets			8,727,746				7,997,166				8,552,669				7,489,440				7,095,864				7,496,800				6,488,275
Deposits			7,077,419				6,148,110				6,873,474				5,935,264				5,896,044				5,628,039				4,795,245
Borrowings			236,064				660,240				403,446				440,122				244,010				830,134				830,329
Shareholders’ equity			1,240,582				1,045,026				1,140,647				987,904				875,812				902,778				774,583

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		Nine months ended September 30,								Years Ended December 31,
(In thousands except per share data and ratios)		2016				2015				2015				2014				2013				2012				2011
Capital and Related Ratios:
Cash dividends declared per share		$	0.94			$	0.91			$	1.22			$	1.16			$	1.10			$	1.06			$	1.00
Book value per share			27.97				25.48				26.06				24.24				21.66				22.78				20.94
Tangible book value per share(1)			18.06				17.05				15.90				15.63				12.80				13.72				11.85
Market capitalization (in millions)			2,134				1,525				1,748				1,554				1,604				1,084				1,028
Tier 1 leverage ratio			10.35	%			10.09	%			10.32	%			9.96	%			9.29	%			8.40	%			8.38	%
Total risk-based capital to risk-adjusted assets			15.51	%			15.93	%			18.08	%			18.75	%			17.57	%			16.20	%			15.51	%
Tangible equity to tangible assets(1)			9.66	%			9.14	%			8.59	%			8.92	%			7.68	%			7.62	%			7.12	%
Dividend payout ratio			53.6	%			52.2	%			55.5	%			51.6	%			56.0	%			54.3	%			49.3	%
Period end common shares outstanding			44,357				41,019				43,775				40,748				40,431				39,626				36,986
Diluted weighted-average shares outstanding			44,609				41,343				41,605				41,232				40,726				39,927				36,454
Selected Performance Ratios:
Return on average assets			1.19	%			1.24	%			1.17	%			1.23	%			1.09	%			1.08	%			1.18	%
Return on average equity			8.56	%			9.40	%			8.87	%			9.65	%			9.04	%			8.82	%			10.36	%
Net interest margin			3.69	%			3.74	%			3.73	%			3.91	%			3.91	%			3.88	%			4.07	%
Noninterest income/operating income (FTE)			35.7	%			31.9	%			32.1	%			31.4	%			30.0	%			28.6	%			28.4	%
Efficiency ratio(2)			59.6	%			58.0	%			57.9	%			57.9	%			59.3	%			57.4	%			57.6	%
Asset Quality Ratios:
Allowance for loan losses/total loans			0.95	%			1.06	%			0.95	%			1.07	%			1.08	%			1.11	%			1.22	%
Nonperforming loans/total loans			0.47	%			0.58	%			0.50	%			0.56	%			0.54	%			0.75	%			0.85	%
Allowance for loan losses/nonperforming loans			201	%			181	%			190	%			190	%			201	%			147	%			144	%
Loan loss provision/net charge-offs			134	%			109	%			101	%			117	%			122	%			108	%			94	%
Net charge-offs/average loans			0.11	%			0.09	%			0.15	%			0.15	%			0.17	%			0.23	%			0.15	%

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Merchants Bancshares, Inc.
Selected Historical Financial Data

		Nine months ended September 30,								Years Ended December 31,
(In thousands except per share data and ratios)		2016				2015				2015				2014				2013				2012				2011
Summary of Operations:
Interest and dividend income		$	44,755			$	38,419			$	52,116			$	50,972			$	53,967			$	56,857			$	58,018
Interest expense			3,395				3,048				4,052				4,525				5,070				6,883				8,644
Net interest income			41,360				35,371				48,064				46,447				48,897				49,974				49,374
Provision for loan losses			905				250				250				150				800				950				750
Net interest income after provision for loan losses			40,455				35,121				47,814				46,297				48,097				49,024				48,624
Noninterest income			9,276				8,872				11,960				11,574				11,630				12,613				11,838
Noninterest expenses			34,172				31,079				43,971				42,214				39,534				40,950				40,770
Income before income taxes			15,559				12,914				15,803				15,657				20,193				20,687				15,810
Provision for income taxes			3,792				2,606				3,185				3,532				5,062				5,493				4,890
Net income		$	11,767			$	10,308			$	12,618			$	12,125			$	15,131			$	15,194			$	14,620
Share Data:
Basic earnings per common share		$	1.71			$	1.63			$	1.98			$	1.92			$	2.40			$	2.43			$	2.35
Diluted earnings per common share		$	1.71			$	1.62			$	1.98			$	1.91			$	2.40			$	2.42			$	2.35
Cash dividends declared per common share		$	0.84			$	0.84			$	1.12			$	1.12			$	1.12			$	1.12			$	1.12
Weighted average common shares outstanding(1)			6,866,418				6,332,663				6,373,115				6,326,142				6,302,494				6,258,832				6,212,187
Period end common shares outstanding(2)			6,883,644				6,338,158				6,855,294				6,327,226				6,318,708				6,282,385				6,232,783
Period-end book value per share(2)		$	22.99			$	20.93			$	21.59			$	19.89			$	18.93			$	18.82			$	17.57
Average Balances(3):
Total assets		$	1,959,396			$	1,736,523			$	1,775,496			$	1,667,665			$	1,677,342			$	1,648,393			$	1,507,656
Earning assets			1,880,008				1,670,727				1,708,153				1,603,460				1,617,225				1,587,190				1,461,359
Gross loans			1,432,167				1,218,067				1,240,386				1,165,586				1,133,637				1,057,446				971,003
Investments(4)			397,146				379,030				385,806				358,274				455,679				509,384				436,170
Total deposits			1,507,276				1,359,958				1,383,537				1,320,389				1,299,449				1,222,423				1,120,234
Shareholders’ equity			153,822				127,876				130,220				123,283				116,640				113,621				103,639
Period-End:
Total assets		$	1,994,655			$	1,818,341			$	2,021,237			$	1,723,464			$	1,725,469			$	1,708,550			$	1,611,869
Gross loans			1,477,285				1,257,932				1,414,280				1,182,334				1,166,233				1,082,923				1,027,626
Allowance for loan losses			12,540				12,210				12,040				11,833				12,042				11,562				10,619
Investments(4)			394,489				410,390				406,925				346,272				400,835				517,233				520,939
Total deposits			1,503,840				1,387,473				1,551,439				1,308,772				1,323,576				1,271,080				1,177,880
Shareholders’ equity			158,287				132,646				148,054				125,821				119,611				118,221				109,537

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SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED
CONSOLIDATED FINANCIAL INFORMATION

The following table shows unaudited pro forma financial information about the financial condition and results of operations, including per share data, after giving effect to the Merger and other pro forma adjustments. The unaudited pro forma financial information assumes that the Merger is accounted for under the acquisition method of accounting for business combinations, and that the assets and liabilities of Merchants will be recorded by Community Bank System at their respective fair values as of the date the Merger is completed. The unaudited pro forma condensed combined balance sheet gives effect to the transactions as if the transactions had occurred on September 30, 2016. The unaudited pro forma condensed combined income statements for the nine months ended September 30, 2016, and the year ended December 31, 2015, give effect to the transactions as if the transactions had become effective at January 1, 2015. The unaudited selected pro forma combined financial information has been derived from and should be read in conjunction with the consolidated financial statements and related notes of Community Bank System, which are incorporated in this Proxy Statement/Prospectus by reference, the consolidated financial statements and related notes of Merchants, which are incorporated in this Proxy Statement/Prospectus by reference, and the more detailed unaudited pro forma condensed combined financial information, including the notes thereto, appearing elsewhere in this Proxy Statement/Prospectus. See “Where You Can Find More Information” on page 104 of this Proxy Statement/Prospectus and “Unaudited Pro Forma Combined Condensed Consolidated Financial Information” beginning on page 81.

The unaudited pro forma condensed combined financial information is presented for illustrative purposes only and does not indicate the financial results of the combined company had the companies actually been combined at the beginning of each period presented, nor the impact of possible business model changes. The unaudited pro forma condensed combined financial information also does not consider any potential effects of changes in market conditions on revenues, expense efficiencies, asset dispositions, and share repurchases, among other factors, including those discussed in the section entitled “Risk Factors” beginning on page 15 of this Proxy Statement/Prospectus. In addition, as explained in more detail in the accompanying notes to the “Unaudited Pro Forma Combined Condensed Consolidated Financial Information” beginning on page 81 of this Proxy Statement/Prospectus, the preliminary allocation of the pro forma purchase price reflected in the unaudited pro forma condensed combined financial information is subject to adjustment and may vary significantly from the actual purchase price allocation that will be recorded upon completion of the Merger.

(in thousands)		Nine months ended September 30, 2016				Year ended December 31, 2015
Statements of Income
Net interest income		$	245,947			$	298,116
Provision for loan losses			6,341				6,697
Net interest income after provision for loan losses			239,606				291,419
Noninterest revenues			126,281				135,259
Noninterest expenses			236,769				281,542
Income before taxes			129,118				145,136
Income taxes			40,802				43,070
Net income			88,316				102,066

(in thousands)		As of September 30, 2016
Balance Sheet
Cash and cash equivalents		$	149,379
Securities			3,234,246
Net loans			6,362,659
Total assets			10,822,621
Deposits			8,581,580
Short-term borrowings			155,900
Subordinated debt held by unconsolidated subsidiary trusts			117,700
Securities sold under agreement to repurchase			276,083
Total shareholders’ equity			1,496,027

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COMPARATIVE UNAUDITED PER SHARE DATA

The following table summarizes the per share information for Community Bank System and Merchants on a historical, pro forma and equivalent basis. The pro forma and pro forma per equivalent share information gives effect to the Merger as if the Merger had been effective on the date presented in the case of the book value data, and as if the Merger had been effective as of the beginning of each period presented in the case of the earnings per share and the cash dividends data. As described elsewhere in this Proxy Statement/Prospectus, the stock consideration may be adjusted in the event Merchants invokes its right to terminate the Merger Agreement if the average closing price of Community Bank System common stock for a specified period prior to closing is less than $35.77 and Community Bank System common stock underperforms a specified peer-group index by more than 20%, and Community Bank System elects to increase the stock consideration, in order that the Merger Agreement will not be terminated.

The pro forma information, while helpful in illustrating the financial characteristics of the combined company under one set of assumptions, does not reflect the impact of factors that may result as a consequence of the Merger or consider any potential impacts of current market conditions or the Merger on revenues, expense efficiencies, asset dispositions, and share repurchases, among other factors, nor the impact of possible business model changes. As a result, the pro forma results are not necessarily indicative of what would have occurred had the Merger taken place on the assumed dates, nor do they represent an attempt to predict or suggest future results. You should read the information in the following table in conjunction with the historical financial information and related notes contained in the annual, quarterly and other reports filed by Community Bank System or Merchants with the SEC. See “Where You Can Find More Information” beginning on page 104 of this Proxy Statement/Prospectus. You should not rely on the pro forma information as being indicative of the results that Community Bank System will achieve in the Merger. The information below should be read in conjunction with “Unaudited Pro Forma Combined Condensed Consolidated Financial Information” beginning on page 81 of this Proxy Statement/Prospectus.

		Historical								Pro Forma
		Community Bank System				Merchants				Combined Company(1)(2)(3)				Merchants Equivalent(4)
For the nine months ended September 30, 2016:
Basic Earnings per share		$	1.75			$	1.71			$	1.81			$	1.74
Diluted Earnings per share			1.74				1.71				1.79				1.72
Cash Dividends			0.94				0.84				0.94				0.91
Book Value at September 30, 2016			27.97				22.99				30.53				29.40
For the year ended December 31, 2015:
Basic Earnings per share		$	2.21			$	1.98			$	2.23			$	2.15
Diluted Earnings per share			2.19				1.98				2.21				2.13
Cash Dividends			1.22				1.12				1.22				1.17

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RISK FACTORS

In addition to the other information contained in or incorporated by reference into this Proxy Statement/Prospectus, including the matters addressed under the section titled “Cautionary Statement Regarding Forward-Looking Statements,” you should consider carefully the risk factors described below in deciding how to vote. You should also read and consider the risk factors associated with the businesses of Community Bank System and Merchants because these risk factors may affect the operations and financial results of the combined company. Community Bank System’s risk factors may be found in Community Bank System’s Annual Report on Form 10-K for the year ended December 31, 2015 and subsequent quarterly reports on Form 10-Q. Merchants’ risk factors may be found in Merchants’ Annual Report on Form 10-K for the year ended December 31, 2015 and subsequent quarterly reports on Form 10-Q. See “Where You Can Find More Information.”

Risks Related to the Merger

The value of the stock consideration will vary with changes in Community Bank System’s stock price.

Upon completion of the Merger, each share of Merchants common stock will be converted into the right to receive the stock election consideration, the cash election consideration, or the mixed election consideration, subject to proration as set forth in the Merger Agreement. The exchange ratio for the stock portion of the merger consideration is fixed. Any change in the market price of Community Bank System common stock will affect the implied value of the merger consideration that Merchants stockholders will receive upon completion of the Merger. Accordingly, at the time of the special meeting and at the time that elections are due, you will not know or be able to determine the value of the stock election consideration or mixed election consideration. Stock price changes may result from a variety of factors, including general market and economic conditions, changes in Community Bank System’s and Merchants’ respective businesses, operations and prospects, and regulatory considerations. Many of these factors are beyond the control of Community Bank System and Merchants.

You may not receive the form of merger consideration that you elect.

The consideration to be received by Merchants stockholders in the Merger is subject to proration and adjustment procedures that are designed to ensure, as nearly as practicable, that the total cash amount of consideration and the total number of shares of Community Bank System common stock issued, as a whole, will equal the total amount of cash and number of shares that would have been paid and issued if all of the Merchants stockholders received the mixed election consideration. Accordingly, unless you elect to receive a combination of 0.6741 shares of Community Bank System common stock and $12.00 in cash per share for your Merchants shares, there is no assurance that you will receive the form of consideration that you elect with respect to all shares of Merchants common stock you hold. There is a risk that you will receive a portion of the merger consideration in the form that you do not elect, which could result in, among other things, tax consequences that differ from those that would have resulted had you received the form of consideration you elected, including with respect to the recognition of taxable gain to the extent cash is received. For illustrative examples of how the proration procedures would work in the event there is an oversubscription of the cash election or stock election in the Merger, see “The Merger Agreement — Election and Proration Procedures” beginning on page 63 of this Proxy Statement/Prospectus.

Community Bank System and Merchants will be subject to business uncertainties and contractual restrictions while the Merger and the NRS acquisition are pending.

Uncertainty about the effect of the Merger and the NRS acquisition on employees and customers may have an adverse effect on Merchants and Community Bank System. These uncertainties may impair Community Bank System’s or Merchants’ ability to attract, retain and motivate key personnel until the Merger is consummated, and could cause customers and others that deal with Merchants or Community Bank System to seek to change existing business relationships with Merchants or Community Bank System. Retention of certain employees by Merchants may be challenging while the Merger and the NRS acquisition are pending, as certain employees may experience uncertainty about their future roles with Community Bank System. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not

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to remain with Community Bank System, Community Bank System’s business following the Merger could be harmed. In addition, the Merger Agreement restricts Merchants from operating its business other than in the ordinary course, and prohibits it from taking specified actions until the Merger occurs without the consent of Community Bank System. These restrictions may prevent Merchants from pursuing business opportunities that may arise prior to the completion of the Merger. Please see the section entitled “The Merger Agreement — Conduct of Business Pending the Merger” beginning on page 68 of this Proxy Statement/Prospectus for a description of the restrictive covenants applicable to Merchants.

There is no assurance when or even if the Merger will be completed.

Completion of the Merger is subject to satisfaction or waiver of a number of conditions, including among others the adoption of the Merger Agreement by Merchants stockholders and regulatory approvals. See the section entitled “The Merger Agreement” beginning on page 62 of this Proxy Statement/Prospectus. There can be no assurance that Community Bank System and Merchants will be able to satisfy the closing conditions or that closing conditions beyond their control will be satisfied or waived.

Community Bank System and Merchants can agree at any time to terminate the Merger Agreement, even if Merchants stockholders have already voted to adopt the Merger Agreement. Community Bank System and Merchants can also terminate the Merger Agreement under other specified circumstances.

The fairness opinion delivered to Merchants’ board of directors does not reflect changes in circumstances subsequent to the date of the fairness opinion.

Piper Jaffray & Co., financial advisor to Merchants in connection with the Merger, delivered its opinion to the board of directors of Merchants on October 22, 2016. The opinion of Piper speaks only as of such date. Changes in the operations and prospects of Merchants or Community Bank System, general market and economic conditions and other factors beyond the control of Merchants or Community Bank System may significantly alter the value of Merchants or the price of shares of Community Bank System common stock or Merchants common stock by the time the Merger is completed. Piper’s opinion does not speak as of the time the Merger will be completed or as of any date other than the date of such opinion. For a description of Piper’s opinion, please see the section entitled “The Merger — Opinion of Merchants’ Financial Advisor,” beginning on page 38 of this Proxy Statement/Prospectus. For a description of the other factors considered by the Merchants board of directors in determining to approve the Merger and the other transactions contemplated in the Merger Agreement, please see the sections entitled “The Merger — Background of the Merger,” and “The Merger — Merchants’ Reasons for the Merger; Recommendation of Merchants’ Board of Directors,” beginning on pages 34 and 36, respectively, of this Proxy Statement/Prospectus.

Community Bank System may fail to implement the Merger and the NRS acquisition successfully, achieve savings and realize the other anticipated benefits from the Merger and the NRS acquisition, which would adversely affect Community Bank System’s financial condition and results of operations.

The Merger and the NRS acquisition involve the integration of three companies that have previously operated independently. The difficulties of combining the operations of the three companies include: integrating personnel with diverse business backgrounds; integrating core processing systems and converting customers to new systems; and retaining key employees. As a result, Community Bank System may not be able to operate the combined company as effectively as it expects. Community Bank System may also fail to achieve the anticipated potential benefits of the Merger and/or the NRS acquisition as quickly or as cost effectively as it anticipates or may not be able to achieve those benefits at all. The management of Community Bank System will have to dedicate substantial effort to integrating the three companies and, therefore, its focus and resources may be diverted from other strategic opportunities and from operational matters.

In addition, certain employees of Merchants or NRS may not be employed after the Merger. Employees of Merchants or NRS that Community Bank System wishes to retain may elect to terminate their employment as a result of the Merger or NRS acquisition, respectively, which could delay or disrupt the integration process. It is possible that the integration process could result in the disruption of the ongoing business of Community Bank System and its subsidiaries following the Merger and the NRS acquisition or cause inconsistencies in standards, controls, procedures and policies that adversely affect the ability of Community

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Bank System and its subsidiaries to maintain relationships with Merchants’ or NRS’s customers and employees or to achieve the anticipated benefits of the Merger and the NRS acquisition.

The unaudited pro forma condensed combined financial information included in this document is preliminary and the actual financial condition and results of operations of Community Bank System after the Merger may differ materially.

The unaudited pro forma condensed combined financial information in this document is presented for illustrative purposes only and is not necessarily indicative of what Community Bank System’s actual financial condition or results of operations would have been had the Merger been completed on the dates indicated. The unaudited pro forma condensed combined financial information reflects adjustments, which are based upon preliminary estimates, to record the Merchants identifiable assets acquired and liabilities assumed at fair value and the resulting goodwill recognized. The purchase price allocation reflected in this document is preliminary, and final allocation of the purchase price will be based upon the actual purchase price and the fair value of the assets and liabilities of Merchants as of the date of the completion of the Merger. Accordingly, the final acquisition accounting adjustments may differ materially from the pro forma adjustments reflected in this document. For more information, see “Unaudited Pro Forma Combined Condensed Consolidated Financial Statements” beginning on page 81 of this Proxy Statement/Prospectus.

Additional growth will subject Community Bank System to additional regulation, increased supervision and increased costs.

The Dodd-Frank Act imposes additional regulatory requirements on institutions with $10 billion or more in assets. Community Bank System had $8.7 billion in assets as of September 30, 2016. If the pending Merger with Merchants is completed, then Community Bank System will have more than $10 billion in assets and, as a result, will be subject to the additional regulatory requirements, increased supervision and increased costs, including but not limited to the following:

The imposition of these regulatory requirements and increased supervision may require additional commitment of financial resources to regulatory compliance and may increase Community Bank System’s cost of operations. Further, the results of the stress testing process may lead Community Bank System to retain additional capital or alter the mix of its capital components.

Regulatory approvals may not be received, may take longer than expected or impose conditions that are not presently anticipated.

Before the Merger may be completed, Community Bank System must obtain various approvals or consents, including approvals or consents from the OCC and the Federal Reserve Board. These governmental entities, including the OCC, may impose conditions on the completion of the Merger or require changes to the terms of the Merger Agreement or the manner in which Merchants or Community Bank System conducts their respective businesses. Although Community Bank System and Merchants do not currently expect that any

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such conditions or changes would be imposed, there can be no assurance that they will not be. Such conditions or changes could have the effect of delaying completion of the Merger or imposing additional costs on or limiting the revenues of Community Bank System, any of which might have a material adverse effect on Community Bank System following the Merger.

There can be no assurance as to whether the regulatory approvals will be received, the timing of those approvals, or whether any conditions will be imposed.

Certain of Merchants’ officers and directors have interests that are different from, or in addition to, interests of Merchants stockholders generally.

Merchants stockholders should be aware that some of Merchants’ directors and executive officers have interests in the Merger and have arrangements that are different from, or in addition to, those of Merchants stockholders in general. These interests include:

For a more complete description of these interests, see “The Merger — Interests of Merchants’ Directors and Executive Officers in the Merger” beginning on page 48 of this Proxy Statement/Prospectus.

The shares of Community Bank System common stock that may be received by Merchants stockholders as a result of the Merger will have different rights from the shares of Merchants common stock they currently hold.

Following completion of the Merger, Merchants stockholders who receive the stock consideration will no longer be stockholders of Merchants but will instead be stockholders of Community Bank System. There will be important differences between the current rights of Merchants stockholders and the rights of Community Bank System stockholders that may be important to Merchants stockholders. See the section of this Proxy Statement/Prospectus entitled “Comparison of Rights of Holders of Merchants Common Stock and Community Bank System Common Stock” commencing on page 96 for a detailed description of the stockholder rights of each corporation.

The price of Community Bank System common stock may be affected by factors different from those affecting the shares of Merchants common stock currently, and could decrease after the Merger.

Upon completion of the Merger, holders of Merchants common stock who receive stock consideration will become stockholders of Community Bank System. Community Bank System common stock could decline in value after the Merger. The market value of Community Bank System common stock fluctuates based upon

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various factors, including changes in the business, operations or prospects of Community Bank System, market assessments of the Merger and/or the NRS acquisition, regulatory considerations, market and economic considerations, and other factors. Further, the market price of Community Bank System common stock after the Merger may be affected by factors different from those currently affecting the common stock of Community Bank System or Merchants. The businesses of Community Bank System and Merchants differ and, accordingly, the results of operations of the combined company and the market price of Community Bank System’s shares of common stock after the Merger may be affected by factors different from those currently affecting the independent results of operations and market price of each of Community Bank System or Merchants. For a discussion of the businesses of Community Bank System and Merchants and of certain factors to consider in connection with their businesses, see the documents incorporated by reference into this Proxy Statement/Prospectus and referred to under “Where You Can Find More Information” beginning on page 104.

Merchants stockholders will have limited ability to exercise influence over management of the combined organization.

Merchants stockholders currently have the right to vote in the election of the board of directors of Merchants and on other matters affecting Merchants. Upon the completion of the Merger, each Merchants stockholder who receives shares of Community Bank System common stock will become a stockholder of Community Bank System with a percentage ownership of the combined organization that is much smaller than the stockholder’s percentage ownership of Merchants. It is expected that the former common stockholders of Merchants as a group will receive shares in the Merger constituting less than [•]% of the outstanding shares of Community Bank System common stock immediately after the Merger. Merchants stockholders will not have separate approval rights with respect to any actions or decisions of Community Bank System or have separate representation on Community Bank System’s board of directors. Because of this, Merchants stockholders will have significantly less influence on the management and policies of Community Bank System than they now have on the management and policies of Merchants.

Merchants stockholders who hold their stock certificates and make elections will be unable to sell their shares in the market pending the Merger.

Merchants stockholders who wish to elect the form of merger consideration that they receive must complete an election form and deliver their Merchants stock certificates. This means that during the time between when the election is made and the date the Merger is completed, Merchants stockholders will be unable to sell their Merchants common stock. If the Merger is unexpectedly delayed, this period could extend for a significant period of time. Merchants stockholders can shorten the period during which they cannot sell their shares by delivering their election shortly before the election deadline. However, elections received after the election deadline will not be accepted or honored.

If the Merger is not completed, Merchants will have incurred substantial expenses without its stockholders recognizing the expected benefits.

Merchants has incurred substantial expenses in connection with the Merger. If the Merger is not completed, Merchants expects that it will have incurred approximately $2.36 million in Merger-related expenses. These expenses would likely have a material adverse impact on the operating results of Merchants because it would not have realized the expected benefits of the Merger. Furthermore, if the Merger Agreement is terminated under certain circumstances, Merchants may be required to pay a termination fee of $10.72 million to Community Bank System. The payment of the termination fee could have a material adverse effect on Merchants’ financial condition. See “The Merger Agreement — Termination” and “The Merger Agreement — Termination Fee” beginning on pages 78 and 80, respectively, of this Proxy Statement/Prospectus.

The Merger Agreement limits Merchants’ ability to pursue alternatives to the Merger.

The Merger Agreement limits Merchants’ ability to initiate, solicit, encourage or knowingly facilitate any inquiries or competing third-party proposals, or knowingly engage in any negotiations, or provide any confidential information, or have any discussions with any person relating to a proposal to acquire all or a significant part of Merchants. In addition, Merchants has agreed to pay Community Bank System a

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termination fee in the amount of $10.72 million in the event that the Merger Agreement is terminated for certain reasons. These provisions may discourage a potential competing acquirer that would have an interest in acquiring all or a significant part of Merchants from considering or proposing that acquisition, even if it were prepared to pay consideration with a higher per share market price than that proposed in the Merger, or may result in a potential competing acquirer proposing to pay a lower per share price to acquire Merchants than it might otherwise have proposed to pay.

Goodwill incurred in the Merger may negatively affect Community Bank System’s financial condition.

To the extent that the merger consideration, consisting of cash plus the number of shares of Community Bank System common stock issued or to be issued in the Merger, exceeds the fair value of the net assets, including identifiable intangibles of Merchants, that amount will be reported as goodwill by Community Bank System. In accordance with current accounting guidance, goodwill will not be amortized but will be evaluated for impairment annually. A failure to realize expected benefits of the Merger could adversely impact the carrying value of the goodwill recognized in the Merger, and in turn negatively affect Community Bank System’s financial condition.

If the Merger fails to qualify as a “reorganization” within the meaning of Section 368(a) of the Code, Merchants stockholders will be required to recognize gain or loss on the exchange of their shares of Merchants common stock in the Merger for U.S. federal income tax purposes.

It is a condition to the respective obligations of Merchants and Community Bank System to complete the Merger that each of Merchants and Community Bank System receives a legal opinion to the effect that the Merger qualifies as “reorganization” within the meaning of Section 368(a) of the Code. None of these opinions will be binding on the Internal Revenue Service. Merchants and Community Bank System have not sought and will not seek any ruling from the Internal Revenue Service regarding any matters relating to the Merger, and as a result, there can be no assurance that the Internal Revenue Service will not assert, or that a court would not sustain, a position contrary to any of the conclusions set forth herein. If the Merger fails to qualify as a “reorganization” within the meaning of Section 368(a) of the Code, Merchants stockholders will be required to recognize gain or loss on the exchange of their shares of Merchants common stock in the Merger for U.S. federal income tax purposes. In addition, Merchants will be treated as having sold all of its assets to Community Bank System in a taxable transaction, and will recognize taxable gain to the extent the sum of the total consideration paid by Community Bank System to the Merchants stockholders, plus the liabilities of Merchants, exceeds the tax basis of Merchants in its assets, including its tax basis in its bank and other subsidiaries. Community Bank System would succeed to and become liable for any such Merchants corporate tax as a consequence of the Merger. For further information, see “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 54 of this Proxy Statement/Prospectus.

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Proxy Statement/Prospectus that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions and the risks and other factors set forth in the “Risk Factors” section beginning on page 15 of this Proxy Statement/Prospectus.

Additional factors that could cause the results of Community Bank System or Merchants to differ materially from those described in the forward-looking statements can be found in the filings made by Community Bank System and Merchants with the Securities and Exchange Commission, including the Community Bank System Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and subsequent quarterly reports on Form 10-Q, and the Merchants Annual Report on Form 10-K for the fiscal year ended December 31, 2015 and subsequent quarterly reports on Form 10-Q.

Because of these and other uncertainties, Community Bank System’s and Merchants’ actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, Community Bank System’s and Merchants’ past results of operations do not necessarily indicate Community Bank System’s and Merchants’ combined future results. You should not place undue reliance on any of the forward-looking statements, which speak only as of the dates on which they were made. Neither Community Bank System nor Merchants is undertaking an obligation to update these forward-looking statements, even though its situation may change in the future, except as required under the federal securities laws. All forward-looking statements contained in this document are qualified by these cautionary statements.

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THE COMPANIES

Community Bank System

Community Bank System is a Delaware corporation registered as a financial holding company under the Bank Holding Company Act of 1956, as amended. Community Bank System was incorporated in April 1983. At September 30, 2016, Community Bank System had on a consolidated basis approximately $8.7 billion in total assets, $7.1 billion in total deposits, $4.9 billion in total loans and stockholders’ equity of $1.2 billion. Its common stock is publicly traded on the NYSE under the symbol “CBU”. Community Bank System, with its principal executive offices in DeWitt, New York, is the parent company of Community Bank, and is among the country’s 150 largest financial institutions.

Community Bank is a commercial banking franchise with more than 200 customer facilities and 202 ATMs stretching diagonally from Northern New York to the Southern Tier and west to Lake Erie, and in Northern Pennsylvania. Community Bank is a national bank and a member of the Federal Reserve System and the Federal Home Loan Bank System, and its deposits are insured by the FDIC, up to applicable limits.

Community Bank System’s business strategy is to operate as a profitable, diversified financial services company providing a variety of banking and other financial services, with an emphasis on consumer and residential mortgage lending and commercial business loans to small and medium-sized businesses. As a result of consolidation of small to medium-sized financial institutions and the de-emphasis on retail branch banking by larger bank holding companies in the markets Community Bank serves, it believes there is a significant opportunity for a community-focused bank to provide a full range of financial services to small and middle-market commercial and retail customers. Community Bank’s branches are located in small towns and villages where competition is less intense. It emphasizes comprehensive retail and small business products and responsive, decentralized decision-making which reflect Community Bank’s knowledge of its local markets and customers.

Through its subsidiaries, Community Bank System offers a wide range of commercial and retail banking and financial services to businesses, individuals, agricultural and government customers. Community Bank’s account services include checking, interest-bearing checking, money market, savings, certificates of deposit and individual retirement accounts. It also offers residential and farm loans, business lines of credit, working capital facilities, inventory and dealer floor plans, as well as installment, commercial, term and student loans. Community Bank’s lending focuses predominantly on consumer and small to medium-sized business borrowers, which enables its loan portfolio to be highly diversified. Because Community Bank believes that there is a significant potential market for financial services and products, it offers a full range of services to satisfy its customers’ financial needs. In addition to traditional banking services and products, it offers personal trust, employee benefit trust, benefits administration and consulting, investment and insurance services to customers in our banking markets as well as in other parts of the country. Community Bank’s subsidiary, OneGroup NY, Inc., is a regional insurance broker with headquarters in Syracuse, New York. Community Bank System’s wholly-owned subsidiary, BPAS, is a leading provider of employee benefits administration and trust services, and actuarial and consulting services to customers on a national scale.

Community Bank System announced on December 5, 2016 that is has entered into an agreement to acquire NRS, a leading institutional provider of plan accounting, transfer agency, fund administration, trust and retirement plan services. Upon the closing of the transaction, NRS will become a subsidiary of BPAS. The cash and stock transaction is valued at approximately $140 million and is expected to close in the first quarter of 2017, subject to certain shareholder and regulatory approvals.

For additional information concerning the business of Community Bank System and its financial condition, results of operations and prospects, you should refer to the documents incorporated in this document by reference. See “Where You Can Find More Information” on page 104 of this Proxy Statement/Prospectus.

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Merchants Bancshares, Inc.

Merchants is a publicly-held bank holding company registered under the Bank Holding Company Act of 1956, as amended, and is subject to supervision, regulation and examination by the Federal Reserve Board. Merchants is incorporated under the laws of the State of Delaware and headquartered in South Burlington, Vermont. At September 30, 2016, Merchants had total consolidated assets of approximately $1.99 billion (including loans of approximately $1.47 billion), deposits of approximately $1.50 billion and stockholders’ equity of approximately $158 million.

Merchants conducts substantially all of its business through its subsidiary, Merchants Bank. Merchants Bank is a Vermont-chartered nonmember stock bank organized in 1849 with 31 full-service banking offices located throughout the State of Vermont and one full-service banking office in Massachusetts. The primary business of Merchants Bank is to attract deposits from and extend loans to consumer, institutional, municipal, non-profit and commercial customers. Merchants also provides wealth management and trust services through the Merchants Trust Company Division of Merchants Bank.

Merchants Bank’s deposits are insured by the FDIC to the maximum extent provided by law, and it is subject to supervision and regulation by the FDIC and the Vermont Department of Financial Regulation. Merchants Bank maintains an Internet website at www.mvbt.com. Information on Merchants Bank’s website should not be considered a part of this Proxy Statement/Prospectus.

Merchants’ principal executive offices are located at 275 Kennedy Drive, South Burlington, Vermont 05403, and its telephone number is (802) 658-3400.

For additional information concerning the business of Merchants and its financial condition, results of operations and prospects, you should refer to the documents incorporated in this document by reference. See “Where You Can Find More Information” on page 104 of this Proxy Statement/Prospectus.

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SPECIAL MEETING OF MERCHANTS STOCKHOLDERS

Time, Date and Place of the Special Meeting

Merchants will hold a special meeting of its stockholders on [•] at [•], Eastern time, at [•].

Actions to be Taken at the Special Meeting

At the special meeting, Merchants stockholders will be asked to consider and vote on the following matters:

Record Date; Outstanding Shares; Shares Entitled to Vote

Holders of record of Merchants common stock at the close of business on [•], are entitled to vote at the special meeting. This date is called the “record date.” As of the record date, there were [•] issued and outstanding shares of Merchants common stock. Merchants stockholders have one vote per share on any matter that may properly come before the special meeting.

Recommendation of the Merchants Board of Directors

The Merchants board of directors has unanimously approved the Merger Agreement and the transactions contemplated by the Merger Agreement. The board of directors of Merchants believes the Merger Agreement is advisable and in the best interests of Merchants and its stockholders and recommends that you vote your shares as follows:

Broker Non-Votes

Brokers who hold shares of Merchants common stock as nominees will not have discretionary authority to vote these shares without instructions from the beneficial owners. Any shares of Merchants common stock for which a broker has submitted an executed proxy but for which the beneficial owner has not given instructions on voting to the broker are referred to as “broker non-votes.” Broker non-votes will have same effect as voting “AGAINST” the Merger Agreement, but it will have no impact on the advisory, non-binding proposal to approve the Merger-Related Executive Compensation or the proposal to approve an adjournment of the special meeting.

Quorum; Vote Required

The presence in person or by proxy of the holders of a majority of the shares of Merchants common stock outstanding on the record date will constitute a quorum for the transaction of business at the special meeting. Abstentions will be included in determining the presence of a quorum at the special meeting. Broker non-votes would generally be included in determining the presence of a quorum; however, since the special meeting will consider and vote upon only non-discretionary matters, broker non-votes will not be included in determining the presence of a quorum.

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Proposal I: Adoption of the Merger Agreement.  Adoption of the Merger Agreement requires the affirmative vote of two-thirds of the outstanding shares of Merchants common stock entitled to vote on the Merger Agreement. Failure to return a properly executed proxy card or to vote in person will have the same effect as a vote against the Merger Agreement. Abstentions and broker non-votes will have the same effect as voting “AGAINST” the Merger Agreement.

Proposal II: Approval of the Merger-Related Executive Compensation.  Approval of the Merger-Related Executive Compensation proposal requires the affirmative vote of a majority of the votes cast on the proposal. Abstentions and broker non-votes will not affect whether the proposal is approved.

Proposal III: Approval of the adjournment proposal.  The affirmative vote of a majority of the votes cast on the proposal is required to approve the proposal to adjourn or postpone the special meeting if necessary to solicit additional proxies if there are not sufficient votes to approve the Merger Agreement. Abstentions and broker non-votes will not affect whether the proposal is approved.

Share Ownership of Management; Voting Agreements

On the record date, the directors of Merchants and another principal stockholder of Merchants, including certain of their related parties, had voting power with respect to an aggregate of [•] shares of Merchants common stock, or approximately [•]% of the shares of Merchants common stock then outstanding. All of the directors of Merchants and another principal stockholder of Merchants have agreed to vote in favor of the adoption of the Merger Agreement all of the shares of Merchants common stock that they are entitled to vote.

Voting and Revocation of Proxies

Merchants has enclosed a form of proxy with this document. To ensure your representation at the special meeting, Merchants recommends that you vote by proxy even if you plan to attend the special meeting. You can always change your vote at the special meeting. Voting instructions are included on your proxy form. If you properly complete and timely submit your proxy, your shares will be voted as you have directed. You may vote for, against, or abstain with respect to the adoption of the Merger Agreement, the approval of the Merger-Related Executive Compensation and the approval of the adjournment proposal. Proxies that are properly signed and dated but which do not specify voting instructions will be voted “FOR” the adoption of the Merger Agreement, “FOR” the approval, on an advisory basis, of the Merger-Related Executive Compensation, and “FOR” the proposal to adjourn or postpone the special meeting, and in the discretion of the proxy holders as to any other matter which may properly come before the special meeting.

If you deliver a properly executed and dated proxy, you may revoke the proxy at any time before it is exercised at the special meeting. You may revoke your proxy either by:

Being present at the special meeting, by itself, will not revoke the proxy. You must vote in person if you wish to revoke the proxy. All written notices of revocation and other communication with respect to the revocation of proxies should be addressed to:

Merchants Bancshares, Inc.
Corporate Secretary
275 Kennedy Drive
South Burlington, Vermont 05403

If your shares are held in street name, you must follow the instructions from your broker regarding voting and revocation of proxies.

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Solicitation of Proxies

Merchants will pay for the cost of this proxy solicitation. In addition to solicitation by mail, Innisfree M&A Incorporated, a proxy solicitation firm, will assist Merchants in soliciting proxies for the special meeting. Merchants will pay approximately $15,000.00, plus expenses, for these services. Merchants will, upon request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial owners and obtaining their voting instructions. Additionally, directors, officers and employees of Merchants may solicit proxies from stockholders by telephone, in person or through other means. These persons will not receive additional compensation, but they will be reimbursed for the reasonable out-of-pocket expenses they incur in connection with this solicitation, if any.

Other Matters

Merchants is unaware of any matter to be presented at the special meeting other than the proposal to adopt the Merger Agreement, the proposal to approve, on an advisory basis, the Merger-Related Executive Compensation, and the proposal to approve one or more adjournments of the special meeting, if necessary or appropriate, including adjournments to permit further solicitations of proxies in favor of the Merger. If other matters are properly presented at the special meeting, the persons named in the proxy will have authority to vote all properly executed and dated proxies in accordance with their judgment on any such matter.

YOUR VOTE IS IMPORTANT!

Whether or not you plan to attend the special meeting in person, Merchants urges you to submit your proxy as soon as possible by (1) calling the toll free telephone number specified on the enclosed proxy card, (2) accessing the Internet website specified on the enclosed proxy card, or (3) completing, signing and dating the enclosed proxy card and returning it in the postage paid envelope provided. If your shares are held in the name of a bank, broker or other fiduciary, please follow the instructions on the voting card provided by such entity.

If you have any questions concerning the Merger or other matters to be considered at the Merchants special meeting, would like additional copies of this Proxy Statement/Prospectus or need help voting your shares, please contact Merchants’ proxy solicitor:

Innisfree M&A Incorporated
501 Madison Avenue
New York, New York 10022
(212) 750-5833

PLEASE DO NOT SEND STOCK CERTIFICATES WITH THE PROXY CARD. YOU WILL BE SENT SEPARATE INSTRUCTIONS REGARDING MAKING ELECTIONS AS TO THE FORM OF MERGER CONSIDERATION YOU WOULD LIKE TO RECEIVE AND THE SURRENDER OF YOUR STOCK CERTIFICATES.

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PROPOSAL I — THE MERGER

The detailed terms of the Merger are contained in the Merger Agreement attached as Annex A to this document. The following discussion and the discussion under the caption “The Merger Agreement” describe the more important aspects of the Merger and material terms of the Merger Agreement. These descriptions are only a summary and are qualified in their entirety by reference to the Merger Agreement, which is attached as Annex A. You are urged to read the Merger Agreement carefully because it is the legal document that actually governs your rights in the Merger.

General

The Merger Agreement provides that, after approval by the stockholders of Merchants and the satisfaction or waiver of the other conditions to the Merger, Merchants will merge with and into Community Bank System, with Community Bank System as the surviving company. The certificate of incorporation and bylaws of Community Bank System will be the certificate of incorporation and bylaws of the surviving company. The directors and officers of Community Bank System immediately prior to the Merger will be the directors and officers of the surviving company. In addition, two current directors of Merchants will be appointed to the boards of directors of Community Bank System and Community Bank effective as of the closing date of the Merger.

At the effective time of the Merger, each share of Merchants common stock issued and outstanding immediately prior to the effective time of the Merger will be automatically converted into the right to receive, subject to the terms and conditions of the Merger Agreement (including proration procedures), at the election of the holder thereof, the following consideration: (i) the combination of $12.00 in cash and 0.6741 shares of Community Bank System common stock, plus cash in lieu of fractional shares; (ii) $40.00 in cash; or (iii) 0.9630 shares of Community Bank System common stock, plus cash in lieu of fractional shares.

Immediately following the Merger of Community Bank System and Merchants, Merchants Bank will merge with and into Community Bank, with Community Bank as the surviving entity. After the Bank Merger, branches of Merchants Bank will become branches of Community Bank.

The companies expect to complete the Merger in late second quarter or early third quarter of calendar year 2017, but they must first obtain the necessary regulatory approvals and the approval of Merchants stockholders at the special meeting, and satisfy other customary closing conditions. The companies cannot assure you as to when or if all the conditions to the Merger will be met or waived, and it is possible they will not complete the Merger at all.

Background of the Merger

The board of directors and management of Merchants periodically review various strategic alternatives as part of their on-going efforts to improve Merchants’ banking franchise and enhance stockholder value. These reviews have focused on assessing opportunities for growth and increasing earnings organically and through acquisitions of other banks, as well as the possibility of a strategic business combination with another banking institution. The board of directors and management of Merchants also regularly review the banking industry environment, including various interest rate scenarios, regulatory compliance and non-interest expenses, and the trend towards consolidation, and in light of these and other factors, potential strategies for enhancing Merchants’ competitive position in this environment.

Consistent with these goals and in the ordinary course of business, members of Merchants’ management have, from time to time, received inquiries from other banking institutions or their advisors regarding Merchants, and engaged in conversations with members of management of other banking institutions regarding a possible business combination, including Community Bank System. In the course of these conversations, Community Bank System expressed a general interest in expanding into Vermont through a possible strategic transaction with Merchants. However, prior to 2016, the parties did not engage in more significant discussions.

On April 1, 2016, a director of Community Bank System had a conversation with one of Merchants’ directors in Plattsburgh, New York, during which the Community Bank System director noted Community Bank System’s potential interest in a business combination with Merchants at a price in the high $30’s range.

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On April 11, 2016, Geoffrey Hesslink, President and Chief Executive Officer of Merchants, and Mark Tryniski, President and Chief Executive Officer of Community Bank System, met in Burlington, Vermont to discuss their respective businesses and industry trends. Mr. Hesslink and Mr. Tryniski did not specifically discuss a potential business combination during this meeting.

On May 4, 2016, the Merchants board held a special meeting in Burlington, Vermont. At this meeting, the Merchants board discussed Community Bank System’s potential interest in a business combination with Merchants. The Merchants board also reviewed summary historical financial data regarding Merchants and discussed Merchants’ strategic outlook in light of the current banking industry environment.

On May 26, 2016, the Merchants board held a regularly scheduled meeting in Burlington, Vermont. At this meeting, the Merchants board continued its discussion of Community Bank System’s potential interest in a business combination with Merchants and determined that a subset of the Merchants board consisting of Jeffrey Davis, Chairman of the Board of Merchants (who we refer to in this section as Chairman Davis), Michael Furlong, a director of Merchants and Chairman of the Board of Merchants Bank, and Mr. Hesslink, should explore Community Bank System’s level of interest.

On June 1, 2016, Chairman Davis, Mr. Furlong and Mr. Hesslink met with Mr. Tryniski and Scott Kingsley, Executive Vice President and Chief Financial Officer of Community Bank System, in Lake George, New York, to discuss a potential business combination between Merchants and Community Bank System. At this meeting, Mr. Tryniski noted Community Bank System’s potential interest again at a price in the high $30’s range.

On June 8, 2016, Mr. Hesslink met with Piper Jaffray & Co., financial advisor to Merchants (“Piper”), to notify them of the potential business combination and discuss the assumptions underlying forecasted financial scenarios. Thereafter, Mr. Hesslink and representatives of Piper met periodically to refine those assumptions.

On June 13, 2016, Merchants and Community Bank System entered into a mutual confidentiality agreement pursuant to which each party agreed to keep confidential certain non-public information about the other party in connection with the consideration of a potential business combination. The confidentiality agreement also included customary standstill obligations of Community Bank System.

Also on June 13, 2016, Merchants entered into a confidentiality agreement with one of its major stockholders, Charles Davis, so that Merchants could obtain his views on a potential business combination with Community Bank System. Charles Davis is a former director of Merchants and the brother of Chairman Davis.

On June 14, 2016, Mr. Hesslink met with Mr. Tryniski and Mr. Kingsley in Lake George, New York, to discuss Merchants’ second quarter earnings and other financial matters, as well as the potential structure of the combined company.

On June 15, 2016, Chairman Davis and Mr. Tryniski had a telephone conversation during which they discussed a potential business combination between Merchants and Community Bank System and the strategic advantages of such a combination. During this discussion, Mr. Tryniski noted Community Bank System’s potential interest at a price of $40.00.

On June 27, 2016, the Merchants board held a special meeting in Burlington, Vermont, at which members of management and representatives of Piper and Goodwin Procter LLP, counsel to Merchants (“Goodwin Procter”), were present. At this meeting, the Merchants board reviewed forecasted financial scenarios for Merchants prepared by management assuming different interest rate environments, as well as the risks, challenges and strategic opportunities facing the company. The Merchants board also discussed other strategic alternatives available to the company, including a potential business combination transaction with parties other than Community Bank System, additional acquisitions in order to achieve scale, and the potential growth or acquisition of non-interest income businesses. The representatives of Goodwin Procter reviewed the fiduciary duties of the directors in the context of their consideration of a potential business combination. Piper also presented a situational analysis of Merchants, including an overview of the U.S. banking market and preliminary financial analyses with respect to a potential business combination with Community Bank System. The Board discussed with Piper a select number of other banking institutions that may have the capacity to

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pay in the $40.00 range being proposed by Community Bank System, and concluded that, based on knowledge of those institutions and current industry dynamics, it was unlikely that one of those banking institutions would be interested in engaging in a strategic transaction with Merchants at such a price range at this time.

On July 4, 2016, Chairman Davis and Mr. Hesslink met with Charles Davis in Burlington, Vermont, to obtain Mr. Davis’ views on a potential business combination between Merchants and Community Bank System. At this meeting, Mr. Davis indicated his support in exploring a potential transaction with Community Bank System.

On July 7, 2016, the Merchants board held a special meeting in Burlington, Vermont, at which members of management and representatives of Goodwin Procter were present. At this meeting, the representatives of Goodwin Procter again reviewed the fiduciary duties of the directors, and the Merchants board discussed whether it was in the best interests of Merchants stockholders to explore a potential business combination with Community Bank System. After considering current market conditions and the prospects of Merchants on a stand-alone basis, the Merchants board determined to engage in discussions with Community Bank System regarding a potential business combination between the two companies. The Merchants board also discussed whether it might be advisable to explore a potential strategic transaction with other third parties in addition to Community Bank System. In particular, the Merchants board discussed potential disruptions to Merchants’ business, the risk of leaks that might arise from making contact with other parties in the industry (and the potential impact on Merchants’ business and employees of such leaks), the potential loss of Community Bank System as a strategic partner if Community Bank System learned of Merchants’ exploration of other alternatives, Merchants’ own strong knowledge and understanding of its business prospects and value on a stand-alone basis, and the likelihood that Merchants would have already been contacted by another banking institution if it were interested in engaging in strategic discussions with Merchants. Based on the foregoing considerations, the Merchants board concluded not to approach other potential strategic partners. The Merchants board also formed a Special Committee consisting of Jeffrey Davis, Michael Furlong and Geoffrey Hesslink to (1) establish, monitor and direct the process and procedures related to the review of the strategic alternatives of Merchants, (2) invite Community Bank System to submit a written indication of interest, (3) participate in and direct the negotiation of the material terms and conditions of any such transaction, (4) recommend to the Board of Directors the advisability of accepting an indication of interest and negotiating a definitive agreement with respect to any such transaction, and (5) perform any other activities or responsibilities incidental to the foregoing.

Later on July 7, 2016, Chairman Davis and Mr. Hesslink each contacted Mr. Tryniski to report the decision of the Merchants board to engage in discussions with Community Bank System regarding a potential business combination and to invite Community Bank System to submit a written indication of interest.

On July 8, 2016, Mr. Tryniski sent a non-binding proposal to Mr. Hesslink with respect to a potential business combination between Merchants and Community Bank System. The proposal provided for, among other things: (1) a mix of stock and cash consideration, with approximately 65% of the consideration to be paid in the form of Community Bank System common stock in a tax-free exchange; (2) a $40.00 per share price, consisting of an unspecified fixed exchange ratio for the stock component of the consideration and $14.00 per share for the cash component of the consideration; (3) one seat on Community Bank System’s combined bank/holding company board for an independent director of Merchants to be identified at a later date; (4) a customary termination provision if Community Bank System’s stock price were to materially decrease both on an absolute basis and in relation to an appropriate index; (5) a 4% termination fee payable by Merchants; and (6) a requirement that Mr. Hesslink enter into an employment agreement with Community Bank System to serve as its New England Regional President (no specific terms of an employment arrangement were included). The proposal also referenced Community Bank System’s commitment to honor the terms of existing employment, change-in-control, termination and retention agreements of Merchants, and the expected payment of severance benefits to displaced employees of Merchants in accordance with Community Bank System’s policy and retention bonuses based on development of an integration plan. Community Bank System’s proposal remained subject to the completion of due diligence and the execution of a definitive merger agreement.

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On July 15, 2016, the Merchants board held a special telephonic meeting to approve the engagement of Piper as its financial advisor. In addition, the Merchants board discussed the role members of management should have in connection with the Board’s consideration of a business combination with Community Bank System given the references to employment and compensation arrangements with members of management in Community Bank System’s July 8^th proposal. Following this discussion, the Merchants board reconstituted the Special Committee to include only independent and disinterested directors. The Special Committee thereafter consisted of Chairman Davis, Mr. Furlong and Donald Chase.

On July 19, 2016, the Special Committee held a telephonic meeting at which Mr. Hesslink and representatives of Piper and Goodwin Procter were present. At this meeting, the Special Committee discussed the proposed terms for a business combination between Merchants and Community Bank System included in Community Bank System’s July 8^th proposal in light of current market conditions and the prospects of Merchants on a stand-alone basis, the competitive landscape and industry trends. At the conclusion of this discussion, the Special Committee directed Piper to engage in negotiations with Community Bank System’s financial advisor, RBC Capital Markets, with respect to: (1) fixing the exchange ratio at one share of Community Bank System common stock for each share of Merchants common stock; (2) increasing the stock component of the merger consideration; (3) providing for Merchants stockholders to have the right to elect the form of consideration that they would like to receive in the transaction; (4) having three seats on Community Bank System’s combined bank/holding company board for independent directors of Merchants to be identified at a later date; (5) decreasing the size of the termination fee payable by Merchants to 2.5%; (6) providing for additional severance benefits to displaced employees of Merchants; and (7) continuing the use of the Merchants Bank name. In executive session, the Special Committee also discussed Mr. Hesslink’s potential employment agreement with Community Bank System referenced in the proposal.

Also on July 19, 2016, Merchants entered into a formal engagement letter with Piper. Prior to engaging Piper, Merchants confirmed that Piper had no conflicts of interest with respect to Community Bank System.

On July 19 and 20, 2016, representatives of Piper, at the direction of the Special Committee, discussed with representatives of RBC Capital Markets the terms of Community Bank System’s July 8^th proposal.

On July 20, 2016, the Special Committee held a telephonic meeting at which Mr. Hesslink and representatives of Piper and Goodwin Procter were present. At this meeting, the Special Committee continued its discussion of Community Bank System’s July 8^th proposal. The representatives from Piper reported on their recent conversations with RBC Capital Markets regarding the proposal, which had focused on the exchange ratio. Piper reported that RBC had proposed an exchange ratio of 0.95. At the conclusion of this discussion, the Special Committee directed Piper to propose an exchange ratio of 0.9857, which was based on the closing price of the common stock of Community Bank System of $40.48 per share on July 7^th, the day before Community Bank System submitted its indication of interest, which resulted in an implied price for the stock consideration of $40.00 per share.

From July 20 through 28, 2016, representatives of Piper, at the direction of the Special Committee, further negotiated with representatives of RBC Capital Markets regarding the terms of Community Bank System’s July 8^th proposal.

On July 26, 2016, Chairman Davis and Mr. Furlong had a telephone conversation with Mr. Tryniski during which they discussed the terms of Community Bank System’s July 8^th proposal.

On July 28, 2016, the Special Committee held a telephonic meeting at which Mr. Hesslink and representatives of Goodwin Procter were present. At this meeting, the Special Committee continued to discuss Community Bank System’s July 8^th proposal, including the termination fee payable by Merchants and the number of seats on Community Bank System’s combined bank/holding company board to be allocated to Merchants.

On July 29, 2016, Chairman Davis and Mr. Furlong had a telephone conversation with Mr. Tryniski during which they discussed the number of seats on Community Bank System’s combined bank/holding company board to be allocated to Merchants.

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Later on July 29, 2016, the Special Committee held a telephonic meeting at which Mr. Hesslink and representatives of Piper and Goodwin Procter were present. At this meeting, the Special Committee continued to discuss Community Bank System’s July 8^th proposal and determined to invite Community Bank System to submit a revised proposal reflecting the recent negotiations between the parties and their advisors. Following this meeting, Chairman Davis and Mr. Furlong had a telephone conversation with Mr. Tryniski to report the decision of the Special Committee.

Also on July 29, 2016, a representative of RBC Capital Markets forwarded a revised non-binding proposal to a representative of Piper for delivery to Merchants. The revised letter of intent provided the following changes to Community Bank System’s July 8^th proposal: (1) approximately 70% of the consideration to be paid in the form of Community Bank System common stock; (2) subject to allocation and proration procedures, the ability of Merchants stockholders to elect between the stock consideration at a fixed exchange ratio of 0.963 of a share of Community Bank System common stock or cash consideration of $40.00 per share; (3) two to three seats on Community Bank System’s combined bank/holding company board for independent directors of Merchants to be identified at a later date; (4) a 3.5% termination fee payable by Merchants; and (5) increased severance benefits for displaced employees of Merchants. Based on the closing price of Community Bank System common stock on July 28, 2016 of $44.31, the implied value of Community Bank System’s offer was $41.87 per share.

On July 30, 2016, the Special Committee held a telephonic meeting at which Mr. Hesslink and representatives of Piper and Goodwin Procter were present. At this meeting, the Special Committee discussed the revised terms for a potential business combination included in Community Bank System’s July 29^th proposal.

On July 31, 2016, Chairman Davis had a telephone conversation with Mr. Tryniski during which they discussed Community Bank System’s July 29^th proposal.

On August 1, 2016, the Special Committee held a special telephonic meeting at which Mr. Hesslink and representatives of Piper and Goodwin Procter were present. At this meeting, the Special Committee continued to discuss Community Bank System’s July 29^th proposal. At the conclusion of this discussion, the Special Committee determined to recommend to the Merchants board that the company proceed with the proposed business combination with Community Bank System.

On August 2, 2016, the Merchants board held a special meeting in Burlington, Vermont, at which members of management and representatives of Piper and Goodwin Procter were present. At this meeting, the Merchants board received an update on discussions with Community Bank System and reviewed the terms of Community Bank System’s July 29^th proposal, as well as certain preliminary financial analyses prepared by Piper with respect to such proposal. The representatives of Goodwin Procter again reviewed the fiduciary duties of the directors in the context of their consideration of the proposed transaction with Community Bank System. After extensive discussion regarding the proposal, current market conditions, and the prospects and value of Merchants on a stand-alone basis, the Merchants board authorized the Special Committee to engage in due diligence activities with Community Bank System and negotiate a definitive merger agreement with respect to a business combination with Community Bank System on the terms outlined in the July 29^th proposal. Following this meeting, Chairman Davis telephoned Mr. Tryniski to inform him of the decision of the Merchants board to proceed forward with Community Bank System regarding a potential business combination.

On August 3, 2016, Merchants countersigned the non-binding letter of intent provided by Community Bank System on July 29^th, and thereafter, a representative of RBC Capital Markets on behalf of Community Bank System sent a due diligence request list to Piper.

On August 16, 2016 and throughout the remainder of the process, the Compensation Committee of the Merchants board held meetings at which the Compensation Committee discussed the need to (1) ensure existing contracts with employees were honored by Community Bank System, (2) encourage executives and other employees of Merchants to remain motivated and engaged through the closing of a potential business combination with Community Bank System, and (3) retain such executives and employees if the transaction were not to be completed for any reason. At these meetings, the Compensation Committee authorized

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retention payments to be made to certain employees and executives as described in the section entitled “— Interests of Certain Persons in the Merger”. The Compensation Committee’s independent compensation consultant generally participated in these meetings.

On August 19, 2016, Cadwalader, Wickersham & Taft LLP, counsel to Community Bank System (“Cadwalader”), provided an initial draft of the merger agreement and a form of voting agreement to Goodwin Procter.

On August 22, 2016, Merchants provided Community Bank System and its advisors with access to a virtual data room containing business and legal due diligence materials. Thereafter, the parties and their advisors had numerous discussions, and Merchants provided answers to numerous questions posed by Community Bank System and its advisors, regarding the due diligence materials provided by Merchants and related matters.

On August 25, 2016, representatives of Community Bank System met with representatives of Merchants in Lake George, New York to discuss Merchants’ business, finances and operations.

On August 29, 2016, Chairman Davis and Mr. Hesslink had a telephone conversation with Mr. Tryniski during which they discussed the potential future organizational structure of the combined company, the process for determining whether members of Merchants’ management team would have continuing roles with the combined company, and the implementation of a retention program for employees of Merchants. Thereafter, the parties and their advisors had additional discussions regarding the scope and terms of a retention program for executive and non-executive employees of Merchants.

On September 2, 2016, the Merchants board held a special telephonic meeting at which representatives of Goodwin Procter were present. At this meeting, management provided the Merchants board with an update on the status of due diligence and negotiations related to the proposed business combination with Community Bank System. The Merchants board also discussed executive compensation and employee retention matters.

Later on September 2, 2016, Goodwin Procter provided comments to the initial draft of the merger agreement to Cadwalader. Thereafter, the parties and their advisors had discussions regarding a number of issues in the merger agreement, including: (1) the scope of the respective representations and warranties and operating covenants of Merchants and Community Bank System; (2) the definition of “material adverse effect”; (3) the circumstances in which the Merchants board may change its recommendation to stockholders regarding adoption of the merger agreement; (4) the ability of the Merchants board to respond to unsolicited inquiries following the announcement of the transaction and to terminate the merger agreement to accept a superior proposal; (5) the circumstances in which Merchants would be required to pay a termination fee to Community Bank System or reimburse Community Bank System for its expenses; (6) Community Bank System’s obligations with respect to Merchants’ employees; (7) Community Bank System’s obligations to obtain necessary regulatory approvals; and (8) the parties who would deliver voting agreements to Community Bank System.

On September 7, 2016, a representative of Piper on behalf of Merchants sent a reverse due diligence request list to RBC Capital Markets.

On September 16, 2016, Mr. Hesslink had a telephone conversation with Mr. Tryniski during which they discussed the open business issues with respect to the proposed business combination.

On September 19, 2016, the Special Committee held a telephonic meeting at which Mr. Hesslink and representatives of Piper and Goodwin Procter were present. At this meeting, the Special Committee received an update on the status of due diligence and negotiations relating to the proposed business combination with Community Bank System. The Special Committee also discussed the open issues with respect to the merger agreement, the reverse due diligence process and the proposed timing.

Later on September 19, 2016, a representative of RBC Capital Markets contacted a representative of Piper to discuss Community Bank System’s due diligence findings and the expected cost savings and restructuring costs related to the transaction, and noted that the total costs to be incurred by Community Bank System were higher than anticipated.

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On September 20, 2016, the Special Committee held a telephonic meeting at which Mr. Hesslink and representatives of Piper and Goodwin Procter were present. At this meeting, the Special Committee discussed Community Bank System’s due diligence findings and the one-time deal costs and potential reductions in Merchants’ operating costs on a post-closing basis. At the conclusion of this discussion, the Special Committee authorized management and Piper to work with Community Bank System to better understand these costs. The Special Committee also discussed the reverse due diligence process.

From September 21 through 27, 2016, representatives of Community Bank System and Merchants discussed Community Bank System’s due diligence findings and the expected cost savings and restructuring costs. As part of these discussions, RBC Capital Markets, on behalf of Community Bank System, proposed a split in the value of these items between Community Bank System and Merchants stockholders. Piper, at the direction of the Special Committee, informed RBC Capital Markets that Merchants was not open to discussing a potential reduction in the exchange ratio.

On September 29, 2016, Chairman Davis and Mr. Tryniski had a telephone conversation during which they further discussed the expected restructuring costs. During this discussion, Mr. Tryniski agreed that there would be no reduction in the exchange ratio, and Mr. Davis agreed that Merchants would be allocated two (and not three) seats on Community Bank System’s combined bank/holding company board.

On September 30, 2016, the Special Committee held a telephonic meeting at which members of management and representatives of Piper and Goodwin Procter were present. At this meeting, the Special Committee discussed the remaining open issues in the merger agreement.

Later on September 30, 2016, the parties and their advisors held a conference call to discuss the remaining open issues in the merger agreement, the reverse due diligence process, timing considerations and employee matters.

On October 5, 2016, representatives of Merchants, Goodwin Procter and Piper met with representatives of Community Bank System and RBC Capital Markets in Lake George, New York, to discuss Community Bank System’s business, finances and operations.

On October 7, 2016, Community Bank System provided initial drafts of the employment agreements for the members of Merchants’ management team who would be continuing with the combined company, which included Mr. Hesslink, Bruce Bernier, Senior Vice President and Senior Lender of Merchants Bank, and Anita Bourgeois, Senior Vice President and Senior Director, Deposit Growth and Profitability of Merchants Bank. Thereafter, the parties and their counsel negotiated the terms of the employment agreements.

On October 20, 2016, the Merchants board held a special meeting in Essex, Vermont, at which representatives of management, Piper and Goodwin Procter were present. At this meeting, Chairman Davis provided an overview of the negotiation process to date, and the representatives of Goodwin Procter presented the terms of the proposed merger agreement and form of voting agreement. The representatives of Goodwin Procter again discussed the fiduciary duties of the directors in the context of their consideration of the proposed transaction with Community Bank System. Management updated the Board on the status of Community Bank System’s due diligence regarding Merchants and the reverse due diligence process. Piper also reviewed with the Merchants board its preliminary analyses of the consideration offered in the proposed transaction from a financial point of view. The Merchants board considered the benefits and risks of the proposed business combination as described in the section entitled “— Reasons for the Merger.” Management also reviewed the proposed timing for signing and completing the proposed business combination with Community Bank System. Prior to the Merchants board meeting, the Special Committee held a special meeting at the same location to discuss employee retention matters.

On October 20 and 21, 2016, the parties and their counsel negotiated the final terms of the merger.

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On October 22, 2016, the Special Committee and the Merchants board held a joint special meeting in Essex, Vermont, at which representatives of management, Piper and Goodwin Procter were present. At this meeting, Goodwin Procter provided an update on the final negotiations with Community Bank System and its counsel, and Piper reviewed with the Merchants board its final analyses of the consideration offered in the proposed transaction from a financial point of view. Piper then provided its oral opinion, subsequently confirmed in writing, to the effect that, as of October 22, 2016 and subject to the assumptions, qualifications and limitations set forth in the opinion, the consideration to be received pursuant to the merger agreement is fair, from a financial point of view, to the holders of Merchants common stock. Based on the closing price of Community Bank System common stock on October 21, 2016 of $47.50, the implied value of the merger consideration was $44.02 per share. After discussion, and upon recommendation of the Special Committee, the Merchants board unanimously adopted resolutions (1) determining that the merger agreement and the transactions contemplated thereby, including the merger, are advisable and in the best interests of the Merchants stockholders, (2) adopting the merger agreement and approving the merger and the other transactions contemplated by the merger agreement, and (3) recommending to Merchants stockholders that they adopt the merger agreement.

Later on October 22, 2016, the merger agreement and voting agreements were executed. Community Bank System also entered into employment agreements with Mr. Hesslink and the other executives of Merchants who would be continuing with the combined company following the closing, and retention agreements with members of Merchants’ management whose employment would not be continuing.

On October 24, 2016, before the U.S. stock markets opened, Merchants and Community Bank System issued a joint press release announcing the transaction.

Merchants’ Reasons for the Merger

In the course of its evaluation of the Merger and the Merger Agreement, the Merchants board of directors held numerous meetings and consulted with Merchants’ senior management as well as its legal counsel and financial advisor. In reaching its decision to approve the Merger and the Merger Agreement and recommend the adoption of the Merger Agreement by its stockholders, the Merchants board considered a number of factors, including, among others, the following:

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The Merchants board of directors also weighed the factors described above against certain factors and potential risks associated with entering into the Merger Agreement, including, among others, the following:

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In considering the recommendation of the Merchants board of directors with respect to the proposal to adopt the Merger Agreement, you should be aware that certain of Merchants’ directors and executive officers may have interests in the Merger that are different from yours. The Merchants board was aware of and considered these interests, among other matters, in evaluating the Merger Agreement and the transactions contemplated by the Merger Agreement and in recommending that the Merger Agreement be adopted by the Merchants stockholders. Please see “— Interests of Merchants Directors and Executive Officers in the Merger” beginning on page 48.

The foregoing discussion of the information and factors considered by the Merchants board of directors in reaching its conclusions and recommendations is not intended to be exhaustive, but includes the material factors considered by the Merchants board. In view of the wide variety of factors considered in connection with its evaluation of the Merger Agreement and the transactions contemplated by the Merger Agreement, and the complexity of these matters, the Merchants Board did not find it practicable to, and did not attempt to, quantify, rank or otherwise assign any relative or specific weights to the various specific factors considered in reaching its determination and making its recommendation. Moreover, in considering the factors described above and any other factors, individual members of the Merchants Board may have viewed factors differently or given different weight, merit or consideration to different factors. The Merchants board considered all of the foregoing factors as a whole and based its recommendation on the totality of the information presented.

Recommendation of the Merchants Board of Directors

At a meeting held on October 22, 2016, the Merchants board of directors unanimously (i) determined that the Merger Agreement and the Merger are advisable and in the best interests of Merchants and its stockholders, (ii) approved the Merger Agreement and recommended that the Merchants stockholders adopt the Merger Agreement, and (iii) directed that the Merger Agreement be submitted for consideration by the Merchants stockholders at the Merchants special meeting.

THE MERCHANTS BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE “FOR” THE ADOPTION OF THE MERGER AGREEMENT.

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Community Bank System’s Reasons for the Merger

In reaching its determination to approve and adopt the Merger Agreement, the board of directors of Community Bank System considered a number of factors, including:

Based on these reasons, Community Bank System’s board of directors unanimously approved the Merger Agreement and the Merger. This discussion of the factors considered by Community Bank System’s board of directors does not list every factor considered by the board but includes all material factors considered by the board. In reaching its determination to approve and adopt the Merger Agreement, the board did not give relative or specific importance to each of the factors listed above, and individual directors may have given differing importance to different factors. Please note that this explanation of the board’s reasoning and all other information presented in this section is forward-looking in nature and, therefore, should be read in light of the factors discussed under the heading “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 21 of this Proxy Statement/Prospectus.

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Opinion of Merchants’ Financial Advisor

Pursuant to an engagement letter dated July 19, 2016, the Merchants board engaged Piper as financial advisor to Merchants in connection with Merchants’ consideration of a possible business combination with Community Bank System. Piper is a nationally recognized investment banking firm with substantial experience in transactions similar to the Merger and is familiar with Merchants and its business. As part of its investment banking business, Piper is routinely engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions. The Piper written opinion, dated October 22, 2016, is sometimes referred to in this section as the “Piper opinion.”

Piper acted as financial advisor to Merchants in connection with the proposed transaction and participated in certain of the negotiations leading to the execution of the Merger Agreement. At the meeting of the board of directors of Merchants held on October 22, 2016, Piper delivered to the board of directors its oral opinion, followed by delivery of its written opinion, that, as of such date, and based upon and subject to the various factors, assumptions and limitations set forth in its opinion, the consideration offered in the Merger was fair, from a financial point of view, to the holders of Merchants common stock.

The full text of Piper’s written opinion dated October 22, 2016, which sets forth, among other things, the procedures followed, assumptions made, matters considered and qualifications and limitations on the scope of review undertaken in rendering its opinion, is attached as Annex B to this Proxy Statement/Prospectus and is incorporated herein by reference. Piper’s opinion speaks only as of the date of the opinion. You are urged to read the opinion carefully and in its entirety. Piper’s opinion was addressed to, and provided for the information and benefit of, the Merchants board of directors (in its capacity as such) in connection with its evaluation of the fairness of the merger consideration from a financial point of view, and did not address any other aspects or implications of the Merger. The opinion does not constitute a recommendation to the Merchants board of directors or to any other persons in respect of the Merger, including as to how any holder of Merchants common stock should vote at any stockholders’ meeting held in connection with the Merger or take, or not to take, any action in respect of the Merger. Piper’s opinion does not address the relative merits of the Merger as compared to any other business or financial strategies that might be available to Merchants, nor does it address the underlying business decision of Merchants to engage in the Merger. The issuance of the Piper opinion was approved by the fairness opinion committee of Piper. The summary of the opinion of Piper set forth below is qualified in its entirety by reference to the full text of the opinion. Piper has consented to the inclusion of this summary of its opinion in this Proxy Statement/Prospectus.

In rendering its opinion, Piper reviewed and analyzed, among other things:

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Piper also held several discussions with certain members of senior management and representatives of both Merchants and Community Bank System with respect to certain aspects of the Merger, and the past and current business operations of Merchants and Community Bank System, the financial condition and future prospects and operations of Merchants and Community Bank System, the effects of the Merger on the financial condition and future prospects of Community Bank System, and certain other matters Piper believed necessary or appropriate to its inquiry.

In arriving at its opinion, Piper relied upon and assumed, without assuming liability or responsibility for independent verification, the accuracy and completeness of all information that was publicly available or was furnished, or otherwise made available to, or discussed with or reviewed by Piper. Piper further relied upon the assurances of the management of Merchants and Community Bank System that the financial information provided has been prepared on a reasonable basis in accordance with industry practice, and that they are not aware of any information or facts that would make any information provided to Piper incomplete or misleading. Without limiting the generality of the foregoing, Piper assumed that with respect to financial forecasts, estimates and other forward-looking information (including the Synergies) reviewed by Piper, that such information was reasonably prepared based on assumptions reflecting the best currently available estimates and judgments of the management of Merchants and Community Bank System as to the expected future results of operations and financial condition of Merchants and Community Bank System, respectively, to which such financial forecasts, estimates and other forward-looking information (including the Synergies) relate and Piper assumed that such results would be achieved. Piper expressed no opinion as to any such financial forecasts, estimates or forward-looking information (including the Synergies) or the assumptions on which they were based. Piper further assumed that the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended, for United States federal income tax purposes. Piper also expressed no opinion as to any of the legal, accounting and tax matters relating to the Merger and any other transactions contemplated in connection therewith and with the consent of Merchants relied, on the advice of the outside legal counsel and the independent accountants to Merchants, and on the assumptions of the management of Merchants and Community Bank System, as to all accounting, legal, tax and financial reporting matters with respect to Merchants and Community Bank System and the Merger Agreement.

In arriving at its opinion, Piper assumed that the executed Merger Agreement would be in all material respects identical to the last draft reviewed by it. Piper relied upon and assumed, without independent verification, that:

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Additionally, Piper assumed that all the necessary regulatory approvals and consents required for the Merger will be obtained in a manner that will not adversely affect Merchants and Community Bank System or the contemplated benefits of the Merger.

For purposes of rendering its opinion, Piper did not perform any appraisals or valuations of any specific assets or liabilities (fixed, contingent, derivative, off-balance sheet, or other) of Merchants or Community Bank System, and was not furnished or provided with any such appraisals or valuations, and did not evaluate the solvency of Merchants or Community Bank System under any state or federal law relating to bankruptcy, insolvency or similar matters. Accordingly, Piper expressed no opinion regarding the liquidation value of Merchants, Community Bank System or any other entity. Piper assumed that there has been no material change in the respective assets, financial condition, results of operations, business or prospects of Merchants or Community Bank System since the date of the most recent financial data made available to Piper. Piper also assumed in all respects material to its analysis that Merchants and Community Bank System would remain as a going concern for all periods relevant to its analysis. Without limiting the generality of the foregoing, Piper did not conduct a review of:

Piper also assumed, with Merchants’ consent, that the respective allowances for loan and lease losses for both Merchants and Community Bank System and the credit mark are adequate to cover any losses and will be adequate on a pro forma basis for the combined company. Accordingly, Piper expressed no opinion with respect to these matters.

In addition, Piper did not make any independent analysis of any pending or threatened litigation, regulatory action, possible unasserted claims or other contingent liabilities to which Merchants or Community Bank System is a party or may be subject, and at the direction of Merchants and with its consent, Piper’s opinion makes no assumption concerning, and therefore does not consider, the possible assertion of claims, outcomes or damages arising out of any such matters. Piper also assumed that neither Merchants nor Community Bank System is party to any material pending transaction, including without limitation any financing, recapitalization, acquisition or merger, divestiture or spin-off, other than the Merger and the merger of the principal banking subsidiaries of Merchants and Community Bank System contemplated by the agreement.

The Piper opinion is necessarily based on economic, market and other conditions and upon the information made available to Piper and facts and circumstances as they exist and are subject to evaluation as of the date of the Piper opinion. It should be understood that events occurring after the date of the Piper opinion could materially affect the assumptions used in preparing the Piper opinion. Further, Piper expressed no opinion as to the price at which shares of the common stock of Merchants or Community Bank System may trade following announcement of the Merger or at any future time.

The Piper opinion addresses solely the fairness, from a financial point of view, to holders of Merchants common stock of the proposed merger consideration set forth in the Merger Agreement and does not address any other terms or agreement relating to the Merger or any other terms of the Merger Agreement. Piper was

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not requested to opine as to, and the Piper opinion does not address: (1) the basic business decision to proceed with or effect the Merger; (2) the merits of the Merger relative to any alternative transaction or business strategy that may be available to Merchants; (3) Community Bank System’s ability to fund the cash portion of the merger consideration; (4) any other terms contemplated by the Merger Agreement; or (5) the fairness of the Merger, or any consideration received in connection therewith by, the holders of any other class of securities, any creditor or other constituency of Merchants. Furthermore, Piper expressed no opinion with respect to the amount or nature of compensation to any officer, director or employee of any party to the Merger, or any class of such persons, relative to the merger consideration to be received by holders of Merchants common stock in the Merger or with respect to the fairness of any such compensation, including whether such payments are reasonable in the context of the Merger.

In performing its analyses, Piper made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, which are beyond the control of Piper, Merchants and Community Bank System. Any estimates contained in the analyses performed by Piper are not necessarily indicative of actual values or future results, which may be more or less favorable than suggested by these analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or to reflect the prices at which such businesses or securities might actually be sold. Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. In addition, the Piper opinion was among several factors taken into consideration by the Merchants board in making its determination to approve the Merger Agreement. The type and amount of consideration payable in the Merger were determined solely through negotiation between Merchants and Community Bank System, and the decision to enter into the Merger Agreement was solely that of the Merchants board.

Piper’s opinion was necessarily based upon conditions as they existed and could be evaluated on October 22, 2016, the date of such opinion, and the information made available to Piper through such date. Developments subsequent to the date of Piper’s opinion may have affected, and may affect, the conclusion reached in Piper’s opinion, and Piper did not and does not have an obligation to update, revise or reaffirm its opinion.

The following is a summary of the material financial analyses performed and presented by Piper to the Merchants board on October 22, 2016 in connection with its fairness opinion. Each analysis was provided to the Merchants board of directors. The following summary, however, does not purport to be a complete description of all the analyses performed and reviewed by Piper underlying the Piper opinion or the presentation made by Piper to the Merchants board on October 22, 2016, but summarizes the material analyses performed and presented in connection with such opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. A fairness opinion is thus not susceptible to partial analysis or summary description. In arriving at its opinion, Piper did not attribute any particular weight to any analysis or factor that it considered, but rather made qualitative judgments as to the significance and relevance of each analysis and factor.

The financial analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the financial analyses. Accordingly, Piper believes that its analyses and the summary of its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on the information presented below in tabular format, without considering all analyses and factors or the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a potentially misleading or incomplete view of the process underlying its analyses and opinion. Also no company or transaction used in Piper’s analysis for purposes of comparison is identical to Merchants and Community Bank System or the Merger. Accordingly, an analysis of the results of the comparisons is not mathematical; rather, it involves complex considerations and judgments about differences in the companies and transactions to which Merchants and Community Bank System and the Merger were compared and other factors that could affect the public trading value or transaction value of the companies to which they are being compared. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data that existed on or before October 22, 2016 (the date of the Piper opinion), and is not necessarily indicative of current market conditions.

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Summary of Proposal.  Pursuant to the terms of the Merger Agreement, at the effective time of the Merger, each share of Merchants common stock will be converted, at the election of the holder, into the right to receive the following consideration: (i) the combination of $12.00 in cash and 0.6741 shares of Community Bank System common stock; (ii) 0.9630 shares of Community Bank System common stock; or (iii) $40.00 in cash, subject to an allocation process intended to result in approximately 70% of the shares of Merchants common stock being exchanged for shares of Community Bank System. Based on Community Bank System’s closing price on October 21, 2016 of $47.50, the merger consideration was equivalent to a price of $44.02 per share of Merchants common stock. Based on this deemed value per share to Merchants stockholders and based on an aggregate of 6,883,644 shares of Merchants common stock outstanding, 27,020 options outstanding with a weighted average exercise price of $22.49 per share and 77,999 warrants outstanding with a weighted average exercise price of $29.81, the aggregate merger consideration to holders of Merchants common stock, options and warrants was approximately $304.7 million.

Selected Companies Analysis.  Using publicly available information, Piper compared the financial performance, financial condition, and market performance of Merchants to seventeen selected major exchange traded bank holding companies and thrifts headquartered in the New England and Mid-Atlantic with total assets between $1.0 billion and $3.0 billion and last twelve months return on average assets between 0.50% and 1.00%. The companies included in this group were:

Company		Ticker		State
CNB Financial Corporation		CCNE		PA
Enterprise Bancorp, Inc.		EBTC		MA
BSB Bancorp, Inc.		BLMT		MA
Peoples Financial Services Corp.		PFIS		PA
ESSA Bancorp, Inc.		ESSA		PA
Chemung Financial Corporation		CHMG		NY
Old Line Bancshares, Inc.		OLBK		MD
Bankwell Financial Group, Inc.		BWFG		CT
Orrstown Financial Services, Inc.		ORRF		PA
Codorus Valley Bancorp, Inc.		CVLY		PA
First United Corporation		FUNC		MD
Community Financial Corporation		TCFC		MD
ACNB Corporation		ACNB		PA
Shore Bancshares, Inc.		SHBI		MD
1st Constitution Bancorp		FCCY		NJ
Evans Bancorp, Inc.		EVBN		NY
Mid Penn Bancorp, Inc.		MPB		PA

Using publicly available information, Piper compared the financial performance, financial condition, and market performance of Community Bank System to a regional peer group and a nationwide high performing peer group. The regional peer group was based on eight selected publicly traded bank holding companies and thrifts headquartered in the New England and Mid-Atlantic regions of the United States with total assets between $5.0 billion and $12.0 billion and last twelve months return on average assets greater than 0.90%. The companies included in this regional peer group were:

Company		Ticker		State
Provident Financial Services, Inc.		PFS		NJ
NBT Bancorp Inc.		NBTB		NY
Independent Bank Corp.		INDB		MA
Eagle Bancorp, Inc.		EGBN		MD
S&T Bancorp, Inc.		STBA		PA
Brookline Bancorp, Inc.		BRKL		MA
Tompkins Financial Corporation		TMP		NY
WSFS Financial Corporation		WSFS		DE

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The nationwide high performing peer group was based on ten selected publicly traded bank holding companies and thrifts headquartered in the United States with total assets between $5.0 billion and $12.0 billion, last twelve months return on average assets greater than 1.10% and non-interest income to total revenue greater than 20%. The companies included in this nationwide high performing peer group were:

Company		Ticker		State
Pinnacle Financial Partners, Inc.		PNFP		TN
Columbia Banking System, Inc.		COLB		WA
Glacier Bancorp, Inc.		GBCI		MT
South State Corporation		SSB		SC
Simmons First National Corporation		SFNC		AR
BofI Holding, Inc.		BOFI		CA
First Financial Bankshares, Inc.		FFIN		TX
Ameris Bancorp		ABCB		GA
WSFS Financial Corporation		WSFS		DE
Westamerica Bancorporation		WABC		CA

To perform this analysis, Piper used financial information as of the twelve-month period ended September 30, 2016 (or as of the most recently available quarter). Market price information was as of October 21, 2016. Earnings estimates for 2017 for Merchants, Community Bank System and other selected companies were taken from SNL Financial, a nationally recognized earnings estimate consolidator.

Piper’s analysis showed the following concerning Merchants’ and Community Bank System’s market performance:

		Merchants				Merchants Group Minimum				Merchants Group 25th Percentile				Merchants Group Median				Merchants Group Mean				Merchants Group 75th Percentile				Merchants Group Maximum
Stock Price/Tangible Book Value per Share			152.4	%			88.8	%			112.0	%			121.7	%			127.7	%			140.7	%			165.5	%
Stock Price/Last Twelve Months EPS			15.6x				7.7x				13.8x				15.8x				15.7x				17.1x				23.0x
Stock Price/2017 Est. EPS			13.4x				11.3x				12.8x				13.0x				13.7x				14.0x				18.8x
Dividend Yield			3.4	%			0.0	%			1.2	%			1.8	%			2.0	%			2.7	%			3.6	%

Using the range of multiples representing the 25^th and 75^th percentiles, the analysis indicated an approximate implied per share equity value range for Merchants of $24.15 to $35.91.

		Community Bank System				Community Bank System Regional Group Minimum				Community Bank System Regional Group 25th Percentile				Community Bank System Regional Group Median				Community Bank System Regional Group Mean				Community Bank System Regional Group 75th Percentile				Community Bank System Regional Group Maximum
Stock Price/Tangible Book Value per Share			278.5	%			164.7	%			186.3	%			215.3	%			211.2	%			232.3	%			265.0	%
Stock Price/Last Twelve Months EPS			21.6x				14.1x				16.8x				17.4x				17.4x				18.1x				20.9x
Stock Price/2017 Est. EPS			19.9x				13.8x				14.7x				16.2x				16.1x				17.3x				18.8x
Dividend Yield			2.7	%			0.0	%			1.8	%			2.5	%			2.1	%			2.8	%			3.4	%

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Using the range of multiples representing the 50^th and 100^th percentiles for CBU’s Regional Peer Group, the analysis indicated an approximate implied per share equity value range of $36.73 to $45.99.

		Community Bank System				Community Bank System Nationwide Group Minimum				Community Bank System Nationwide Group 25th Percentile				Community Bank System Nationwide Group Median				Community Bank System Nationwide Group Mean				Community Bank System Nationwide Group 75th Percentile				Community Bank System Nationwide Group Maximum
Stock Price/Tangible Book Value per Share			278.5	%			200.3	%			212.1	%			227.9	%			241.7	%			257.8	%			328.1	%
Stock Price/Last Twelve Months EPS			21.6x				11.9x				17.2x				18.0x				18.0x				18.6x				23.0x
Stock Price/2017 Est. EPS			19.9x				10.5x				14.2x				15.5x				16.0x				16.7x				21.7x
Dividend Yield			2.7	%			0.0	%			1.1	%			1.8	%			1.7	%			2.4	%			3.2	%

Using the range of multiples representing the 50^th and 100^th percentiles for CBU’s Nationwide Peer Group, the analysis indicated an approximate implied per share equity value range for CBU of $37.06 to $70.58.

Comparable Transaction Analysis.  Piper reviewed certain publicly available information related to twelve selected acquisitions of banks and bank holding companies as well as thrifts and thrift holding companies with headquarters in the New England and Mid-Atlantic regions of the United States announced after January 1, 2013, where transaction value was available and the buyer was a bank or bank holding company or a thrift or thrift holding company, the seller had assets between $1.0 billion and $3.0 billion and last twelve months return on average assets between 0.25% and 1.25%. The transactions included in the group were:

Acquiror		Acquiree
OceanFirst Financial Corp.		Ocean Shore Holding Co.
People's United Financial, Inc.		Suffolk Bancorp
Bar Harbor Bankshares		Lake Sunapee Bank Group
Investors Bancorp, Inc.		Bank of Princeton
OceanFirst Financial Corp.		Cape Bancorp, Inc.
Univest Corporation of Pennsylvania		Fox Chase Bancorp, Inc.
United Bankshares, Inc.		Bank of Georgetown
WesBanco, Inc.		ESB Financial Corporation
Bank of the Ozarks, Inc.		Intervest Bancshares Corporation
Center Bancorp, Inc.		ConnectOne Bancorp, Inc.
Rockville Financial, Inc.		United Financial Bancorp, Inc.
Provident New York Bancorp		Sterling Bancorp

Transaction multiples for the Merger were based on an offer price of $44.02 per share for Merchants based on Community Bank System’s October 21, 2016 closing price of $47.50. For each precedent transaction, Piper derived and compared, among other things, the implied ratio of price per common share paid for the acquired company to:

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In addition, Piper derived and compared the price per share paid for the acquired company as a percentage of the closing price of the acquired company one day prior to the announcement of the acquisition.

The results of the analysis are set forth in the following table:

Transaction Price to:		Merchants/Community Bank System Merger				Comparable Transactions Minimum				Comparable Transactions 25th Percentile				Comparable Transactions Median				Comparable Transactions Mean				Comparable Transactions 75th Percentile				Comparable Transactions Maximum
Tangible Book Value			204.2	%			110.6	%			138.0	%			157.6	%			161.7	%			183.5	%			217.9	%
Core Deposit Premium			11.3	%			2.8	%			5.6	%			8.7	%			9.9	%			12.5	%			20.5	%
LTM Earnings Per Share			21.0x				13.1x				16.4x				19.8x				19.1x				21.6x				27.6x
FWD Yr Est. Earnings Per Share			17.9x				14.0x				15.0x				17.8x				17.9x				19.3x				24.3x
One-Day Market Premium			34.0	%			10.9	%			15.0	%			17.5	%			23.5	%			29.3	%			49.1	%

Using the range of multiples representing the 25^th and 75^th percentiles, the analysis indicated an approximate implied per share equity value range for Merchants of $29.75 to $47.40 based on the selected transactions.

Discounted Cash Flow Analysis.  Piper performed a discounted cash flow analysis to estimate a range of the present values of after-tax cash flows that Merchants could provide to equity holders through 2020 on a stand-alone basis. In performing this analysis, Piper used the Projections to derive projected after-tax cash flows. The analysis assumed discount rates ranging from 11.0% to 13.0%, which were assumed deviations, both up and down, as selected by Piper based on the Merchants discount rate of 11.8% as determined by Piper. The range of values for the discounted cash flow analysis was determined by adding (1) the present value of projected cash flows to Merchants stockholders from fiscal years 2016 to 2020 and (2) the present value of the terminal value of Merchants common stock. In determining cash flows available to Merchants stockholders, Piper assumed that Merchants would maintain a tangible common equity to tangible asset ratio of 7.00% and would retain sufficient earnings to maintain these levels. Any earnings in excess of what would need to be retained were assumed to be distributed as dividends to Merchants stockholders. In calculating the terminal value of Merchants, Piper applied multiples ranging from 13.0 times to 15.0 times fiscal year 2020 estimated earnings. These multiples were selected based on a review of trading multiples of common stocks of the selected bank holding companies headquartered in the New England and Mid-Atlantic regions of the United States with total assets between $1.0 billion and $3.0 billion specified above. Piper also assumed a pre-tax cost of cash of 1.50% and a marginal tax rate of 35.0%. This resulted in a range of values of Merchants from $29.71 to $35.34 per share.

Piper also performed a discounted cash flow analysis to estimate a range of the present values of after-tax cash flows that Community Bank System could provide to equity holders through fiscal year 2020 on a stand-alone basis and on a pro forma basis, which included the Synergies and the impact of crossing the $10 billion threshold. In performing this analysis, Piper used publicly available earnings estimates by research analysts covering Community Bank System, which were discussed with senior management of Community Bank System, for fiscal years 2016 (EPS of $2.32) and 2017 (EPS of $2.40), and with respect to the fiscal years 2018 through 2020 applied an earnings growth rate of 5.0% to derive projected after-tax cash flows. The analysis assumed discount rates ranging from 10.0% to 12.0%, which were assumed deviations, both up and down, as selected by Piper based on the Community Bank System discount rate of 11.3% as determined by Piper. The analysis also assumed asset growth based on analyst estimates through 2017 and 3.0% growth thereafter. The range of values for the discounted cash flow analysis was determined by adding (1) the present value of projected cash flows to Community Bank System’s stockholders from fiscal years 2016 to 2020 and (2) the present value of the terminal value of Community Bank System’s common stock. In determining cash flows available to stockholders, Piper assumed that Community Bank System would maintain a tangible common equity to tangible asset ratio of 7.00% and would retain sufficient earnings to maintain these levels. Any earnings in excess of what would need to be retained were assumed to be distributed as dividends to Community Bank System stockholders. In calculating the terminal value of

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Community Bank System, Piper applied multiples ranging from 17.0 times to 19.0 times fiscal year 2020 estimated earnings. These multiples were selected based on a review of trading multiples of the eight publicly traded bank holding companies headquartered in the Mid-Atlantic and New England regions of the United States with total assets between $5.0 billion and $12.0 billion specified above. Piper also assumed a pre-tax cost of cash of 1.50% and a marginal tax rate of 35.0%. This resulted in a range of values of Community Bank System on a stand-alone basis from $41.72 to $48.43 per share and on a pro forma basis from $41.60 to $48.58 per share.

Piper stated that the discounted cash flow present value analysis is a widely used valuation methodology but noted that it relies on numerous assumptions, including asset and earnings growth rates, terminal values and discount rates. The analysis did not purport to be indicative of the actual values or expected values of Merchants and Community Bank System.

Financial Impact Analysis.  Piper performed pro forma merger analyses that combined projected income statement and balance sheet information of Merchants and Community Bank System. Assumptions regarding the Synergies were used to calculate the financial impact that the Merger would have on certain projected financial results of Community Bank System. In the course of this analysis, Piper used the Projections for Merchants and used assumptions provided by Community Bank System’s management for the Synergies. For Community Bank System, Piper used publicly available earnings estimates by research analysts covering Community Bank System for 2016 and 2017 and applied an earnings growth rate of 5.0% thereafter. This analysis indicated that the Merger is expected to be accretive to Community Bank System’s estimated earnings per share in 2017 and 2018. The analysis also indicated that the Merger is expected to be dilutive to tangible book value per share for Community Bank System with an earnback (using the Crossover method) of 4.7 years including the impact of crossing the $10 billion asset threshold, 3.3 years excluding the impact of crossing the $10 billion asset threshold and dilutive to Community Bank System’s tangible common equity to tangible assets ratio, leverage ratio and total risk-based capital ratio. For all of the above analyses, the actual results achieved by Community Bank System following the Merger will vary from the projected results, and the variations may be material.

Other Analyses.  Among other things, Piper also reviewed earnings estimates, balance sheet composition and other financial data for Merchants and Community Bank System. With respect to Merchants’ public price, Piper reviewed the public price targets of the three research analysts covering Merchants as provided by SNL Financial, a nationally recognized research price target consolidator, of which the mean was $33.50. With respect to Community Bank System’s public price, Piper reviewed the public price targets of the five research analysts covering Community Bank System as provided by SNL, of which the mean was $42.80. Piper also reviewed the historical trading performances of shares of Merchants and Community Bank System common stock during the 52-week period ended October 21, 2016. Merchants common stock traded as low as $27.21 per share and as high as $33.99 per share, and the closing price of Merchants common stock on October 21, 2016 was $32.85 per share. Community Bank System common stock traded as low as $34.47 per share and as high as $48.67 per share, and the closing price of Community Bank System common stock on October 21, 2016 was $47.50 per share.

Piper’s Compensation and Other Relationships.  Merchants and Piper entered into an engagement letter dated July 19, 2016 relating to the services to be provided by Piper in connection with the Merger. Pursuant to the engagement letter, Merchants agreed to pay Piper (a) a fee of $250,000 upon the delivery to the Merchants board of the written Piper opinion, which fee will be credited against the transaction fee; and (b) contingent upon closing of the Merger, a transaction fee of $1.9 million. Pursuant to the Piper engagement letter, Merchants also agreed to reimburse Piper for reasonable out-of-pocket expenses and disbursements incurred in connection with its retention up to $25,000 without Merchants prior written consent. Merchants has also agreed to indemnify Piper against certain liabilities, including liabilities under the federal securities laws, arising out of its engagement.

Other than Piper’s engagement by Merchants in connection with the Merger, Piper has not provided any other material investment banking or financial advisory services to Merchants, Community Bank System or their affiliates during the past two years; however, Piper may do so in the future. In the ordinary course of

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Piper’s business as a broker-dealer, Piper may, from time to time, purchase securities from and sell securities to Merchants, Community Bank System or their affiliates.

Certain Prospective Financial Information

Merchants does not, as a matter of course, publicly disclose forecasts or projections of its expected future financial performance, earnings or other results because of, among other things, the inherent difficulty of predicting financial performance for future periods and the likelihood that the underlying assumptions and estimates may not be realized. However, Merchants is including in this Proxy Statement/Prospectus certain unaudited prospective financial information that was prepared based on publicly available earnings estimates (the “Projections”). The Projections were discussed with Piper and used by Piper in connection with its financial analyses and opinion to the Merchants board of directors as described above under the heading “— Opinion of Merchants’ Financial Advisor.” The Projections also were provided to the Merchants board in its consideration of the Merger.

The Projections were not prepared with a view toward public disclosure and, accordingly, do not necessarily comply with published guidelines of the SEC or established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information or generally accepted accounting principles. Merchants’ independent registered public accounting firm, which is listed as an expert in the section entitled “Experts,” or any other independent accountants, did not compile, examine, audit, or perform any procedures with respect to such prospective financial information, and has not expressed any opinion or any other form of assurance on this information or its achievability.

The Projections, while presented with numerical specificity, necessarily were based on numerous variables and assumptions that are inherently uncertain and many of which are beyond the control of Merchants’ management. Given that the Projections cover multiple years, by their nature, they become subject to greater uncertainty with each successive year. The assumptions upon which the Projections were based necessarily involve judgments with respect to, among other things, future economic, market, competitive and regulatory conditions, all of which are difficult or impossible to predict and many of which are beyond Merchants’ control. Important factors that may affect actual results and the achievability of the Projections include, but are not limited to, the risks and uncertainties described in Merchants’ annual report on Form 10-K for the fiscal year ended December 31, 2015, subsequent quarterly reports on Form 10-Q and current reports on Form 8-K. See “Where You Can Find More Information” beginning on page 104 of this Proxy Statement/Prospectus.

The Projections also reflect assumptions that are subject to change and are susceptible to multiple interpretations and periodic revisions based on actual results, revised prospects for Merchants’ business, changes in general business or economic conditions, or any other transaction or event that has occurred or that may occur and that was not anticipated when the Projections were prepared. In addition, the Projections do not take into account any circumstances, transactions or events occurring after the dates on which the Projections were prepared. Accordingly, actual results will differ, and may differ materially, from those contained in the Projections. There can be no assurance that the financial results in the Projections will be realized, or that future actual financial results will not materially vary from those in the Projections.

The inclusion of a summary of the Projections should not be regarded as an indication that Community Bank System or Merchants or any of their respective affiliates, officers, directors, advisors or other representatives consider the Projections to be predictive of actual future events, and the Projections should not be relied upon as such. None of Community Bank System or Merchants or any of their respective affiliates, officers, directors, advisors or other representatives gives any stockholder of Merchants or any other person any assurance that actual results will not differ materially from the Projections, and, except as otherwise required by law, Community Bank System, Merchants and their respective affiliates undertake no obligation to update or otherwise revise or reconcile the Projections to reflect circumstances existing after the dates on which the Projections were prepared or to reflect the occurrence of future events, even in the event that any or all of the assumptions and estimates underlying the Projections are shown to be in error.

In light of the foregoing factors and the uncertainties inherent in the Projections, Merchants stockholders are cautioned not to place undue, if any, reliance on such Projections.

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The following table presents a summary of the Projections, which has been included solely to give the Merchants stockholders access to certain prospective financial information that was made available to the Merchants board and used by Piper, and is not included in this Proxy Statement/Prospectus to influence any decision of Merchants stockholders as to whether to vote to adopt the Merger Agreement or for any other purpose. The Projections are based on publicly available earnings estimates by research analysts covering Merchants through 2017, with an earnings growth rate of 5.0% applied to derive fiscal years 2018 through 2020. The projected financial data provided in this table has not been updated to reflect Merchants’ current views of its future financial performance, and should not be treated as guidance with respect to projected results for 2016 or any other period.

(in millions, except per share amounts)		2016P(1)				2017P				2018P				2019P				2020P
Net Income		$	16.1			$	16.9			$	17.8			$	18.7			$	19.6
Earnings Per Diluted Share		$	2.34			$	2.46			$	2.58			$	2.71			$	2.85

The Projections were used to derive projected after-tax cash flows based on assumptions provided by management, including (1) asset growth based on analyst estimates through 2017 and 4.0% asset growth thereafter, (2) a tangible common equity to tangible assets threshold of 7.0%, (3) pre-tax cost of cash of 1.5%, and (4) a marginal tax rate of 35.0%. Based on these assumptions, the projected after-tax cash flows were: $5.8 million for the second half of 2016; $11.8 million in 2017; $12.3 million in 2018; $12.8 million in 2019; and $13.2 million in 2020. This information was not prepared with a view toward public disclosure, and actual results may differ materially from these projected amounts.

Stockholder Support Agreements with Directors and Another Principal Stockholder of Merchants

Community Bank System has entered into a stockholder support agreement with each director of Merchants and another principal stockholder of Merchants with voting power with respect to an aggregate of [•] shares of Merchants common stock, or approximately [•]% of the shares of Merchants common stock outstanding as of the record date. Pursuant to the agreements, each director and the principal stockholder of Merchants have agreed to vote “FOR” the adoption of the Merger Agreement all of the shares of Merchants common stock that they are entitled to vote.

Interests of Merchants Directors and Executive Officers in the Merger

In considering the recommendation of the Merchants board of directors with respect to its approval of the Merger Agreement, Merchants stockholders should be aware that certain of Merchants’ directors and executive officers have interests in the Merger that are different from, or in addition to, those of Merchants stockholders generally. These interests may create potential conflicts of interest. The Merchants board of directors was aware of and considered these interests, among other matters, in reaching its decision to approve, and declare advisable, the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement. The material interests are summarized below.

Effect of the Merger Agreement on Equity Awards

In connection with the Merger, the Merchants’ equity awards held by Merchants’ directors and executive officers will be treated the same as all outstanding Merchants’ equity awards, except as noted below under the header titled “Equity Awards of Certain Directors and Executive Officers”.

Cash Payment for Outstanding Merchants Stock Options.  Consistent with the terms of Merchants’ 2008 Stock Incentive Plan, the Merger Agreement provides that, at the effective time of the Merger, each Merchants stock option outstanding and unexercised immediately prior to the effective time of the Merger, whether or not vested or exercisable, will be cancelled and automatically converted into the right to receive a cash amount equal to the aggregate number of shares of Merchants common stock subject to such option multiplied by the excess of the value of the mixed election consideration over the exercise price of such option.

Vesting of Merchants Restricted Stock Awards.  Consistent with the terms of Merchants’ 2008 Stock Incentive Plan, the Merger Agreement provides that, at the effective time of the Merger, each share of

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Merchants common stock subject to vesting or forfeiture restrictions and granted under any Merchants benefit plan that is outstanding immediately prior to the effective time, whether or not vested, will automatically vest in full, and any restrictions thereon will lapse, and such Merchants restricted share shall be canceled and converted into the right to receive an amount of cash equal to the value of the mixed election consideration plus dividends, if any, accrued but unpaid as of the effective time with respect to such restricted share.

Treatment of Merchants Warrants.  Each organizers’ warrant to purchase Merchants common stock outstanding as of the effective time will be converted at the effective time into a warrant to acquire, upon payment of the amount determined by dividing the per share exercise price immediately prior to the effective time by the stock election consideration of 0.9630, the number of shares of Community Bank System common stock determined by multiplying (i) the number of shares of Merchants common stock which may be acquired upon exercise of such organizers’ warrant immediately prior to the effective time by (ii) the stock election consideration of 0.9630. As of January 15, 2017, Don Chase held organizers’ warrants for 1,208 shares with an exercise price of $41.39 per share.

Equity Awards of Certain Directors and Executive Officers

For certain executive officers, Merchants accelerated the vesting of outstanding equity awards that would otherwise have vested at the effective time of the Merger, so that such awards vested in December 2016 in order to mitigate the impact of Section 4999 of the Code, as discussed in more detail below. In connection with such acceleration, each executive officer agreed to (i) hold such accelerated shares through the earlier of his or her termination of employment with Merchants or the closing of the Merger and (ii) repay to Merchants an amount, in cash, equal to the compensation recognized by such executive officer, less applicable employment and income taxes, for the accelerated shares should he or she terminate employment prior to closing of the Merger.

Outstanding stock options held by Mr. Tuttle were scheduled to expire on December 31, 2016 if they had not been exercised as of such date. Due to the pendency of the Merger, Merchants extended the exercise period with respect to Mr. Tuttle’s stock options until the earlier of (i) the closing of the Merger, and (ii) the original expiration date of the options. As of January 15, 2017, Mr. Tuttle held options to purchase 26,520 shares of Merchants stock with a weighted average exercise price of $22.50.

Retention Incentives for Executive Officers

In order to incentivize and motivate certain executives who are not expected to be retained on a long-term basis following the closing of the Merger to provide critical services during the pendency of the Merger, Community Bank System has entered into retention agreements with each of Messrs. Cataldo and Watson and Mses. Thresher, Abbott, and Dragon. Under these retention agreements, an amount equal to 40% of the executive’s 2016 base salary (or 50% of base salary, in the case of Ms. Thresher) will become payable upon the closing of the Merger, subject to the executive’s continued service through the closing of the Merger and completion of certain activities and other items prior to the closing of the Merger related to the integration of Merchants with Community Bank System. In the event that the retention bonus (together with any other payments to the executive officers) would constitute a “parachute payment” and would be subject to the excise tax imposed by Section 4999 of Code, such amounts would be reduced to the largest payment possible without the imposition of an excise tax under Section 4999 of the Code.

In addition, for performance in 2016, Merchants granted restricted stock awards under the 2008 Stock Incentive Plan in early 2017 to these executive officers (the “2017 Restricted Stock Grants”). The value of each restricted stock award was approximately 15% of each executive officer’s respective 2017 base salary and has terms and conditions consistent with Merchants’ past practice, which include three-year cliff vesting subject to acceleration upon a change in control of Merchants, including as a result of the Merger.

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Quantification of Equity Acceleration and Retention Incentives

The following table quantifies the payments and benefits that Merchants’ executive officers may receive in connection with the Merger due to the accelerated vesting of unvested restricted shares held as of January 15, 2017 and the payment of retention incentives. As of January 15, 2017, none of Merchants’ executive officers held any stock options and none of Merchants’ directors held unvested restricted shares or unvested stock options or had received, or were expected to receive, any retention incentives.

Executive Officer		Restricted Stock								Value of 2017 Restricted Stock Grant ($)(3)				Value of Retention Bonus ($)				Total ($)
		Number of Shares				Estimated Value ($)(1)(2)
Laura Abbott			879				37,621				24,000				62,000				123,621
Bruce Bernier			1,204				51,531				—				—				51,531
Anita Bourgeois			—				—				—				—				—
Michael Cataldo			342				14,638				22,800				59,200				96,638
Richard Donovan			—				—				—				—				—
Jacqueline Dragon			1,463				62,616				22,650				58,000				143,266
Geoffrey Hesslink			6,153				263,348				—				—				263,348
Marie Thresher			3,182				136,190				45,750				145,000				326,940
Jonathan Watson			879				37,621				25,650				65,200				128,471

Severance Arrangements with Merchants

Merchants has an existing employment agreement with each of its executive officers (other than Richard Donovan and Eric Segal), which provides that if, within 24 months following a change in control, an executive is terminated without cause or resigns for good reason, the executive will be paid a lump sum amount equal to the sum of (i) a prorated bonus and (ii) three times (for Mr. Hesslink) or two times (for the other executives) the executive’s then-current base salary. Furthermore, Merchants will continue to pay its share of the cost of health insurance for the executive for up to 18 months following such termination. The prorated bonus portion of the cash severance shall be calculated as the amount payable under Merchants’ annual incentive compensation plan based on the extent to which the applicable performance criteria for the year of termination of employment have been achieved, as measured through the end of the most recently

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completed calendar quarter, multiplied by a fraction, the numerator of which shall be the number of days the executive was employed by Merchants in the year of termination of employment and the denominator of which shall be 365.

In the event that any payments to the executive officers would constitute a “parachute payment” and would be subject to the excise tax imposed by Section 4999 of the Code, such amounts would be reduced to the largest payment possible without the imposition of an excise tax under Section 4999 of the Code. As noted above, Merchants has accelerated the vesting of certain equity awards that would otherwise have vested at the effective time of the Merger, so that such awards vested in December 2016 in order to mitigate the impact of Section 4999 of the Code.

In December 2016, Merchants entered into an employment agreement with Richard Donovan as interim Principal Accounting Officer, interim Principal Financial Officer, and interim Treasurer. The employment agreement provides that Mr. Donovan’s employment will automatically terminate upon the closing of the Merger. If Mr. Donovan’s employment is terminated without cause prior to the closing of the Merger, he shall receive the base salary he otherwise would have received had he remained employed until the earliest of (1) the end of the 90 day period following his termination date, (2) the closing of the Merger, or (3) the date that Merchants determines to be the end of the merger process. Mr. Donovan could receive severance in the form of base salary continuation for up to 90 days, or approximately $56,250.

As described below, Community Bank System has entered into employment agreements with each of Messrs. Hesslink and Bernier, and Ms. Bourgeois, which agreements will become effective upon the closing of the Merger and will supersede the employment agreements each executive is currently party to with Merchants.

Community Bank System has confirmed its intention to honor the terms of the employment agreements with Messrs. Cataldo and Watson and Mses. Thresher, Abbott, and Dragon. Community Bank System further acknowledged that these executive officers would have good reason to resign following the closing of the Merger. The following table quantifies the potential payments and benefits that these executive officers may receive under their employment agreements, assuming a termination without cause or resignation for good reason following the Merger. As noted above, such amounts may be subject to reduction to the extent necessary to avoid the imposition of an excise tax under Section 4999 of the Code.

Executive Officer		Severance Payment ($)(1)				Estimated Value of Benefits Continuation ($)				Total ($)
Laura Abbott			321,644				23,101				344,745
Michael Cataldo			305,562				22,930				328,491
Jacqueline Dragon			303,551				8,221				311,773
Marie Thresher			613,760				—				613,760
Jonathan Watson			343,757				22,763				366,519