COMMUNITY BANK SYSTEM, INC. (Form: 8-K, Received: 05/18/2017 16:32:21)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

__________________

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 OR 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported) : May 12 , 2017

(Exact name of registrant as specified in its charter)

Delaware	001-13695	16-1213679
(State or other jurisdiction of incorporation)	(Commission File Number)	(I.R.S. Employer Identification No.)

5790 Widewaters Parkway, DeWitt, New York		13214-1883
(Address of principal executive offices)		(Zip Code)

(315) 445-2282

( Registrant's telephone number, including area code)

_________________ Not Applicable ________________

(Former Name or Former Address, if Changed Since Last Report)

	Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

	o	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

	o	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

	o	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

	o	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

	Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Item 2.01

Completion of Acquisition or Disposition of Assets.

On May 12, 2017, Community Bank System, Inc. ("Community Bank System") completed its previously announced acquisition of Merchants Bancshares, Inc., a Delaware corporation ("Merchants"), pursuant to the Agreement and Plan of Merger, dated as of October 22, 2016 (the "Merger Agreement"), by and between Community Bank System and Merchants. Under the terms of the Merger Agreement, Merchants merged with and into Community Bank System (the "Merger"), with Community Bank System being the surviving corporation of the Merger. Additionally, Merchants Bank ("Merchants Bank"), a wholly owned subsidiary of Merchants, merged with and into Community Bank, N.A. ("Community Bank"), a wholly owned subsidiary of Community Bank System, with Community Bank continuing as the surviving bank.

The total consideration paid to Merchants stockholders consists of approximately $82.85 million cash and 4.68 million shares of Community Bank System common stock, par value $1.00 per share ("Community Common Stock").

Community Bank System also issued replacement organizer warrants (the "Replacement Organizer Warrants") to the holders of Merchants' Replacement Organizer Warrants which were originally issued in December 2015 by Merchants in connection with its acquisition of NUVO Bank & Trust Company. The Replacement Organizer Warrants, which expire in 2018, grant the holders the right to purchase an aggregate of approximately 31,918 shares of Community Common Stock at an adjusted exercise price of $42.98 per share. The foregoing description of the Replacement Organizer Warrants does not purport to be complete and is qualified in its entirety by reference to the form of Replacement Organizer Warrant Certificate, which is attached hereto as Exhibit 4.1.

Under the terms of the Merger Agreement, Merchants stockholders were entitled to elect the form of merger consideration to be received in the transaction. Each stockholder who submitted a completed Letter of Election and Transmittal prior to the election deadline of May 9, 2017 had the ability to elect to receive, for each share of Merchants common stock, either (i) $40.00 in cash (the "Cash Consideration"), (ii) 0.9630 shares of Community Common Stock, par value $1.00 per share, and cash in lieu of fractional shares, if any (the "Stock Consideration"), or (iii) a combination of $12.00 in cash and 0.6741 shares of Community Common Stock, and cash in lieu of fractional shares, if any (the "Mixed Election Consideration," and together with the Cash Consideration and the Stock Consideration, the "Merger Consideration"). Both the Cash Consideration and the Stock Consideration were subject to proration and adjustment procedures to ensure that the total amount of cash paid, and the total number of shares of Community Common Stock issued, in the Merger to Merchants stockholders, 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 (equating to an overall proration to approximately 70% stock and 30% cash).

Most of the Merchants stockholders who submitted election forms by the election deadline made the "all stock" election to receive their merger consideration solely in the form of shares of Community Common Stock. As a result of the elections of Merchants stockholders, and in accordance with the allocation and proration mechanisms of the Merger Agreement, the Merger Consideration has been allocated as follows:

·	Those stockholders who elected to receive the Stock Consideration in the merger will receive, for each share of Merchants common stock with respect to which such election was made, a combination of 0.6811 shares of Community Common Stock and $11.71 in cash;

·	Those stockholders who elected to receive the Cash Consideration in the merger will receive $40.00 in cash for each share of Merchants common stock with respect to which such election was made;

·	Those stockholders who elected to receive the Mixed Election Consideration in the merger will receive a combination of 0.6741 shares of Community Common Stock and $12.00 in cash for each share of Merchants common stock with respect to which such election was made; and

·	Those stockholders that did not select an election preference or submit a properly completed election form within the required timeframe will receive the Mixed Election Consideration of 0.6741 shares of Community Common Stock and $12.00 in cash for each share of Merchants common stock they own.

No fractional shares of Community Common Stock will be issued in the Merger and cash in lieu of any fractional share of Community Common Stock will be paid at the rate of $55.91 per whole share.

The foregoing description of the Merger Agreement and the Merger does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement which was filed as Exhibit 2.1 to Community Bank System's Current Report on Form 8-K filed with the Securities and Exchange Commission on October 27, 2016, and is incorporated herein by reference.

A copy of Community Bank System's press release May 18, 2017 is attached hereto as Exhibit 99.1 and is incorporated herein by reference.

Item 2.03

Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of Registrant.

In connection with the Merger, and pursuant to a First Supplemental Indenture, dated as of May 12, 2017, by and among Community Bank System, Merchants and Wilmington Trust Company, as trustee (the "First Supplemental Indenture"), Community Bank System assumed Merchants' rights, duties and obligations under the Indenture, dated as of December 15, 2004, between Merchants and Wilmington Trust Company, as trustee (the "Indenture"), with respect to the due and punctual payment of principal and premium, if any, and interest on $20,619,000 in original issuance amount of the Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures due 2034 issued by Merchants under the Indenture.

The foregoing description of the First Supplemental Indenture does not purport to be complete and is qualified in its entirety by reference to the First Supplemental Indenture which is filed as Exhibit 4.2 hereto, and is incorporated herein by reference.

Item 5.02

Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

On May 12, 2017, in connection with the Merger and pursuant to the terms of the Merger Agreement, the Board of Directors of Community Bank System expanded the size of the Board of Directors to appoint two former Merchants directors, Jeffrey L. Davis and Raymond C. Pecor, III. Messrs. Davis and Pecor have also been appointed to the Board of Directors of Community Bank.

Mr. Davis has over 20 years of experience in the banking industry having served as a member of the Board of Directors of Merchants and Merchants Bank since 1993. He has served as Chairman of Merchants' Board of Directors since February 2015. Over the course of his tenure on Merchants' Board of Directors he has served on its Audit, Compensation and Governance Committees. He is President of J.L. Davis, Inc., a construction and development firm, President of The Champlain Valley Exposition and President of Taft Corners Associates, a development firm. He is also a trustee emeritus of the University of Vermont in Burlington, Vermont, and a former president of the Vermont Special Olympics.

Mr. Pecor has over eight years of experience in the banking industry having served as a member of Merchants Bank's Board of Directors since 2009 and a member of Merchants' Board of Directors since 2012. Over the course of his tenure on Merchants' Board of Directors he has served on its Audit, Compensation and Governance Committees. He is President of Lake Champlain Transportation Company in Burlington, Vermont, and serves on the board of the Champlain Valley Expo.

Messrs. Davis and Pecor will receive compensation for their service on the Board of Directors in accordance with Community Bank System's standard compensatory arrangements for non-employee directors. A description of the compensatory arrangements for non-employee directors is included in Community Bank System's proxy statement on Schedule 14A for its 2017 Annual Meeting of Stockholders, filed with the Securities and Exchange Commission on March 31, 2017.

Item 9.01		Financial Statements and Exhibits.

(a)		Financial Statements of Business Acquired

The financial statements required to be filed under this Item 9.01(a) shall be filed by an amendment to this Form 8-K not later than 71 days after the date this Current Report on Form 8-K is required to be filed.

(b)		Pro Forma Financial Information

The pro forma financial information required to be filed under this Item 9.01(b) shall be filed by an amendment to this Form 8-K not later than 71 days after the date this Current Report on Form 8-K is required to be filed.

(d)		Exhibits.

	Exhibit No .	Description

	4.1	Form of Replacement Organizers' Warrant to purchase Community Bank System, Inc. Common Stock

	4.2	First Supplemental Indenture, dated as of May 12, 2017, by and among Wilmington Trust Company, Community Bank System, Inc., and Merchants Bancshares, Inc.

	99.1	Press Release, dated May 18, 2017

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

		Community Bank System, Inc.



		By: /s/ George J. Getman
		Name: George J. Getman
		Title: EVP and General Counsel
Dated: May 18, 2017

FORM OF SECOND REPLACEMENT ORGANIZER WARRANT CERTIFICATE

THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE RESTRICTIONS SPECIFIED IN THAT CERTAIN ORGANIZER WARRANT AGREEMENT DATED AS OF APRIL 25, 2008, BY NUVO BANK & TRUST COMPANY, FORMERLY A MASSACHUSETTS CHARTERED TRUST COMPANY ("NUVO"), IN FAVOR OF THE ORGANIZERS OF NUVO LISTED ON EXHIBIT A THERETO, AS THE SAME MAY BE AMENDED FROM TIME TO TIME ("WARRANT AGREEMENT"). EFFECTIVE AS OF DECEMBER 4, 2015, NUVO MERGED (THE "FIRST MERGER") WITH AND INTO MERCHANTS BANK, FORMERLY A VERMONT BANK AND WHOLLY OWNED SUBSIDIARY OF MERCHANTS BANCSHARES, INC., A DELAWARE CORPORATION ("BANCSHARES"). THE OBLIGATIONS OF NUVO UNDER THE WARRANT AGREEMENT WERE ASSUMED BY BANCSHARES IN CONNECTION WITH THE FIRST MERGER. EFFECTIVE AS OF MAY 12, 2017, BANCSHARES MERGED (THE "SECOND MERGER") WITH AND INTO COMMUNITY BANK SYSTEM, INC., A DELAWARE CORPORATION (THE "COMPANY"). THE OBLIGATIONS OF BANCSHARES UNDER THE WARRANT AGREEMENT WERE ASSUMED BY THE COMPANY IN CONNECTION WITH THE SECOND MERGER. THIS CERTIFICATE REFLECTS ADJUSTMENT OF THE EXERCISE PRICE AND NUMBER OF WARRANTS IN CONNECTION WITH THE SECOND MERGER, IN ACCORDANCE WITH SECTION 2.8 OF THE AGREEMENT AND PLAN OF MERGER DATED AS OF OCTOBER 22, 2016, BETWEEN BANCSHARES AND THE COMPANY (THE "MERGER AGREEMENT") AND SECTION 12 OF THE WARRANT AGREEMENT. COPIES OF THE WARRANT AGREEMENT AND THE MERGER AGREEMENT ARE ON FILE AND MAY BE INSPECTED AT THE PRINCIPAL EXECUTIVE OFFICE OF THE COMPANY DURING NORMAL BUSINESS HOURS.

No. ORG. W-____

Number of Warrants:_____

This Second Replacement Organizer Warrant Certificate certifies that

__________________________________________________________________________________________, or registered assigns, is the registered holder of a warrant to purchase the number of fully paid and non-assessable shares of common stock, $1.00 par value of Community Bank System, Inc. (" Shares ") set forth above, at the exercise price, subject to further adjustment in certain events in accordance with the terms of the Warrant Agreement (" Exercise Price "), of $42.98 per share (" Warrant ").

The Warrant evidenced by this Second Replacement Organizer Warrant Certificate (" Warrant Certificate ") is part of a duly authorized issue of Warrants issued by the Company pursuant to Section 12 of the Warrant Agreement and Section 2.8 of the Merger Agreement, as a replacement for a warrant issued by Bancshares in 2015 pursuant to an Agreement and Plan of Merger dated as of April 27, 2015 by NUVO and Bancshares and the Warrant Agreement, which is hereby incorporated by reference in and made a part of this instrument. The Warrant Agreement is hereby referred to for a description of the rights, limitation of rights, obligations, duties and immunities thereunder of the Company and the Holder. All terms used, but not otherwise defined, in this Warrant Certificate shall have the meanings assigned to them in the Warrant Agreement. If any provision of this Warrant Certificate conflicts with a provision of the Warrant Agreement, the provision of the Warrant Agreement shall supersede.

This Warrant may not be exercised after 2:00 p.m., Springfield, Massachusetts time, on April 25, 2018 (the " Expiration Time ").

The Holder may exercise the Warrant evidenced by this Warrant Certificate in whole or in part at any time prior to the Expiration Time by delivering to American Stock Transfer & Trust Company, LLC (the " Securities Registrar "), (A) this Warrant Certificate, with the section of this Warrant Certificate titled " ELECTION TO PURCHASE " properly completed; and (B) a check for the full amount of the aggregate Exercise Price of the Shares being acquired.

Upon receipt of the items set forth above, and subject to the terms of the Warrant Agreement, the Company or the Securities Registrar shall promptly deliver to, and register in the name of, the Holder a certificate or certificates representing the number of Shares acquired by exercise of this Warrant. In the event of a partial exercise of this Warrant, a new Warrant Certificate evidencing the number of Shares that remain subject to this Warrant shall be issued by the Company or the Securities Registrar to such Holder or to his duly authorized assigns.

The Warrant Agreement provides that upon the occurrence of certain events the Exercise Price and the type and/or number of Company securities issuable thereupon may, subject to certain conditions, be adjusted. In such event the Company may, at its option, issue a new Warrant Certificate evidencing the adjustment in the Exercise Price and the number and/or type of securities issuable upon the exercise of the Warrants.

Upon surrender for registration of transfer of this Warrant Certificate, subject to the terms of the Warrant Agreement, the Company shall issue and deliver to the Holder or his duly authorized assigns, one or more new Warrant Certificates of like tenor and in like aggregate amount.

Prior to the due presentment of this Warrant Certificate for registration of transfer or exchange, the Company, any Securities Registrar and any other agent of the Company may treat the person in whose name this Warrant Certificate is registered in the Securities Register as the sole Holder of this Warrant Certificate and of the Warrant represented by this Warrant Certificate for all purposes whatsoever, and shall not be bound to recognize any equitable or other claim to or interest in this Warrant Certificate or in the Warrant represented by this Warrant Certificate on the part of any person and shall be unaffected by any notice to the contrary.

The Holder, in his capacity as such, shall not be entitled to vote or receive dividends nor be deemed for any other purpose the holder of the Shares or other securities which may at any time be issuable upon the exercise of this Warrant. Nothing contained in this Warrant Certificate shall be construed to confer upon the Holder, in his capacity as such, any of the rights of a shareholder of the Company, including any right to vote for the election of directors or upon any matter submitted to shareholders of the Company at any meeting thereof, to give or withhold consent to any corporate action, or to receive notices of meeting or other actions affecting shareholders.

Any notice or other communication required or permitted to be made by the Holder to the Company shall be in writing, duly signed by the Holder and shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid to the Company, at its principal place of business (or such other address as designated in writing to the Holder by the Company. A notice given to the Company by a Holder with respect to the exercise of this Warrant shall not be effective until received by the Company.

This Warrant Certificate and each Warrant represented hereby are issued pursuant to and are subject in all respects to the terms and conditions set forth in the Warrant Agreement, a copy of which may be obtained from the Company at 570 Widewaters Parkway, DeWitt, NY 13214 by a written request from the Holder hereof or which may be inspected by any Holder or his agent at the principal offices of the Company.

IN WITNESS WHEREOF, Community Bank System, Inc. has caused this Second Replacement Organizer Warrant Certificate to be duly executed by the facsimile signatures of its authorized officers.

Dated as of May 12, 2017.

COMMUNITY BANK SYSTEM, INC.
a Delaware corporation


By:	By:


Mark Tryniski	Scott Kingsley
President & Chief Executive Officer	Executive Vice President & Chief Financial Officer

COUNTERSIGNED AND REGISTERED
AMERICAN STOCK TRANSFER & TRUST COMPANY, LLC
SECURITIES REGISTRAR


By:



AUTHORIZED SIGNATURE

ELECTION TO PURCHASE
(To be executed by the registered Holder if such Holder desires to exercise the
Second Replacement Organizer Warrant Certificate in whole or in part).

TO: American Stock Transfer & Trust Company, LLC, Securities Registrar

The undersigned hereby irrevocably elects to exercise Warrants represented by this Second Replacement Organizer Warrant Certificate to purchase the Shares issuable upon the exercise of such Warrants and requests that certificates for such stock be issued in the name of:

PLEASE INCLUDE SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER
______________________________
______________________________
______________________________
______________________________
[please print name and address]

If such number of Warrants shall not be all the Warrants evidenced by this Second Replacement Organizer Warrant Certificate, a new Second Replacement Organizer Warrant Certificate for the balance remaining of such Warrants shall he registered in the name of and delivered to:

Dated:_______________

Signature:_______________

Signature Guaranteed:__________________

Number of Warrants being Exercised:_______________

Number of Shares to be Issued:_______________

*(No fractional Shares will be issued in connection with the exercise of the Warrants)

Exercise Price: ________________ x $42.98=$_______________

(Number of Shares)

(Payment must accompany completed Election to Purchase)

ASSIGNMENT

(To be executed by the registered Holder if such Holder desires to transfer the

Second Replacement Organizer Warrant Certificate in whole or in part.)

FOR VALUE RECEIVED, _______________ hereby sells, assigns and transfers unto _______________ this Second Replacement Organizer Warrant Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________ to transfer the Second Replacement Organizer Warrant Certificate on the books of the within-named Company, with full power of substitution in the name of the Assignee as provided above as to _____ Shares, to issue a new Second Replacement Organizer Warrant Certificate to the Assignee (and, if this assignment Is for fewer than 100% of the Shares covered by said Warrant, to the Assignor for the balance thereof) to reflect the assignment and registration, and to provide written notice of such registration to the Assignor and the Assignee at the addresses provided above. The undersigned hereby acknowledges that such transfer may not be effective unless said Warrant is registered in the Company's Second Replacement Organizer Warrant Register.

USActive 37082461.1

Dated:_______________

Signature:_______________

Signature Guaranteed:__________________

NOTICE

The signature on the foregoing Election to Purchase or Assignment must correspond to the name as written upon the face of this Second Replacement Organizer Warrant Certificate in every particular, without alteration or enlargement or any change whatsoever.

Return completed Election to Purchase and/or Assignment to the Securities Registrar at:


By hand, express mail, courier, or other expedited service:	American Stock Transfer &Trust Company, LLC Operations Center, Attn: Reorganization Department 0201 15th Avenue, Brooklyn, New York 11219	By mail:	American Stock Transfer & Trust Company, LLC Operations Center, Attn: Reorganization Department P.O. Box 2042, New York, New York 10272-2042

FIRST SUPPLEMENTAL INDENTURE

THIS FIRST SUPPLEMENTAL INDENTURE dated as of May 12, 2017 is by and among Wilmington Trust Company, a Delaware trust company, as Trustee (herein, together with its successors in interest, the "Trustee"), Community Bank System, Inc., a Delaware corporation (the "Successor Company"), and Merchants Bancshares, Inc., a Delaware corporation (the "Company"), under the Indenture referred to below.

NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, the Trustee, the Company and the Successor Company hereby agree as follows:

PRELIMINARY STATEMENTS

The Trustee and the Company are parties to that certain Indenture dated as of December 15, 2004 (the "Indenture"), pursuant to which the Company issued U.S. $20,619,000 of its Fixed/Floating Rate Junior Subordinated Deferrable Interest Debentures due 2034.

As permitted by the terms of the Indenture, the Company, simultaneously with the effectiveness of this First Supplemental Indenture, shall merge (referred to herein for purposes of Article XI of the Indenture as the "Merger") with and into the Successor Company with the Successor Company as the surviving corporation. The parties hereto are entering into this First Supplemental Indenture pursuant to, and in accordance with, Articles IX and XI of the Indenture.

SECTION 1. Definitions . All capitalized terms used herein that are defined in the Indenture, either directly or by reference therein, shall have the respective meanings assigned them in the Indenture except as otherwise provided herein or unless the context otherwise requires.

SECTION 2. Interpretation .

(a)	In this First Supplemental Indenture, unless a clear contrary intention appears:

(i)	the singular number includes the plural number and vice versa;

(ii)	reference to any gender includes the other gender;

(iii)

the words "herein," "hereof" and "hereunder" and other words of similar import refer to this First Supplemental Indenture as a whole and not to any particular Section or other subdivision;

(iv)	reference to any Person includes such Person's successors and assigns but, if applicable, only if such successors and assigns are permitted by this First Supplemental Indenture or the Indenture,

and reference to a Person in a particular capacity excludes such Person in any other capacity or individually provided that nothing in this clause (iv) is intended to authorize any assignment not otherwise permitted by this First Supplemental Indenture or the Indenture;

(v)

reference to any agreement, document or instrument means such agreement, document or instrument as amended, supplemented or modified and in effect from time to time in accordance with the terms thereof and, if applicable, the terms hereof, as well as any substitution or replacement therefor and reference to any note includes modifications thereof and any note issued in extension or renewal thereof or in substitution or replacement therefor;

(vi)	reference to any Section means such Section of this First Supplemental Indenture; and

(vii)

the word "including" (and with correlative meaning "include") means including without limiting the generality of any description preceding such term.

(b)	No provision in this First Supplemental Indenture shall be interpreted or construed against any Person because that Person or its legal representative drafted such provision.

SECTION 3. Assumption of Obligations .

(a)

Pursuant to, and in compliance and accordance with, Section 11.1 and Section 11.2 of the Indenture, the Successor Company hereby expressly assumes the due and punctual payment of the principal of and premium, if any, and interest on all of the Debentures, and the due and punctual performance and observance of all of the covenants and conditions of the Indenture to be kept, performed, or observed by the Company under the Indenture.

(b)

Pursuant to, and in compliance and accordance with, Section 11.2 of the Indenture, the Successor Company succeeds to and is substituted for the Company, with the same effect as if the Successor Company had originally been named in the Indenture as the Company and the Company is hereby relieved of any further liability or obligation under the Indenture and the Debentures.

(c)	The Successor Company also succeeds to and is substituted for the Company with the same effect as if the Successor Company had originally been named in (i) the Amended and Restated Declaration of Trust of the Trust, dated as of December 15, 2004 (the "Trust Agreement"), as Sponsor

(as defined in the Trust Agreement) and (ii) the Guarantee Agreement, dated as of December 15, 2004 (the "Guarantee"), as Guarantor (as defined in the Guarantee).

SECTION 4. Representations and Warranties . The Successor Company represents and warrants that (a) it has all necessary power and authority to execute and deliver this First Supplemental Indenture and to perform the Indenture, (b) that it is the successor of the Company pursuant to the Merger effected in accordance with applicable law, (c) that it is a corporation organized and existing under the laws of Delaware, and (d) that this First Supplemental Indenture is executed and delivered pursuant to Section 9.1(a) and Article XI of the Indenture and does not require the consent of the Securityholders.

SECTION 5. Conditions of Effectiveness . This First Supplemental Indenture shall become effective simultaneously with the effectiveness of the Merger, provided, however, that:

(a)

the Trustee shall have executed a counterpart of this First Supplemental Indenture and shall have received one or more counterparts of this First Supplemental Indenture executed by the Successor Company and the Company;

(b)

the Trustee shall have received an Officers' Certificate stating that (i) this First Supplemental Indenture complies with the requirements of Article IX of the Indenture; and (ii) in the opinion of the signers, all conditions precedent, if any, provided for in the Indenture relating to the Merger and this First Supplemental Indenture have been complied with;

(c)

the Trustee shall have received an Opinion of Counsel to the effect that (i) all conditions precedent provided for in the Indenture relating to the Merger and this First Supplemental Indenture have been complied with and; (ii) this First Supplemental Indenture complies with the requirements of Article IX of the Indenture and is authorized or permitted by, and conforms to, the terms of Article IX of the Indenture; and

(d)

the Successor Company and the Company shall have duly executed and filed with the Sec re tary of the State of the State of Delaware a Certificate of Merger in connection with the Merger.

SECTION 6. Reference to the Indenture .

(a)	Upon the effectiveness of this First Supplemental Indenture, each reference in the Indenture to "this Indenture," "hereunder," "herein" or words of like import shall mean and be a reference to the Indenture, as affected, amended and supplemented hereby.

(b)	Upon the effectiveness of this First Supplemental Indenture, each reference in the Debentures to the Indenture including each term defined by reference to the Indenture shall mean and be a reference to the Indenture or such term, as the case may be, as affected, amended and supplemented hereby.

(c)	The Indenture, as amended and supplemented hereby shall remain in full force and effect and is hereby ratified and confirmed.

SECTION 7. Execution in Counterparts . This First Supplemental Indenture may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument.

SECTION 8. Governing Law; Binding Effect . This First Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York without regard to conflict of laws principles and shall be binding upon the parties hereto and their respective successors and assigns.

SECTION 9. The Trustee . The Trustee shall not be responsible in any manner whatsoever for or in respect of the validity or sufficiency of this First Supplemental Indenture or the due execution thereof by the Company or the Successor Company. The recitals of fact contained herein shall be taken as the statements solely of the Company or the Successor Company, and the Trustee assumes no responsibility for the correctness thereof.

[Signatures on following page]

IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed as of the day and year first written above.

	MERCHANTS BANCSHARES, INC.

	By:	/s/ George R. Hesslink
		Name: George R. Hesslink
		Title: President & Chief Executive Officer


	COMMUNITY BANK SYSTEM, INC.

	By:	/s/ George J. Getman
		Name: George J. Getman
		Title: Executive Vice President & General Counsel


	WILMINGTON TRUST COMPANY, not in its individual capacity, but solely as Trustee

	By:	/s/ Michael S. Wass
	Name:	Michael S. Wass
	Title:	Vice President

[ Signature page to First Supplemental Indenture ]

	News Release For further information, please contact:
5790 Widewaters Parkway, DeWitt, N.Y. 13214	Scott A. Kingsley, EVP & Chief Financial Officer Office: (315) 445-3121

Community Bank System, Inc.

Announces Results of Allocation and Proration of

Merchants Bancshares, Inc. Merger Consideration

SYRACUSE, N.Y. — May 18, 2017 — Community Bank System, Inc. ("Community Bank System") (NYSE: CBU) announced today that American Stock Transfer & Trust Company, LLC, the Exchange Agent for the merger with Merchants Bancshares, Inc. ("Merchants"), has completed the process of determining the allocation and proration of the merger consideration in accordance with the Agreement and Plan of Merger, dated as of October 22, 2016, with respect to the merger ("Merger Agreement").

Under the terms of the Merger Agreement, Merchants stockholders were entitled to elect the form of merger consideration to be received in the transaction. Each stockholder who submitted a completed Letter of Election and Transmittal prior to the election deadline of May 9, 2017 had the ability to elect to receive, for each share of Merchants common stock, (a) $40.00 in cash (the "Cash Consideration"), (b) 0.9630 shares of Community Bank System common stock, par value $1.00 per share, and cash in lieu of fractional shares, if any (the "Stock Consideration"), or (c) a combination of $12.00 in cash and 0.6741 shares of Community Bank System common stock, and cash in lieu of fractional shares, if any (the "Mixed Election Consideration," and together with the Cash Consideration and the Stock Consideration, the "Merger Consideration"). However, all elections were subject to certain allocation procedures to ensure that the aggregate amount of cash paid and shares of Community Bank System common stock issued in the merger as a whole are equal to the total amount of cash and number of Community Bank System shares that would have been paid and issued if all Merchants stockholders received the Mixed Election Consideration (equating to an overall proration to approximately 70% stock and 30% cash).

Most of the Merchants stockholders who submitted election forms by the election deadline made the "all-stock" election to receive their merger consideration solely in the form of shares of Community Bank System common stock. As a result of the elections of Merchants stockholders, and in accordance with the allocation and proration mechanisms of the Merger Agreement, the Merger Consideration has been allocated as follows:

	Those stockholders who elected to receive the Stock Consideration in the merger will receive, for each share of Merchants common stock with respect to which such election was made, a combination of 0.6811 shares of Community Bank System common stock and $11.71 in cash;

	Those stockholders who elected to receive the Cash Consideration in the merger will receive $40.00 in cash for each share of Merchants common stock with respect to which such election was made;

	Those stockholders who elected to receive the Mixed Election Consideration in the merger will receive a combination of 0.6741 shares of Community Bank System common stock and $12.00 in cash for each share of Merchants common stock with respect to which such election was made; and

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Those stockholders that did not select an election preference or submit a properly completed election form within the required timeframe will receive the Mixed Election Consideration of 0.6741 shares of Community Bank System common stock and $12.00 in cash for each share of Merchants common stock they own.

No fractional shares of Community Bank System common stock are being issued in the merger and any fractional share of Community Bank System common stock will be paid in cash at the rate of $55.91 per share.

Stockholders of Merchants who did not participate in the election process will receive a letter of transmittal during the week of May 22, 2017 from the Exchange Agent with instructions on how to deliver their Merchants stock in exchange for their payment of the Merger Consideration. For those stockholders who participated in the election process, their consideration will be distributed by the Exchange Agent promptly. Any questions should be directed to the Exchange Agent at:

American Stock Transfer & Trust Company, LLC

Operations Center

Attn: Reorganizations Department

6201 15th Avenue

Brooklyn, NY 11219

Phone: (718) 921-8317

Toll Free: (877) 248-6417

About Community Bank System, Inc.

Community Bank System, Inc. operates more than 230 customer facilities across Upstate New York, Northeastern Pennsylvania, Vermont, and Western Massachusetts through its banking subsidiary, Community Bank, N.A. With assets of approximately $11.0 billion, the DeWitt, N.Y. headquartered company is among the country's 150 largest financial institutions. In addition to a full range of retail, municipal, and business banking services, the Company offers comprehensive financial planning, insurance and wealth management services. The Company's Benefit Plans Administrative Services, Inc. subsidiary is a leading provider of employee benefits administration and trust services, and actuarial and other consulting services to customers on a national scale. Community Bank System, Inc. is listed on the New York Stock Exchange and the Company's stock trades under the symbol CBU. For more information about Community Bank visit www.communitybankna.com or http://ir.communitybanksystem.com.

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This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The following factors, among others, could cause the actual results of CBU's operations to differ materially from CBU's expectations: the successful integration of operations of its acquisitions; competition; changes in economic conditions, interest rates and financial markets; and changes in legislation or regulatory requirements. These statements are based on the current beliefs and expectations of CBU's management and CBU does not assume any duty to update forward-looking statements.