8-K

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): October 24, 2016

(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)

_________________________________

 (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:
ý	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))

Item 2.02Results of Operations and Financial Condition.

On October 24, 2016, Community Bank System, Inc. ("Community") announced its results of operations for the quarter ended September 30, 2016. The public announcement was made by means of a news release, the text of which is set forth in Exhibit 99.1 hereto.

The information in this Item 2.02, including Exhibit 99.1 attached hereto, is being furnished under Item 2.02 of Form 8-K and shall not be deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act"), or incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

Item 8.01Other Events.

On October 24, 2016, Community and Merchants Bancshares, Inc. ("Merchants") issued a joint press release announcing that they have entered into a definitive agreement under which Community will acquire Merchants.  Copies of the press release and investor presentation with respect to the proposed transaction are attached hereto as Exhibit 99.2 and Exhibit 99.3, respectively, and each is incorporated by reference into this Item 8.01.

Item 9.01Financial Statements and Exhibits.

(d)	Exhibits
99.1	Press Release, dated October 24, 2016
99.2	Joint Press Release, dated October 24, 2016, issued by Community and Merchants
99.3	Investor Presentation

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.

Date: October 24, 2016	/s/ Mark Tryniski
	Mark E. Tryniski, President, Chief Executive Officer and Director
Date: October 24, 2016	/s/ Scott Kingsley
	Scott Kingsley, Executive Vice President and Chief Financial Officer

EX-99

Exhibit 99.1

	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 Reports

  Third Quarter 2016 Results

-  GAAP earnings of $27.2 million, or $0.61 per share

-  Increased dividend for the 24^th consecutive year

SYRACUSE, N.Y. — October 24, 2016 — Community Bank System, Inc. (NYSE: CBU) reported third quarter 2016 net income of $27.2 million, an increase of 8.5% compared with $25.0 million earned for the third quarter of 2015.  Diluted earnings per share totaled $0.61 for the third quarter of 2016, compared to $0.60 per share reported in the third quarter of last year.  Fully diluted shares outstanding increased 3.4 million shares from the third quarter of 2015, principally from shares issued in the fourth quarter of 2015 for the stock portion of consideration for the Oneida Financial acquisition.  2016 year-to-date net income of $77.4 million, or $1.74 per share, was 8.8% above the $71.2 million of earnings for the first nine months of 2015, or $1.72 per share.

"Our solid third quarter operating results were a result of consistent tactical execution on our core strategic objectives, including growing revenues from organic and acquired opportunities while maintaining disciplined operating expense management," said President and Chief Executive Officer, Mark E. Tryniski.  "As we celebrate our 150^th year anniversary in 2016, the strength of our company continues to be driven by the commitment of our employees.  Through their hard work and dedication, we continue to consistently deliver above-peer financial results.  We remain well positioned to provide the right products and services to our customers so that they may achieve their financial objectives as we continue to create value for our shareholders."

Total revenue for the third quarter of 2016 was $108.4 million, an increase of $14.7 million, or 15.6%, over the prior year quarter, and included the impact of the Oneida Financial transaction completed in December of last year.  The higher revenue was generated as a result of a 7.9% increase in average earning assets and continued acquired and organic growth in noninterest income, combined with a two basis-point increase in net interest margin from the prior year quarter.  A combination of acquired and organic growth resulted in a $6.3 million, or 39.8% increase in wealth management, insurance, and employee benefit services revenues compared to the third quarter of last year.  Deposit service fees increased 10.7% year-over-year, the result of increased card-related revenues offset by modestly lower fees from account overdraft protection programs, including the additional activities from the Oneida transaction.  The current quarter's results also included $1.0 million of nonrecurring insurance-related gains.  The quarterly provision for loan losses of $1.8 million was consistent with the $1.9 million reported in the third quarter of 2015, reflective of comparable credit trends and loan portfolio growth.  Non-performing asset and delinquent loan ratios improved somewhat from the prior year, and remain at very favorable and manageable levels.  Total operating expenses of $66.2 million for the quarter were $10.1 million, or 18.1% above the third quarter of 2015, and included the incremental operating expenses from the Oneida Financial acquisition.  The third quarter of 2015 also included $0.6 million of acquisition expenses.  Certain statutory changes to state tax rates and structures along with a lower proportion of tax-exempt income resulted in a quarterly effective tax rate of 32.8% in the third quarter of 2016, compared to 30.0% in the third quarter of 2015, an outcome that resulted in a two cent per share headwind compared to the prior year.

Third quarter 2016 net interest income was $68.5 million, an increase of $6.1 million, or 9.8%, compared to the third quarter of 2015.  Modestly improved funding costs combined with a one basis point improvement in earning asset yields to produce the net two basis-point increase in year-over-year net interest margin.  While average loan balances grew $626.5 million, or 14.6%, average loan yields declined four basis points year-over-year, resulting in a $6.7 million increase in quarterly loan interest income.  Quarterly loan income also included $0.5 million of early termination fees on an unusually high level of unscheduled commercial payoffs, of over $32 million in the quarter.  Investment interest income was $0.6 million lower than the third quarter of 2015 as average investment securities (including cash equivalents) declined by $66.4 million, and the yield declined seven basis points.  Third quarter 2016 interest expense was $0.1 million lower than the previous year's quarter, driven by an $872.6 million increase in average deposits and a $348.4 million decline in average borrowings, including the impact of the Oneida acquisition.  Wealth management, insurance and employee benefit services revenues increased $6.3 million, or 39.8%, compared to the third quarter of 2015, to $22.2 million, principally from the acquired activities of Oneida Financial.  Revenues from mortgage banking and other banking services increased $0.8 million from the third quarter of 2015, and included nearly $1.0 million in non-recurring, insurance-related gains.

Third quarter 2016 operating expenses of $66.2 million increased $10.1 million over the third quarter of 2015, including the operating activities added from the Oneida Financial transaction.  Salaries and employee benefits increased $7.1 million, or 22.8%, and included personnel added from the Oneida transaction as well as planned merit increases.  All other expenses increased 12.2% and reflected the occupancy, equipment and other operating costs of Oneida, including higher intangible amortization, compared to the third quarter of 2015.  The third quarter and year-to-date 2016 effective income tax rates of 32.8% and 32.7%, respectively, were higher than the 30.0% and 30.5%, in last year's comparable periods.  Third quarter 2016 operating expenses were consistent with the second quarter of this year despite an additional day of payroll.

Financial Position

Average earning assets of $7.68 billion for the third quarter of 2016 were up $560.1 million from the third quarter of 2015, and were $29.6 million higher than the second quarter of 2016.  Compared to the prior year, total average earning asset balances included acquired and organic growth of $626.5 million in average loan balances, while average investment securities and interest-earning cash balances decreased by $66.4 million.   Average deposit balances grew $872.6 million compared to the third quarter of 2015, and were $74.5 million lower than the second quarter of 2016, as seasonally expected.  Average borrowings in the third quarter of 2016 of $327.6 million, were $78.3 million higher than the second quarter of this year.

Ending loans at September 30, 2016 increased $627.1 million, or 14.5%, year-over-year, reflecting productive organic growth in almost every one of the Company's lending portfolios, and loans acquired in the Oneida Financial transaction.  Ending loans increased $35.8 million in the third quarter of 2016, as solid growth in consumer lending portfolios more than offset a $29.7 million decline in commercial balances, a result of the previously mentioned unscheduled payoffs.  Investment securities totaled $2.88 billion at September 30, 2016, a level consistent with the previous four quarter-ends.

Shareholders' equity of $1.24 billion at September 30, 2016 was $195.6 million, or 18.7%, higher than the prior year third quarter-end, driven by strong earnings generation and capital retention over the last four quarters as well as the issuance of 2.38 million shares of common stock, or $102.2 million, reflecting the equity portion of the consideration in the Oneida transaction.  The Company's net tangible equity to net tangible assets ratio was 9.66% at September 30, 2016, up from 9.14% at September 30, 2015.  The Company's Tier 1 leverage ratio was 10.35% at the end of the third quarter.

As previously announced, in December 2015 the Company's Board of Directors approved a stock repurchase program authorizing the repurchase of up to 2.2 million shares of the Company's common stock during a twelve-month period starting January 1, 2016.  Such repurchases may be made at the discretion of the Company's senior management depending on market conditions and other relevant factors and will be acquired through open market or privately negotiated transactions as permitted under Rule 10b-18 of the Securities Exchange Act of 1934 and other applicable legal requirements.  No shares were repurchased under this authorization in the first nine months of 2016.

Asset Quality

The Company's asset quality metrics continue to be favorable relative to comparative peer and industry averages and illustrate the long-term effectiveness of the Company's disciplined credit risk management and underwriting standards.  Net charge-offs were $1.5 million for the third quarter, compared to $1.6 million for the third quarter of 2015 and $1.4 million for the second quarter of 2016.  Net charge-offs as an annualized percentage of average loans were 0.12% in the third quarter of 2016, compared to 0.15% in the prior year third quarter and 0.11% in the second quarter of 2016.  Nonperforming loans as a percentage of total loans at September 30, 2016 were 0.47%, improved from 0.58% at September 30, 2015 and 0.49% as of June 30, 2016.  The total loan delinquency ratio of 1.06% at the end of the third quarter was down 13 basis points from the end of the third quarter of 2015, and down four basis points from June 30, 2016.  The third quarter provision for loan losses of $1.8 million was $0.1 million lower than the third quarter of 2015, and $0.5 million lower than the second quarter of 2016.  The allowance for loan losses to nonperforming loans was 201% at September 30, 2016, compared with the 181% and 193% levels at the end of the third quarter of 2015 and the second quarter of 2016, respectively.

Dividend Increase

In August, the Company declared a quarterly cash dividend of $0.32 per share on its common stock, marking the 24^th consecutive year of dividend increases.  President and Chief Executive Officer, Mark E. Tryniski, commented, "The payment of a meaningful and growing dividend is an important component of our commitment to provide consistent and favorable long-term returns to our shareholders.  The increase reflected the continued strength of both our current operating performance and capital position."  The one cent increase, or 3.2%,  in the Company's quarterly cash dividend over the same quarter of the prior year, represents an annualized yield of 2.7% based upon its' closing price of $47.50 on October 21, 2016.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET) tomorrow (Tuesday, October 25, 2016) to discuss third quarter results.  The conference call can be accessed at 888-503-8171 (1-719-325-2133 if outside the United States and Canada) using the conference ID code 5675553.  Investors may also listen live via the Internet at: http://www.webcaster4.com/Webcast/Page/995/17761.

This earnings release, including supporting financial tables, is available within the press releases section of the Company's investor relations website at: http://ir.communitybanksystem.com.  An archived webcast of the earnings call will be available on this site for one full year.

Community Bank System, Inc. operates more than 200 customer facilities across Upstate New York and Northeastern Pennsylvania through its banking subsidiary, Community Bank, N.A. With assets of approximately $8.7 billion, the DeWitt, N.Y. headquartered company is among the country's 150 largest financial institutions. In addition to a full range of retail, business, and governmental banking services, the Company offers comprehensive financial planning, insurance and wealth management services through its' Community Bank Wealth Management Group and OneGroup NY, Inc. operating subsidiaries.  The Company's Benefit Plans Administrative Services, Inc. subsidiary is a leading provider of employee benefits administration, trust services, and actuarial 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.

# # #

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.

Summary of Financial Data
(Dollars in thousands, except per share data)
		Quarter Ended						Year-to-Date
	September 30, 2016			September 30, 2015			September 30, 2016			September 30, 2015
Earnings
Loan income		$	53,706		$	47,040		$	157,865		$	138,422
Investment income			17,616			18,244			54,323			53,196
Total interest income			71,322			65,284			212,188			191,618
Interest expense			2,859			2,921			8,538			8,187
Net interest income			68,463			62,363			203,650			183,431
Provision for loan losses			1,790			1,906			5,436			3,120
Net interest income after provision for loan losses			66,673			60,457			198,214			180,311
Deposit service fees			14,894			13,459			43,636			39,142
Revenues from mortgage banking and other banking services			2,863			2,045			6,039			3,899
Wealth management and insurance services			10,928			4,552			32,381			13,383
Employee benefit services			11,267			11,330			34,949			33,727
Total noninterest income			39,952			31,386			117,005			90,151
Salaries and employee benefits			38,300			31,179			115,388			93,218
Occupancy and equipment			7,373			6,652			22,445			20,891
Amortization of intangible assets			1,359			843			4,204			2,642
Acquisition expenses			2			562			342			1,318
Other			19,192			16,843			57,872			50,006
Total operating expenses			66,226			56,079			200,251			168,075
Income before income taxes			40,399			35,764			114,968			102,387
Income taxes			13,239			10,742			37,548			31,228
Net income		$	27,160		$	25,022		$	77,420		$	71,159
Basic earnings per share		$	0.61		$	0.61		$	1.75		$	1.74
Diluted earnings per share		$	0.61		$	0.60		$	1.74		$	1.72

Summary of Financial Data
(Dollars in thousands, except per share data)
	2016									2015
	3rd Qtr			2nd Qtr			1st Qtr			4th Qtr			3rd Qtr
Earnings
Loan income	$	53,706		$	52,509		$	51,650		$	49,321		$	47,040
Investment income		17,616			18,601			18,106			18,683			18,244
Total interest income		71,322			71,110			69,756			68,004			65,284
Interest expense		2,859			2,804			2,875			3,015			2,921
Net interest income		68,463			68,306			66,881			64,989			62,363
Provision for loan losses		1,790			2,305			1,341			3,327			1,906
Net interest income after provision for loan losses		66,673			66,001			65,540			61,662			60,457
Deposit service fees		14,894			15,008			13,734			13,605			13,459
Revenues from mortgage banking and other banking services		2,863			1,597			1,579			1,061			2,045
Wealth management and insurance services		10,928			10,496			10,957			6,825			4,552
Employee benefit services		11,267			11,671			12,011			11,661			11,330
Loss on sale of investments		0			0			0			(4	)		0
Total noninterest income		39,952			38,772			38,281			33,148			31,386
Salaries and employee benefits		38,300			37,950			39,138			33,138			31,179
Occupancy and equipment		7,373			7,409			7,663			6,702			6,652
Amortization of intangible assets		1,359			1,403			1,442			1,021			843
Acquisition expenses		2			263			77			5,719			562
Other		19,192			19,331			19,349			18,400			16,843
Total operating expenses		66,226			66,356			67,669			64,980			56,079
Income before income taxes		40,399			38,417			36,152			29,830			35,764
Income taxes		13,239			12,560			11,749			9,759			10,742
Net income		27,160			25,857			24,403			20,071			25,022
Basic earnings per share	$	0.61		$	0.58		$	0.55		$	0.48		$	0.61
Diluted earnings per share	$	0.61		$	0.58		$	0.55		$	0.47		$	0.60
Profitability
Return on assets		1.24	%		1.20	%		1.14	%		0.98	%		1.25	%
Return on equity		8.71	%		8.62	%		8.34	%		7.41	%		9.77	%
Return on tangible equity(3)		13.52	%		13.63	%		13.38	%		10.98	%		14.82	%
Noninterest income/operating income (FTE) (1)		36.0	%		35.3	%		35.5	%		32.8	%		32.4	%
Efficiency ratio (2)		58.5	%		59.0	%		61.4	%		57.6	%		56.4	%
Components of Net Interest Margin (FTE)
Loan yield		4.36	%		4.35	%		4.33	%		4.43	%		4.40	%
Cash equivalents yield		0.46	%		0.46	%		0.47	%		0.25	%		0.22	%
Investment yield		2.88	%		3.06	%		2.97	%		2.98	%		2.94	%
Earning asset yield		3.82	%		3.87	%		3.82	%		3.86	%		3.81	%
Interest-bearing deposit rate		0.13	%		0.14	%		0.14	%		0.14	%		0.14	%
Borrowing rate		1.31	%		1.50	%		1.33	%		0.83	%		0.72	%
Cost of all interest-bearing funds		0.20	%		0.20	%		0.20	%		0.22	%		0.21	%
Cost of funds (includes DDA)		0.16	%		0.15	%		0.16	%		0.17	%		0.17	%
Net interest margin (FTE)		3.67	%		3.73	%		3.67	%		3.70	%		3.65	%
Fully tax-equivalent adjustment	$	2,450		$	2,605		$	2,524		$	3,041		$	3,162

Summary of Financial Data
(Dollars in thousands, except per share data)
	2016									2015
	3rd Qtr			2nd Qtr			1st Qtr			4th Qtr			3rd Qtr
Average Balances
Loans	$	4,913,517		$	4,866,574		$	4,812,575		$	4,459,575		$	4,287,062
Cash equivalents		19,110			19,456			22,355			12,448			12,395
Taxable investment securities		2,179,044			2,178,448			2,172,983			2,214,690			2,187,818
Nontaxable investment securities		571,327			588,897			603,297			614,891			635,627
Total interest-earning assets		7,682,998			7,653,375			7,611,210			7,301,604			7,122,902
Total assets		8,712,758			8,656,653			8,604,264			8,161,843			7,919,966
Interest-bearing deposits		5,405,180			5,517,287			5,458,273			4,943,210			4,739,513
Borrowings		327,578			249,263			296,964			607,771			675,958
Total interest-bearing liabilities		5,732,758			5,766,550			5,755,237			5,550,981			5,415,471
Noninterest-bearing deposits		1,569,960			1,532,322			1,527,585			1,405,416			1,363,022
Shareholders' equity		1,239,927			1,206,353			1,177,246			1,074,243			1,016,448
Balance Sheet Data
Cash and cash equivalents	$	161,542		$	161,634		$	138,513		$	153,210		$	156,836
Investment securities		2,877,644			2,931,301			2,902,878			2,847,940			2,917,263
Loans:
Consumer mortgage		1,798,748			1,779,295			1,777,792			1,769,754			1,621,862
Business lending		1,506,878			1,536,546			1,509,421			1,497,271			1,288,772
Consumer indirect		1,037,077			993,132			941,151			935,760			872,988
Home equity		401,784			399,870			403,273			403,514			345,446
Consumer direct		196,134			195,959			189,535			195,076			184,479
Total loans		4,940,621			4,904,802			4,821,172			4,801,375			4,313,547
Allowance for loan losses		46,789			46,526			45,596			45,401			45,588
Intangible assets, net		482,119			483,478			484,881			484,146			384,525
Other assets		312,609			307,422			314,053			311,399			270,583
Total assets		8,727,746			8,742,111			8,615,901			8,552,669			7,997,166
Deposits:
Noninterest-bearing		1,577,194			1,546,253			1,533,085			1,499,616			1,357,554
Non-maturity interest-bearing		4,771,436			4,664,635			4,808,650			4,569,310			4,081,796
Time		728,789			746,966			777,327			804,548			708,760
Total deposits		7,077,419			6,957,854			7,119,062			6,873,474			6,148,110
Borrowings		133,900			267,600			33,700			301,300			558,100
Subordinated debt held by unconsolidated subsidiary trusts		102,164			102,158			102,152			102,146			102,140
Accrued interest and other liabilities		173,681			177,570			160,322			135,102			143,790
Total liabilities		7,487,164			7,505,182			7,415,236			7,412,022			6,952,140
Shareholders' equity		1,240,582			1,236,929			1,200,665			1,140,647			1,045,026
Total liabilities and shareholders' equity		8,727,746			8,742,111			8,615,901			8,552,669			7,997,166
Capital
Tier 1 leverage ratio		10.35	%		10.14	%		9.95	%		10.32	%		10.09	%
Tangible equity/net tangible assets (3)		9.66	%		9.58	%		9.25	%		8.59	%		9.14	%
Diluted weighted average common shares O/S		44,835			44,636			44,356			42,373			41,470
Period end common shares outstanding		44,357			44,179			44,070			43,775			41,019
Cash dividends declared per common share	$	0.32		$	0.31		$	0.31		$	0.31		$	0.31
Book value	$	27.97		$	28.00		$	27.24		$	26.06		$	25.48
Tangible book value(3)	$	18.06		$	17.99		$	17.16		$	15.90		$	17.05
Common stock price (end of period)	$	48.11		$	41.09		$	38.21		$	39.94		$	37.17

Summary of Financial Data
(Dollars in thousands, except per share data)
	2016									2015
	3rd Qtr			2nd Qtr			1st Qtr			4th Qtr			3rd Qtr
Asset Quality
Nonaccrual loans	$	21,301		$	22,150		$	23,765		$	21,728		$	23,133
Accruing loans 90+ days delinquent		2,015			1,909			2,327			2,195			2,075
Total nonperforming loans		23,316			24,059			26,092			23,923			25,208
Other real estate owned (OREO)		2,060			1,726			2,031			2,088			2,531
Total nonperforming assets		25,376			25,785			28,123			26,011			27,739
Net charge-offs		1,527			1,375			1,146			3,514			1,600
Allowance for loan losses/loans outstanding		0.95	%		0.95	%		0.95	%		0.95	%		1.06	%
Nonperforming loans/loans outstanding		0.47	%		0.49	%		0.54	%		0.50	%		0.58	%
Allowance for loan losses/nonperforming loans		201	%		193	%		175	%		190	%		181	%
Net charge-offs/average loans		0.12	%		0.11	%		0.10	%		0.31	%		0.15	%
Delinquent loans/ending loans		1.06	%		1.10	%		1.00	%		1.16	%		1.19	%
Loan loss provision/net charge-offs		117	%		168	%		117	%		95	%		119	%
Nonperforming assets/total assets		0.29	%		0.29	%		0.33	%		0.30	%		0.35	%
Asset Quality (excluding loans acquired since 1/1/09)
Nonaccrual loans	$	16,967		$	18,259		$	20,045		$	18,804		$	20,504
Accruing loans 90+ days delinquent		1,870			1,573			1,837			1,802			1,876
Total nonperforming loans		18,837			19,832			21,882			20,606			22,380
Other real estate owned (OREO)		1,594			1,258			1,497			1,546			1,720
Total nonperforming assets		20,431			21,090			23,379			22,152			24,100
Net charge-offs		1,432			1,404			898			3,420			1,473
Allowance for loan losses/loans outstanding		1.02	%		1.02	%		1.04	%		1.05	%		1.10	%
Nonperforming loans/loans outstanding		0.43	%		0.46	%		0.52	%		0.49	%		0.55	%
Allowance for loan losses/nonperforming loans		238	%		224	%		200	%		212	%		201	%
Net charge-offs/average loans		0.13	%		0.13	%		0.09	%		0.34	%		0.14	%
Delinquent loans/ending loans		1.01	%		1.08	%		1.00	%		1.19	%		1.14	%
Loan loss provision/net charge-offs		124	%		144	%		112	%		62	%		127	%
Nonperforming assets/total assets		0.25	%		0.26	%		0.29	%		0.28	%		0.31	%

⁽¹⁾ Excludes gains and losses on sales of investment securities and debt prepayments.

⁽²⁾ Excludes intangible amortization, acquisition expenses, litigation settlement charge, gains and losses on sales of investment securities and losses on debt extinguishments.

⁽³⁾ Includes deferred tax liabilities (of approximately $42.5 million at 9/30/16) generated from tax deductible goodwill.

# # #

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.  CBU does not assume any duty to update forward-looking statements.

EX-99.2

Exhibit 99.2

COMMUNITY BANK SYSTEM AND MERCHANTS BANCSHARES

ANNOUNCE AGREEMENT TO MERGE

· Natural Market Extension into Attractive Vermont Market with a High-Quality, Low Risk Partner

· Financially Attractive Transaction with Significant Premium to MBVT Shareholders and Strong Earnings Accretion to CBU Shareholders

· Transaction Fully Absorbs Cost of Crossing $10 Billion

SYRACUSE, NY and SOUTH BURLINGTON, VT – October 24, 2016 – Community Bank System, Inc. ("Community Bank System") (NYSE: CBU) and Merchants Bancshares, Inc. ("Merchants Bancshares") (NASDAQ: MBVT) today announced that they have entered into a definitive agreement under which Community Bank System will acquire Merchants Bancshares, parent company of Merchants Bank in a cash and stock transaction for total consideration valued at approximately $304 million.  The transaction has been unanimously approved by the boards of directors of both companies.

Merchants Bancshares is the largest statewide independent bank in Vermont, with total assets of nearly $1.9 billion, deposits of $1.5 billion and 32 banking offices.  Additionally, Merchants is the third largest institution by deposit market share in Vermont, with a growing presence in Western Massachusetts.  The combination will provide natural market extension for both institutions, joining two high-quality, low-risk franchises with long histories of service to their customers and communities.

Under the terms of the agreement, shareholders of Merchants Bancshares will have the option to receive, at their election, consideration per share equal to (i) 0.963 shares of Community Bank System common stock, (ii) $40.00 in cash or (iii) the combination of 0.6741 shares of Community Bank System common stock and $12.00 in cash, subject to an overall proration to 70% stock and 30% cash.  The cash and stock consideration would be equivalent to $44.02 for each share of Merchants Bancshares common stock based upon the closing price of Community Bank System common stock as of October 21, 2016.  The transaction is intended to qualify as a reorganization for federal income tax purposes, and as a result, the receipt of Community Bank System common stock by shareholders of Merchants Bancshares is expected to be tax-free.

"We are very excited to be partnering with Merchants Bank, extending our footprint into the attractive Vermont and Western Massachusetts markets," said Community Bank System President & Chief Executive Officer Mark E. Tryniski.  "Merchants Bank has an impressive history of service to its customers, its communities and its shareholders. More importantly, the organizational values of Merchants Bank, and its people, align very well with those of Community Bank.  We are delighted to welcome the Merchants team to the Community Bank organization and look forward to the future of the combined company.  We are also pleased that Geoffrey Hesslink, President & Chief Executive Officer of Merchants Bank, will become the New England Regional President of our combined organization."

Geoffrey R. Hesslink, President and Chief Executive Officer of Merchants Bancshares commented, "We are proud to become part of a long standing, solid and complementary franchise like Community Bank. We will continue to provide our highly personalized experience to our customers, while providing them with an expanded set of products and services as a larger organization.  We look forward to working closely with Community Bank System to complete the combination."

Upon completion of the transaction, the combined company will fully absorb the cost of crossing $10 billion in assets, while providing earnings accretion for Community Bank System shareholders.  Community Bank System expects the transaction to be approximately $0.10 per share accretive to 2018 GAAP earnings ($0.17 excluding the impact of crossing $10 billion in assets) and $0.15 per share accretive to 2018 cash earnings ($0.22 excluding the impact of crossing $10 billion in assets).  Community Bank System intends to donate $500,000 to the Merchants Bank Foundation following the completion of the merger to further strengthen the support of the communities Merchants serves.

The merger agreement provides for two directors from Merchants Bancshares to be added to the Board of Directors of Community Bank System.  The merger is expected to close in the second quarter of 2017 and is subject to customary closing conditions, including approval by the shareholders of Merchants Bancshares and required regulatory approvals.

RBC Capital Markets, LLC acted as exclusive financial advisor to Community Bank System and Cadwalader, Wickersham & Taft LLP acted as its legal advisor.  Piper Jaffray & Co. acted as exclusive financial advisor to Merchants Bancshares and Goodwin Procter LLP acted as its legal advisor.

Community Bank System will host a conference call at 11 am (ET) on Tuesday, October 25, 2016 to discuss its third quarter 2016 financial results and the combination with Merchants Bancshares.  The conference call can be accessed at 888-503-8171 using the conference ID code 5675553.  Investors may also listen live via the Internet at:  http://www.webcaster4.com/Webcast/Page/995/17761.

About Community Bank System, Inc.

Community Bank System, Inc. operates more than 200 customer facilities across Upstate New York and Northeastern Pennsylvania through its banking subsidiary, Community Bank, N.A. With assets of approximately $8.7 billion, the DeWitt, N.Y. headquartered company is among the country's 150 largest financial institutions. In addition to a full range of retail and business banking services, the Company offers comprehensive financial planning, insurance and wealth management services through its' Community Bank Wealth Management Group and OneGroup NY, Inc. operating subsidiaries. The Company's Benefit Plans Administrative Services, Inc. subsidiary is a leading provider of employee benefits administration, trust services, and actuarial and 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.

About Merchants Bancshares, Inc.

Merchants Bancshares, Inc. reported total assets at June 30, 2016 of approximately $1.9 billion. Merchants Bancshares, Inc. is the holding company for Merchants Bank. The bank's business, municipal, consumer, and investment customers enjoy personalized relationships, sophisticated online and mobile banking options, with 31 branches in Vermont and 1 location in Massachusetts, operating as NUVO, a division of Merchants Bank.  Merchants Bancshares, Inc. is listed on the NASDAQ Stock Market and trades under the symbol MBVT. For more information about Merchants Bank visit www.mbvt.com.

Additional Information about the Merger

In connection with the proposed merger, Community Bank System, Inc. will file with the Securities and Exchange Commission (SEC) a Registration Statement on Form S-4 that will include a prospectus of Community Bank System, Inc. and a proxy statement of Merchants Bancshares, Inc., as well as other relevant documents concerning the proposed transaction.  This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval.  Stockholders of Merchants Bancshares, Inc. are urged to read the registration statement and proxy statement/prospectus and the other relevant materials filed with the SEC when they become available because they will contain important information about the proposed transaction.

A free copy of the proxy statement/prospectus, when available, as well as other filings containing information about Merchants Bancshares, Inc. and Community Bank System, Inc., may be obtained at the SEC's Internet site (http://www.sec.gov).  You will also be able to obtain these documents, when available, free of charge from Merchants Bancshares, Inc. at http://www.mbvt.com/ under the heading "Investor Relations" and then "SEC Filings" or from Community Bank System, Inc. by accessing its website at www.communitybankna.com under the heading of "Investor Relations" and then "SEC Filings & Annual Report."  Copies of the proxy statement/prospectus can also be obtained, free of charge and when available, by directing a request to Merchants Bancshares, Inc., P.O. Box 1009, Burlington, Vermont 05402, Attention: Investor Relations, Telephone: (900) 322-5222 or to Community Bank System, Inc., 5790 Widewaters Parkway, DeWitt, New York 13214, Attention: Investor Relations, Telephone: (315) 445-2282.

Merchants Bancshares, Inc. and Community Bank System, Inc. and certain of their respective directors and executive officers may be deemed to participate in the solicitation of proxies from the stockholders of Merchants Bancshares, Inc. in connection with the proposed merger.  Information about the directors and executive officers of Merchants Bancshares, Inc. and their ownership of Merchants Bancshares, Inc. common stock is set forth in the proxy statement for its 2016 annual meeting of stockholders, as filed with the SEC on Schedule 14A on April 15, 2016.  Information about the directors and executive officers of Community Bank System, Inc. and their ownership of Community Bank System, Inc. common stock is set forth in the proxy statement for its 2016 annual meeting of shareholders, as filed with the SEC on Schedule 14A on April 1, 2016.  Additional information regarding the interests of those participants and other persons who may be deemed participants in the transaction may be obtained by reading the proxy statement/prospectus regarding the proposed merger when it becomes available.  Free copies of this document when available may be obtained as described in the preceding paragraph.

Forward Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by the use of the words "will," "anticipate," "expect," "intend," "estimate," "target," and words of similar import.  Forward-looking statements are not historical facts but instead express only management's beliefs regarding future results or events, many of which, by their nature, are inherently uncertain and outside of management's control.  The following factors, among others listed in the Companies' Form 10-K filings, could cause the actual results of the Companies' operations to differ materially from the Companies' expectations: failure to obtain the approval of the shareholders of Merchants Bancshares in connection with the merger;  the timing to consummate the proposed merger;  the risk that a condition to closing of the proposed merger may not be satisfied; the risk that a regulatory approval that may be required for the proposed merger is not obtained or is obtained subject to conditions that are not anticipated; the parties' ability to achieve the synergies and value creation contemplated by the proposed merger; the parties' ability to successfully integrate operations in the proposed merger; the effect of the announcement of the proposed merger on the ability of Merchants Bancshares to maintain relationships with its key partners, customers and employees, and on its operating results and business generally; competition; changes in economic conditions, interest rates and financial markets; and changes in legislation or regulatory requirements. The Companies do not assume any duty to update forward-looking statements.

For further information contact:

Community Bank System, Inc.

Scott A. Kingsley, E.V.P. and Chief Financial Officer

(315) 445-3121

or

Merchants Bancshares, Inc.

Geoffrey R. Hesslink, President and Chief Executive Officer

(802) 865-1603

EX-99.3

Exhibit 99.3