forms4cbna2011.htm

As filed with the Securities and Exchange Commission on January 11, 2011

Registration No. 333-
_____________________________________________________________________________________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________

FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
___________________

COMMUNITY BANK SYSTEM, INC.
(Exact name of registrant as specified in its charter)

Delaware
6712
16-1213679
(State or other jurisdiction of incorporation or organization)
(Primary Standard Industrial Classification Code Number)
(I.R.S. Employer Identification Number)
__________________

5790 Widewaters Parkway
DeWitt, New York 13214
(315) 445-2282
(Address, including zip code, and telephone number,
including area code, of registrant’s principal executive offices)
__________________

Mark E. Tryniski
President and Chief Executive Officer
Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, New York 13214
(315) 445-2282
(Name, address, including zip code, and telephone number,
including area code, of agent for service)

With copies to:

Ronald C. Berger, Esq.
Bond, Schoeneck & King, PLLC
One Lincoln Center
Syracuse, New York 13202-1355
(315) 218-8000
George J. Getman, Esq.
Executive Vice President and General Counsel
Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, New York 13214
(315) 445-2282
Clifford S. Weber, Esq.
Hinman, Howard & Kattell, LLP
700 Security Mutual Building
80 Exchange Street
Binghamton, New York 13902-5250
(607) 723-5341
__________________
Approximate date of commencement of proposed sale to the public:  As soon as practicable after the effective date of the registration statement.

If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
 
 

 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12 b-2 of the Exchange Act.

 
 Large accelerated filer o  Accelerated filer x
   
 Non-accelerated filer o (Do not check if a smaller reporting company)  Smaller reporting company o
 
______________________

CALCULATION OF REGISTRATION FEE

 
Title of Each Class of Securities to be Registered
 
 
 
Amount to be Registered (1)
 
Proposed Maximum Offering Price per Share
 
Proposed Maximum Aggregate Offering Price (2)
 
Amount of Registration Fee (3)
 
Common Stock, $1.00 par value 
 
 
4,133,394 Shares
 
N/A
 
$40,548,592
 
$4,707.69

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.















(1)  Represents the maximum number of shares of Community Bank System, Inc. (NYSE: CBU) common stock estimated to be issuable upon the completion of the merger, which may be higher or lower in accordance with the formula described below.  This number is based upon the product of (x) the number of shares of The Wilber Corporation (NYSE Amex: GIW) common stock outstanding and reserved for issuance as of January 10, 2011; (y) an exchange ratio of .4820, solely for purposes of calculating the registration fee, issuable in exchange for each share of The Wilber Corporation common stock in accordance with the Agreement and Plan of Merger, dated October 22, 2010, by and among Community Bank System, Inc. and The Wilber Corporation (attached hereto as Annex A); and (z) 80% (the portion of the merger consideration consisting of Community Bank System common stock issuable in the merger).

(2)  Estimated solely for the purpose of calculating the registration fee required by Section 6(b) of the Securities Act and computed pursuant to Rules 457(f)(1) and 457(c) of the Securities Act, based on the market value of the Wilber common stock expected to be exchanged in connection with the merger, as established by the average of the high and low sales price of Wilber common stock on NYSE Amex on January 10, 2011 of $9.81.

(3)  Calculated in accordance with Section 6(b) of the Securities Act and SEC Fee Advisory #5 for Fiscal Year 2011 at a rate equal to 0.0001161 multiplied by the proposed maximum aggregate offering price.



 
 

 


 
 The information in this proxy statement/prospectus is subject to completion or amendment.  A registration statement relating to the shares of Community Bank System, Inc. common stock to be issued in the merger has been filed with the Securities and Exchange Commission.  These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective.  This proxy statement/prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation, or sale is not permitted or would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.
 
 
PRELIMINARY - SUBJECT TO COMPLETION DATED JANUARY 11, 2011

PROXY STATEMENT/PROSPECTUS
PROPOSED MERGER -YOUR VOTE IS VERY IMPORTANT

wilber logo
THE WILBER CORPORATION
245 Main Street
Oneonta, New York 13820

Dear Shareholder:

On October 22, 2010, The Wilber Corporation (“Wilber”) entered into an Agreement and Plan of Merger (“Merger Agreement”) with Community Bank System, Inc. (“Community Bank System”) in a stock and cash transaction.  If Wilber’s shareholders approve the Merger Agreement and the merger it provides for is subsequently completed, Wilber will merge with and into Community Bank System (the “Merger”) with Community Bank System being the surviving entity.

In the Merger, you will have an opportunity to elect to receive merger consideration in the form of either cash, Community Bank System common stock, or a combination of both in exchange for your shares of Wilber common stock, as follows:

 
$9.50 in cash;

 
shares of Community Bank System common stock calculated pursuant an exchange ratio based upon the average closing sale price of Community Bank System common stock over the 10 trading days before the consummation of the Merger (the “Average Closing Price”).  The exchange ratio will be:
 
o
0.4820 shares of Community Bank System common stock for each share of Wilber common stock that you own if the Average Closing Price is less than $19.71 per share;
 
o
0.3748 shares of Community Bank System common stock for each share of Wilber common stock that you own if the Average Closing Price is greater than $25.35 per share; or
 
o
the quotient obtained by dividing $9.50 by the Average Closing Price if the Average Closing Price is between $19.71 and $25.35 per share; or
 
 
 

 
 
 
·
a combination of both cash and shares of Community Bank System common stock, at the respective rates described above, whereby 80% of your Wilber common stock will be exchanged for shares of Community Bank System common stock and the remaining 20% of your Wilber common stock will be exchanged for cash.

You will receive a separate mailing containing instructions on how to make your election as to whether you desire cash, stock or a combination of cash and stock.  Under the election and allocation procedures that we have described in this document, shareholders who elect to receive all cash or all stock may actually receive a combination of cash and shares of Community Bank System common stock, depending on elections made by the other Wilber shareholders.

Based on the closing price of Community common stock, as reported by the New York Stock Exchange (“NYSE”) on October 21, 2010, the last trading day before public announcement of the Merger Agreement, the value of the stock and cash consideration represented approximately $9.50 in value for each share of Wilber common stock.

Community Bank System’s common stock is listed on the NYSE under the symbol “CBU.”  On [               ], 2011, the closing sale price for Community Bank System common stock as reported on the NYSE was $[     ] per share.  Wilber’s common stock is traded on the NYSE Amex (formerly the American Stock Exchange) under the symbol “GIW.”  On [                  ], 2011, the last sale price for Wilber common stock as reported on the NYSE Amex was $[    ] per share.  You should obtain current stock price quotations for Wilber and Community Bank System common stock.

The accompanying document is also being delivered to Wilber shareholders as Community Bank System’s prospectus for its offering of Community Bank System common stock in connection with the Merger, and as a proxy statement for the solicitation of proxies from Wilber shareholders to vote for the adoption of the Merger Agreement and approval of the Merger.

The Merger cannot be completed unless at least two thirds of the issued and outstanding shares of Wilber common stock vote in favor of the Merger.  Whether or not you plan to attend the special meeting of shareholders, please take the time to vote by using the Internet, by telephone or by completing the enclosed proxy card and mailing it in the enclosed envelope. If you sign, date and mail your proxy card without indicating how you want to vote, your proxy will be counted as a vote “FOR” adoption of the Merger Agreement.  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.

Your Board of Directors has unanimously determined that the Merger and the Merger Agreement are fair and in the best interest of Wilber and its shareholders and unanimously recommends that you vote “FOR” adoption of the Merger Agreement.

This proxy statement/prospectus provides you with detailed information about the proposed Merger.  It also contains or references information about Wilber, Community Bank System and related matters.  You are encouraged to read this document carefully.  In particular, you should read the “Risk Factors” section beginning on page [____] for a discussion of the risks you should consider in evaluating the proposed Merger and how it will affect you.

 
 

 

On behalf of the Board of Directors, I thank you for your prompt attention to this matter.

Sincerely,
 
 
   wright signature  
 
 
Brian R. Wright
Chairman of the Board

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the Merger, the issuance of the Community Bank System common stock in connection with the Merger or the other transactions described in this proxy statement/prospectus, or passed upon the adequacy or accuracy of the disclosure in this document.  Any representation to the contrary is a criminal offense.

The securities to be issued in connection with the Merger are not savings accounts, deposits or other obligations of any bank or savings association and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

This proxy statement/prospectus is dated [_____________, 2011], and is first being mailed to shareholders of Wilber on or about [____________________, 2011].


 
 

 

 
wilber logo
THE WILBER CORPORATION
245 Main Street
Oneonta, New York 13820

___________________________
 
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON [                                      ], 2011
___________________________

A special meeting of the shareholders of The Wilber Corporation, a New York corporation (“Wilber”), will be held at [                                                ], on [                                ], 2011, at [            ] [a.m. / p.m.], Eastern Time, for the following purposes:

1.           Merger.  To consider and vote upon a proposal to adopt and approve the Agreement and Plan of Merger, dated as of October 22, 2010 (the “Merger Agreement), by and between Community Bank System, Inc., a Delaware corporation (“Community Bank System”) and Wilber, which provides for the merger of Wilber with and into Community Bank System (the “Merger”);

2.           Adjournments.  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; and

3.           Other Business.  To transact such other business as may properly come before the special meeting or any adjournments or postponements of the special meeting.

Only holders of record of Wilber common stock at the close of business on [                  ], 2011 are entitled to the notice of and to vote at the special meeting and any adjournments or postponements of the special meeting.

Please vote as soon as possible.  The affirmative vote of two-thirds of all outstanding shares of Wilber common stock is required for approval of the Merger Agreement.  This means that a failure to vote for approval of the Merger Agreement would have the same effect as a vote against it.  Therefore, your vote is important regardless of the number of shares you own.  Even if you plan to attend the special meeting, we urge you to vote by Internet, by telephone or by completing and returning the enclosed proxy without delay in the enclosed postage-paid envelope.  You may revoke your proxy at any time prior to the special meeting.  If you hold Wilber common stock in your own name and you are present at the special meeting, or at any adjournments or postponements of the special meeting, you may revoke your proxy and vote personally on each matter brought before the special meeting.

If you hold Wilber common stock in the name of a broker, bank or other fiduciary, please follow the instructions on the voting card provided by that broker, bank or other fiduciary.  If you wish to attend the special meeting and vote in person, you must bring a letter or proxy from your broker, bank or other fiduciary to confirm your beneficial ownership of the shares.
 
 
 

 
 
If you have any questions or require assistance, please call Joseph E. Sutaris, Executive Vice President and Chief Financial Officer, at (607) 432-1700.

BY ORDER OF THE BOARD OF DIRECTORS
 
 
   sutaris signature  

 
Joseph E. Sutaris
Secretary
Oneonta, New York
[                                                ], 2011


IMPORTANT

Your vote is important.  Whether or not you plan to attend the special meeting in person, Wilber 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 in 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.

The Board of Directors of Wilber unanimously recommends that the shareholders vote “FOR” the approval of the Merger Agreement.



 
 

 

QUESTIONS AND ANSWERS ABOUT THE MERGER

Q:           What is the purpose of this document?

 
A:
This document serves as Wilber’s proxy statement and as Community Bank System’s prospectus.  As a proxy statement, this document is being provided to Wilber shareholders because the Wilber Board of Directors is soliciting your proxy to vote to approve the Merger Agreement.  As a prospectus, Community Bank System is providing this document to Wilber shareholders because Community Bank System is offering shares of its common stock in exchange for their shares of Wilber common stock in the Merger.

 
Q:
What will happen to Wilber as a result of the Merger?

 
A:
If the Merger is completed, Wilber will cease to exist and Wilber National Bank (“Wilber Bank”), currently a wholly owned subsidiary of Wilber, will become a direct, wholly-owned subsidiary of Community Bank System.  Immediately following completion of the Merger, Wilber Bank will merge with and into Community Bank, N.A. (“Community Bank”), the wholly owned subsidiary of Community Bank System, with Community Bank being the surviving bank.

Q:           What will I receive in the Merger?

 
A:
You may elect to receive cash, shares of Community Bank System common stock, or a combination of cash and shares of Community Bank System common stock, by indicating your preference on the election form/letter of transmittal which will be separately mailed to each shareholder.  If you receive any cash as merger consideration, you will receive $9.50 for each share of your Wilber common stock exchanged for cash in the Merger.  On the other hand, if you receive any Community Bank System common stock in the Merger, the actual value you will receive per share of Wilber common stock is dependent upon the price of Community Bank System during the 10 trading days immediately prior to the Merger.  This document explains in more detail what amount of cash and/or Community Bank System common stock you are entitled to receive in the Merger.  Because of certain limitations on the amount of cash and the number of shares Community Bank System will issue in the Merger, you may receive a combination of cash and shares of Community Bank System common stock even if you elect to receive only one type of merger consideration, depending on the elections made by other Wilber shareholders.  For details, please see “Conversion of Wilber Common Stock,” “Election Procedures” and “Allocation Mechanism” on pages [  ] through [  ].

Q:           Could you tell me more about Community Bank System?

 
A:
Community Bank System is the parent company of Community Bank and is a bank holding company registered under the Bank Holding Company Act of 1956 (“BHCA”).  Community Bank is a commercial banking franchise headquartered in Upstate New York, with 147 customer facilities and 135 ATMs stretching diagonally from Northern New York to the Southern Tier and west to Lake Erie, and in Northeastern Pennsylvania.
 
 
 

 
 
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 level.  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’s common stock is publicly traded on the New York Stock Exchange under the symbol “CBU.”  At September 30, 2010, Community Bank System had on a consolidated basis approximately $5.5 billion in total assets, $4.0 billion in total deposits, $3.0 billion in total loans and shareholders’ equity of $616 million.  For additional information about Community Bank System, please see “Where You Can Find More Information” on page [  ].

Q:           When is the Merger expected to be completed?

 
A
The parties are working to complete the Merger during the second quarter of 2011.  Wilber and Community Bank System must first obtain the necessary regulatory approvals and the approval of the Wilber shareholders at the special meeting and satisfy other conditions.  Wilber and Community Bank System cannot assure you as to when or if all the conditions to the Merger will be met, and it is possible that the parties will not complete the Merger at all.

 
Q:
What happens if the Merger is not completed?

 
A:
If the Merger is not completed, Wilber shareholders will not receive any consideration for their shares of common stock in connection with the Merger.  Instead, Wilber will remain an independent public company and its common stock will continue to be eligible for trading on the NYSE Amex.  In the event of termination of the Merger Agreement under certain specified circumstances, Wilber may be required to pay to Community Bank System a termination fee of $4.0 million, plus all out-of-pocket expenses incurred by Community Bank System and its subsidiaries in connection with the transactions contemplated by the Merger Agreement, up to a maximum of $500,000 in the aggregate.  See the description of the Merger Agreement under “Termination Fee and Expenses” beginning on page [        ].

 
Q:
Who is being asked to approve matters in connection with the Merger?

 
A:
Only the Wilber shareholders are being asked to vote to approve the Merger-related proposals.  Under New  York law, Wilber is required to obtain shareholder approval.  By this proxy statement/prospectus, Wilber’s Board of Directors is soliciting proxies from Wilber’s shareholders to provide the required approval at the special meeting of Wilber shareholders as discussed below.  Under Delaware law, Community Bank System is not required to obtain shareholder consent in a transaction of this size.
 
ii 
 

 
 
 
Q:
Does the Board of Directors of Wilber have a recommendation on how I should vote on the Merger Agreement?

 
A:
Yes.  The Board of Directors of Wilber believes that the proposed Merger is in the best interest of Wilber and its shareholders and unanimously recommends that the shareholders of Wilber vote in favor of the approval of the Merger Agreement.

 
Q:
Did the Board of Directors of Wilber receive an opinion from a financial advisor with respect to the Merger?

 
A:
Yes.  On October 22, 2010, Austin Associates, LLC (“Austin Associates”) rendered its written opinion to the Board of Directors of Wilber that, as of such date and based upon and subject to the factors and assumptions described to the Wilber Board during its presentation and set forth in the opinion, the consideration in the proposed Merger was fair, from a financial point of view, to holders of Wilber common stock.  The full text of Austin Associates’ written opinion is attached as Appendix B to this proxy statement/prospectus.  You are urged to read the opinion in its entirety.

Q:           How do the Directors and executive officers of Wilber plan to vote?

 
A:
All of the Directors and executive officers of Wilber have committed by contract to vote in favor of the Merger Agreement all the shares of Wilber common stock that they are entitled to vote.  As of the record date for the special meeting, the Directors and executive officers of Wilber together had the right to vote [       ] shares, or approximately [     ]% of the outstanding Wilber common stock.

 
Q:
What risks should I consider before I vote on the Merger and make my election as to the form of merger consideration?

A:           You should read “Risk Factors” on pages [   ] to [   ].

 
Q:
Is there other information I should consider?

 
A:
Yes.  Much of the business and financial information about each of the companies that may be important to you is not included in this document.  Instead, that information is incorporated by reference to documents Wilber and Community Bank System separately filed with the Securities and Exchange Commission (“SEC”).  This means that Wilber and Community Bank System can satisfy their disclosure obligations to you by referring you to one of more documents separately filed by Community Bank System or Wilber with the SEC.  For additional information, please see “Where You Can Find More Information” on pages [  ] through [  ], for a list of documents that they have incorporated by reference into this document and for instructions on how to obtain copies of those documents, free of charge.

 
Q:
When and where will Wilber shareholders meet?

 
A:
Wilber will hold a special meeting of its shareholders on [_____________], 2011, at [      :           ] a.m./p.m., Eastern Standard Time, at [_____________], Oneonta, New York.
 
  iii
 

 
 
 
Q:
Who can vote at the Wilber special meeting?

 
A:
Holders of record of Wilber common stock at the close of business on [_____________], 2011, which is the record date for the Wilber special meeting, are entitled to vote at the special meeting.

 
Q:
How many votes must be represented in person or by proxy at the Wilber special meeting to have a quorum?

 
A:
The holders of a majority of the shares of Wilber common stock outstanding and entitled to vote at the special meeting, present in person or represented by proxy, will constitute a quorum at the special meeting.

 
Q:
What vote by Wilber shareholders is required to approve the Merger?

 
A:
Assuming a quorum is present at the Wilber special meeting, approval of the Merger proposal will require the affirmative vote of the holders of at least two-thirds of the outstanding shares of Wilber common stock entitled to vote.  Submission of proxies not designating an election will have the same effect as shares voted “FOR” the Merger proposal.  Abstentions and broker non-votes will have the same effect as shares voted “AGAINST” the Merger proposal.

Q:           What do I need to do now?

 
A:
After you have carefully read this proxy statement/prospectus and have decided how you wish to vote your shares, please vote your shares promptly.  If you hold common stock in your name as a shareholder of record, Wilber and Community Bank System request that you complete, sign, date and mail your proxy card in the enclosed postage paid return envelope as soon as possible.  You may also authorize a proxy to vote your shares by telephone or through the Internet as instructed on the enclosed proxy card.  If you hold your stock in “street name” through a bank, broker or other fiduciary, you must direct your bank or broker to vote in accordance with the instructions you have received from your bank, broker or other fiduciary.  Submitting your proxy card, authorizing a proxy by telephone or through the Internet, or directing your bank, broker or other fiduciary to vote your shares will ensure that your shares are represented and voted at the special meeting.

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.  Your failure to sign and send in your proxy or your abstention will have the same effect as a vote against the Merger.

Q:           Should Wilber shareholders send in their stock certificates with the enclosed proxy?

 
A:
No. Wilber shareholders SHOULD NOT send in any stock certificates now with the enclosed proxy.  An election form and transmittal materials, with instructions for their completion will be provided to Wilber shareholders under separate cover and the stock certificates should be sent with those materials at that time.

In the event that a Wilber shareholder fails to return a completed election form with such shareholder’s stock certificates prior to the expiration of the election period, a letter of transmittal with instructions for submission of such stock certificates will be mailed to such shareholder shortly following the effective time of the Merger.
 
iv 
 

 
 
 
Q:
If my shares are held in “street name” by my broker, will the broker vote my shares for me?

 
A:
No.  Your broker will vote your shares only if you provide instructions on how to vote.  You should instruct your broker how to vote your shares, following the directions your broker provides.  If you do not give instructions to your broker, your broker will not be able to vote your shares.

 
Q:
What if I fail to instruct my broker?

 
A:
If you do not provide your broker with instructions and your broker submits an unvoted proxy, referred to as a broker non-vote, the broker non-vote will be counted toward a quorum at the special meeting, but it will have the same effect as a vote against adoption of the Merger Agreement.  With respect to the proposal to adjourn the special meeting if necessary to solicit additional proxies, an abstention will have the same effect as a vote against the proposal.  If you fail to instruct your broker to vote your shares, your broker may vote your shares in its discretion to adjourn the special meeting.

 
Q:
Can I attend the special meeting and vote my shares in person?

 
A:
Yes.  All common shareholders, including common shareholders of record and common shareholders who hold their shares through banks, brokers, nominees or any other holder of record, may attend the special meeting.  Holders of record of Wilber common stock can vote in person at the special meeting.  If you are not a common shareholder of record, you must obtain a proxy, executed in your favor, from the record holder of your shares of common stock, such as a broker, bank or other fiduciary, to be able to vote in person at the special meeting.  If you plan to attend the special meeting, you must hold your shares of common stock in your own name or have a letter from the record holder of your shares of common stock confirming your ownership and you must bring a form of personal photo identification with you in order to be admitted.

 
Q:
Can I change my vote?

 
A:
Yes.  A Wilber common shareholder who is a shareholder of record and has given a proxy may revoke it at any time before its exercise at the special meeting by (i) giving written notice of revocation to Wilber’s corporate secretary, (ii) properly submitting to Wilber a duly executed proxy bearing a later date or (iii) attending the special meeting and voting in person.  Any common shareholder entitled to vote in person at the special meeting may vote in person regardless of whether a proxy has been previously given, and such vote will revoke any previous proxy, but the mere presence (without notifying the Corporate Secretary) of a common shareholder at the special meeting will not constitute revocation of a previously given proxy.  If you hold your shares in “street name” through a bank, broker or other fiduciary, you should contact your bank, broker or other fiduciary to revoke your proxy.

Any written notices of revocation and other communications with respect to revocation of proxies should be addressed to Wilber as follows: Corporate Secretary, Joseph E. Sutaris, 245 Main Street, Oneonta, New York 13820, which must be received by 11:59 p.m. Eastern time on [          ].

Proxies may also be revoked via the Internet or telephone following the instructions on your proxy card.
 
 

 
 
 
Q:
How do I make an election as to the form of merger consideration I wish to receive in the Merger?

 
A:
American Stock Transfer & Trust Company (“American Stock Transfer”), the exchange agent for the Merger, must receive your properly completed election form/letter of transmittal and your stock certificates by no later than the election deadline in order for your choice as to the form of merger consideration to be considered with those made by the other Wilber shareholders.  Wilber and Community Bank System expect the election deadline will be 5:00 p.m., Eastern time, on [        ], 2011, but they will notify you if this date changes.  Wilber and Community Bank System will mail to each Wilber shareholder an election form/letter of transmittal which will contain instructions for making a selection of merger consideration and for surrendering your stock certificates in exchange for the merger consideration.

 
Q:
What happens if I don’t make a valid election as to the form of merger consideration before the election deadline?

 
A:
You will automatically be deemed to have made an election to receive a mixture of cash and shares of Community Bank System common stock.  If the Merger is completed, the exchange agent will send you a new letter of transmittal that you can use to submit your stock certificate in exchange for the merger consideration.

Q:           Can I change my election as to the form of merger consideration?

 
A:
Yes.  You can change your election as to the form of  merger consideration by submitting a new election form/letter of transmittal.  For a change to be effective, the exchange agent must receive your election form/letter of transmittal before the election deadline.

Q:           What are the tax consequences of the Merger to me?

 
A:
Wilber and Community Bank System expect that for federal income tax purposes, the Merger will be a taxable event to those Wilber shareholders who receive cash, in whole or in part, in exchange for their shares of Wilber common stock, to the extent of the cash received, and the Merger will not be a taxable event to those Wilber shareholders who receive solely shares of Community Bank System common stock except to the extent they receive cash in lieu of fractional shares, if any.  The material U.S. federal income tax consequences of the Merger are described in more detail on pages [  ] to [  ].  The tax consequences of the Merger to you will depend upon the facts of your own situation.  Please consult your own tax advisor for a full understanding of the tax consequences of the Merger to you.

 
Q:
Are Wilber’s shareholders entitled to seek appraisal or dissenters’ rights if they do not vote in favor of the approval of the Merger Agreement?

 
A:
No.  As a holder of Wilber common stock, you are not entitled to appraisal or dissenters’ rights under Section 910 of the New York Business Corporation Law in connection with the Merger.  See “The Merger—No Appraisal or Dissenters’ Rights” beginning on page [  ].

vi 
 

 

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:


Community Bank System, Inc.
The Wilber Corporation
Scott A. Kingsley
Executive Vice President and Chief Financial Officer
Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, New York 13214
(315) 445-7378
Joseph E. Sutaris
Executive Vice President and Chief Financial Officer
The Wilber Corporation
245 Main Street
Oneonta, New York 13820
(607) 432-1700


If you wish to obtain an additional copy of this document, or any other information, please see “Where You Can Find More Information” on pages [  ] through [  ] to find out where you can find more information about Community Bank System and Wilber, or contact:


Community Bank System, Inc.
The Wilber Corporation
Donna J. Drengel
Corporate Secretary
Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, New York 13214
(315) 445-7313
Joseph E. Sutaris
Executive Vice President, Chief Financial Officer, and Corporate Secretary
The Wilber Corporation
245 Main Street
Oneonta, New York 13820
(607) 432-1700



vii 
 

 


TABLE OF CONTENTS
 
     Page
   
 QUESTIONS AND ANSWERS ABOUT THE MERGER........................................................................................................................................................................................................................  i
     
 WHO CAN HELP ANSWER YOUR QUESTIONS..................................................................................................................................................................................................................................  vii
     
 SUMMARY......................................................................................................................................................................................................................................................................................................  1
     
 SELECTED HISTORICAL FINANCIAL DATA.......................................................................................................................................................................................................................................  9
     
 COMPARATIVE UNAUDITED PER SHARE DATA...............................................................................................................................................................................................................................  13
     
 RISK FACTORS............................................................................................................................................................................................................................................................................................  15
     
 A WARNING ABOUT FORWARD-LOOKING INFORMATION........................................................................................................................................................................................................  26
     
 THE COMPANIES.........................................................................................................................................................................................................................................................................................  27
     
   Community Bank System..............................................................................................................................................................................................................................................  27
   The Wilber Corporation................................................................................................................................................................................................................................................  27
     
 SPECIAL MEETING OF WILBER SHAREHOLDERS...........................................................................................................................................................................................................................  29
     
   General.............................................................................................................................................................................................................................................................................  29
   Record Date; Voting Power..........................................................................................................................................................................................................................................  29
   Vote Required.................................................................................................................................................................................................................................................................  29
   Recommendation of the Wilber Board........................................................................................................................................................................................................................  29
   Solicitation and Revocation of Proxies.......................................................................................................................................................................................................................  30
   Other Matters.................................................................................................................................................................................................................................................................  30
     
 THE MERGER.................................................................................................................................................................................................................................................................................................  31
     
   General..............................................................................................................................................................................................................................................................................  31
   Background of the Merger............................................................................................................................................................................................................................................  31
   Community Bank System’s Reasons for the Merger................................................................................................................................................................................................  37
   Wilber’s Reasons for the Merger; Recommendation of Wilber’s Board of Directors.........................................................................................................................................  38
   Opinion of Austin Associates......................................................................................................................................................................................................................................  40
   Voting and Affiliate Agreements with Directors and Executive Officers of Wilber.............................................................................................................................................  51
   Financial Interests of Certain Wilber Directors and Executive Officers in the Merger........................................................................................................................................  51
   Material Federal Income Tax Consequences..............................................................................................................................................................................................................  52
   Accounting Treatment of the Merger.........................................................................................................................................................................................................................  54
   Resales of Community Bank System Common Stock................................................................................................................................................................................................  54
   New York Stock Exchange Listing...............................................................................................................................................................................................................................  55
   Regulatory Approvals and Notices for the Merger..................................................................................................................................................................................................  55
   Litigation Relating to the Merger.................................................................................................................................................................................................................................  56
   Formal Agreement with Office of the Comptroller of the Currency........................................................................................................................................................................  56
   No Appraisal or Dissenters’ Rights.............................................................................................................................................................................................................................  57
     
 
 
 

 
 
 THE MERGER AGREEMENT.......................................................................................................................................................................................................................................................................  58
     
   Conversion of Wilber Common Stock.........................................................................................................................................................................................................................  58
   Election Procedures.......................................................................................................................................................................................................................................................  59
   Allocation Mechanism..................................................................................................................................................................................................................................................
 61
   Representations and Warranties.................................................................................................................................................................................................................................  62
   Conditions to the Merger..............................................................................................................................................................................................................................................  63
   Termination......................................................................................................................................................................................................................................................................  64
   Conduct of Business Prior to Completion of the Merger; Covenants...................................................................................................................................................................  65
   No Solicitation of Takeover Proposals; Superior Proposals....................................................................................................................................................................................  67
   Termination Fee and Expenses.....................................................................................................................................................................................................................................  69
   Directors, Employees and Employee Benefits............................................................................................................................................................................................................  70
   Indemnification................................................................................................................................................................................................................................................................  71
   Amendment and Waiver................................................................................................................................................................................................................................................  71
   Alternate Structure.........................................................................................................................................................................................................................................................  71
     
 MARKET PRICE AND DIVIDEND INFORMATION...............................................................................................................................................................................................................................  72
     
 DESCRIPTION OF CAPITAL STOCK OF COMMUNITY BANK SYSTEM......................................................................................................................................................................................  74
     
   General..............................................................................................................................................................................................................................................................................  74
   Common Stock.................................................................................................................................................................................................................................................................  74
   Certain Certificate of Incorporation and Bylaws Provisions....................................................................................................................................................................................  74
     
 DESCRIPTION OF CAPITAL STOCK OF WILBER..............................................................................................................................................................................................................................  76
     
   General..............................................................................................................................................................................................................................................................................  76
   Common Stock.................................................................................................................................................................................................................................................................  76
     
 COMPARISON OF RIGHTS OF HOLDERS OF WILBER COMMON STOCK AND COMMUNITY BANK SYSTEM COMMON STOCK.......................................................................  77
     
   Authorized Capital Stock...............................................................................................................................................................................................................................................  77
   Quorum of Shareholders................................................................................................................................................................................................................................................  77
   Nomination of Directors.................................................................................................................................................................................................................................................  78
   Qualification of Directors...............................................................................................................................................................................................................................................  78
   Number of Directors.......................................................................................................................................................................................................................................................  79
   Removal of Directors......................................................................................................................................................................................................................................................  79
   Payment of Dividends....................................................................................................................................................................................................................................................  79
   Special Meeting of Shareholders..................................................................................................................................................................................................................................  79
   Rights of Shareholders to Dissent...............................................................................................................................................................................................................................  80
   Indemnification and Limitation of Liability.................................................................................................................................................................................................................  80
   Certain Voting Rights and Restrictions with Respect to Mergers..........................................................................................................................................................................  81
   Amendment to Certificate of Incorporation................................................................................................................................................................................................................  83
   Amendment to Bylaws...................................................................................................................................................................................................................................................  84
     
 EXPERTS.........................................................................................................................................................................................................................................................................................................  85
     
 LEGAL MATTERS.........................................................................................................................................................................................................................................................................................  85
     
 WHERE YOU CAN FIND MORE INFORMATION..................................................................................................................................................................................................................................  85
     
 ANNEX A MERGER AGREEMENT ............................................................................................................................................................................................................................................................  A-1
     
 ANNEX B FAIRNESS OPINION ..................................................................................................................................................................................................................................................................  B-1
     
 
 

ii 
 

 

SUMMARY

This summary highlights selected information from this document and may not contain all 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, you should read this entire document carefully, as well as the additional documents that the parties refer you to.  See “Where You Can Find More Information” on page  [   ].

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.

Wilber and Community Bank System propose a merger of Community Bank System and Wilber (Page [  ])

Wilber and Community Bank System are proposing a merger of Wilber into Community Bank System, which will combine both companies.  Community Bank System will continue as the surviving corporation of the Merger.  Immediately following the Merger, the parties will merge Wilber Bank, a wholly-owned banking subsidiary of Wilber, with and into Community Bank, a wholly-owned banking subsidiary of Community Bank System, with Community Bank surviving the Merger.

In the Merger, You may Elect to Receive Either Cash, Shares of Community Bank System or a Combination of Both (Page [  ])

You are entitled to elect to receive either cash, shares of Community Bank System common stock, or a combination of cash and Community Bank System common stock, in exchange for your shares of Wilber common stock.  To enable you to make this election, Wilber and 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 Wilber stock certificates before the election deadline of [          ], 2011.  If you don’t make a timely election, or if you fail to make your election properly, you will automatically receive a mixture of cash and stock in the Merger.

Subject to certain allocation procedures, you will receive either:

 
$9.50 in cash for each share of Wilber common stock you own; or
 
a number of Community Bank System common stock based on the exchange ratio, as explained below, for each share of Wilber common stock you own; or
 
a combination of $9.50 in cash per share for 20% of the total number of shares of Wilber common stock you own, and a number of shares of Community Bank System common stock based on the exchange ratio, as explained below, for the remaining 80% of the total number of shares of Wilber common stock you own.
 
 
 

 
 
The exchange ratio for the Merger will be calculated as follows:

 
If the applicable Community Bank System market price is:
Then you will receive, for each Wilber share converted into Community Bank System common stock:
     
 
Greater than $25.35
0.3748 shares of Community Bank System common stock
 
     
 
 
Equal to or greater than $19.71, or
equal to or less than $25.35
 
 
Quotient (rounded to the nearest one-thousandth) obtained by dividing $9.50 by the applicable market price
     
 
Less than $19.71
0.4820 shares of Community Bank System common stock
 
For these purposes, the applicable market price is the average closing sale price of Community Bank Stock common stock over the 10 trading days immediately preceding the closing of the Merger.

Your Election of Merger Consideration May be Subject to Certain Allocation Procedures (Page [    ])

Wilber and Community Bank System have agreed that no more than 80% of the outstanding shares of Wilber common stock will be exchanged for shares of Community Bank System common stock, and that no more than 20% of the outstanding shares of Wilber common stock will be exchanged for cash.  Depending on the elections made by the other Wilber shareholders, your election as to the form of merger consideration might be subject to certain allocation mechanisms which are designed to ensure compliance with those limitations on the form of merger consideration.  Accordingly, unless you elect to receive a mixture of cash for 20% of your Wilber shares, and Community Bank System common stock for 80% of your Wilber shares, Wilber and Community Bank System cannot assure you that you will receive the form of consideration that you elect with respect to all of the shares of Wilber common stock you hold.  However, if you own 100 or fewer shares of Wilber common stock and elect to receive only cash in the Merger, you will receive only cash in the Merger.

Wilber and Community Bank System Expect that Wilber Shareholders Will Own Approximately [____%] of the Combined Company Following the Merger (Page [    ])

At the completion of the Merger, if 80% of the outstanding shares of Wilber common stock are exchanged for shares of Community Bank System common stock at an exchange ratio of .3748, Wilber shareholders are expected to own approximately [____%] of the outstanding shares of common stock of the combined company.  The actual ownership percentage of the Wilber shareholders in the combined company could be higher or lower, depending on:

 
the actual number of shares of Wilber common stock subject to elections made by Wilber shareholders to receive shares of Community Bank System common stock in the Merger; or
 
the actual exchange ratio of the Merger, which will be adjusted if the market price of Community Bank System common stock over a specified period before the Merger falls outside of a certain range, as described above.

No Federal Income Tax on Community Bank System Common Stock Received in the Merger, but Any Cash Received in the Merger May be Taxed (Page [   ])

Wilber and Community Bank System expect that Wilber shareholders will not recognize any gain or loss for U.S. Federal income tax purposes in the Merger, except for those who receive cash, whether as entire or partial merger consideration, or for fractional shares of Community Bank System common stock.  Tax matters are complicated, and tax consequences of the Merger may vary among Wilber shareholders depending on their election and specific situations.  You are urged to consult your own tax advisor to fully understand how the Merger will affect you.
 
 
2

 
 
Austin Associates, an Independent Financial Advisor, Says that the Merger Consideration is Fair from a Financial Point of View (Page [  ])

Austin Associates, an independent financial advisor, rendered an opinion to the Board of Directors of Wilber, dated October 22, 1010, that the merger consideration was fair from a financial point of view to the shareholders of Wilber.  This opinion is attached as Annex B to this document.  You should read it carefully.

Share Information and Market Price (Page [  ])

Community Bank System common stock is traded on the NYSE under the symbol “CBU.”  Wilber common stock is traded on the NYSE Amex (formerly the American Stock Exchange) under the symbol “GIW.”  The following table shows the closing or last sale prices of Community Bank System common stock and Wilber common stock on October 21, 2010 and [       ], 2011.  October 21, 2010 is the last full trading day prior to the announcement of the signing of the Merger Agreement.  [    ], 2011 was the last practicable trading day for which information was available prior to the date of this document.  The equivalent price per share of Wilber common stock is determined by multiplying the closing price of Community Bank System common stock by the assumed exchange ratio.  As described above, the exchange ratio may be adjusted, depending on the market price of Community Bank System common stock during a specified period before the Merger.  You will need to multiply the closing price of Community Bank System common stock by the actual exchange ratio to obtain an equivalent price per share of Wilber common stock.

 
Community Bank
____System____
 
                        Wilber                      
Closing or Last Sale Prices Per Share on:
     Historical     
 
    Historical    
Equivalent Market
   Value Per Share   
  October 21, 2010. . . . . . . . . . . . . . . . . . . . . . . . . .
$23.37
 
$6.11
$9.50
  [                    ], 2011 . . . . . . . . . . . . . . . . . . . . . . .
$[      ]
 
$[      ]
$[           ]

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

Information about the Companies (Page [   ])

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 147 customer facilities and 135 ATMs in 28 counties in Upstate New York: Allegany, Clinton, Hamilton, Essex, St. Lawrence, Jefferson, Lewis, Oneida, Cayuga, Seneca, Ontario, Oswego, Wayne, Yates, Cattaraugus, Tioga, Tompkins, Steuben, Chautauqua, Franklin, Herkimer, Erie, Livingston, Chemung, Schuyler, Washington, Warren, and Onondaga, and five counties in Northern Pennsylvania:  Bradford, 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.
 
 
3

 
 
Community Bank is Community Bank System’s principal operating subsidiary.  At September 30, 2010, Community Bank System had on a consolidated basis approximately $5.5 billion in total assets, $4.0 billion in total deposits, $3.0 billion in total loans and shareholders’ equity of $616 million.
 
The Wilber Corporation
245 Main Street
Oneonta, New York 13820
(607) 432-1700

Wilber is a financial holding company operating Wilber Bank.  Wilber Bank is a bank operating 22 banking offices and 20 ATMs in Broome, Otsego, Delaware, Schoharie, Chenango, Saratoga, Ulster and Onondaga Counties.  Wilber National Bank offers a broad range of commercial banking and trust services to individuals and small to medium-sized businesses in its market area.

Wilber National Bank is Wilber’s principal operating subsidiary.  At September 30, 2010, Wilber had on a consolidated basis approximately $906.63 million in assets, $753.40 million in total deposits, $540.44 million in total loans and shareholders’ equity of $77.62 million.

The Special Meeting will be held on [               ], 2011 (Page [   ])

A special meeting of the Wilber shareholders will be held at [           ], at [  ].m., Eastern time, on [                       ], 2011.  At the special meeting, shareholders of Wilber will vote on a proposal to adopt and approve the Merger Agreement.

Record Date for the Special Meeting is [              ], 2011; Each Share will Entitle You to One Vote on the Merger (Page __)

You are entitled to vote at the special meeting if you owned shares of Wilber common stock on the record date of [         ], 2011.  As of that date, there were [                    ] shares of Wilber common stock issued and outstanding held by approximately [    ] holders of record.  Each share of Wilber common stock entitles its holder to one vote on any matter that may properly come before the special meeting, including the proposal to approve the Merger Agreement.

Merger Approval Requires Affirmative Vote of Two-Thirds (2/3) of Outstanding Common Shares (Page [  ])

The approval of the Merger Agreement requires the affirmative vote of the holders of two-thirds (2/3) of the outstanding shares of Wilber common stock.  Abstentions would have the same effect as a vote against the Merger Agreement.

Wilber and Community Bank System Expect Directors and Executive Officers of Wilber to Vote Their Shares in Favor of Approving the Merger (Page [   ])

On the record date set for the Wilber special meeting, the executive officers and Directors of Wilber, including certain related parties, had voting power with respect to an aggregate of [         ] shares of Wilber common stock, or approximately [   ]% of the shares of the Wilber common stock then outstanding.  Each director and executive officer of Wilber executed an agreement which commits him or her to vote in favor of the Merger Agreement all of the shares of Wilber common stock that he or she is entitled to vote.
 
 
4

 
 
Wilber’s Board of Directors has unanimously approved the Merger Agreement, and recommends a vote FOR approval of the Merger Agreement.  Wilber shareholders should refer to the reasons that their Board of Directors considered in determining whether to adopt and approve the Merger Agreement on pages [   ] through [  ].

Terms of the Merger Agreement (Page [   ])

The Merger Agreement is attached to this document as Annex A.  You are encouraged to read the Merger Agreement in its entirety.  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 [   ].

General.  The Merger Agreement provides that Wilber will merge with and into Community Bank System, with Community Bank System continuing as the surviving corporation.  Following the Merger, Wilber Bank will merge with and into Community Bank, with Community Bank being the continuing bank.

Merger Consideration.  If the Merger is completed, you will receive either cash, shares of Community Bank System common stock, or a combination of cash and stock.  In the Merger, in exchange for each share of Wilber common stock you own, Community Bank System will pay $9.50 in cash, and/or issue a number of shares of Community Bank System based upon an exchange ratio that is calculated using the market price of Community Bank System common stock during a specified period before the Merger.  You are entitled to elect the form of merger consideration, but your election is subject to certain allocation procedures.  As a result, you may not necessarily receive the form of merger consideration you selected with respect to all of your shares.

Completion of the Merger.  The Merger will become effective on the date and at the time that Wilber and Community Bank System file a certificate or articles of merger with each of the Delaware Secretary of State and the New York Secretary of State.

Conditions to the Merger.  The completion of the Merger depends upon the satisfaction of a number of conditions, including:

 
the SEC declares effective the registration statement covering the Community Bank System common stock to be issued in the Merger, and the registration statement is not the subject of any stop order or proceeding seeking a stop order;
 
Wilber shareholders approve the Merger Agreement by the affirmative vote of at least two-thirds of the shares outstanding at the special meeting;
 
Community Bank System and Wilber receive all approvals or consents required by law from any applicable governmental agency, and all applicable notice or waiting periods have expired;
 
no court or regulatory actions, nor any judgments, orders, decrees or injunctions, have been instituted or issued by any governmental authority, court, or administrative agency preventing or seeking to prevent the consummation of the Merger;
 
the representations and warranties made by Community Bank System and Wilber in the Merger Agreement shall continue to be true and accurate as of the effective time of the Merger;
 
the New York Stock Exchange lists the Community Bank System common stock to be issued in the Merger, subject to official notification of issuance;
 
Hinman, Howard & Kattell, LLP, Wilber’s outside legal counsel, delivers an opinion to Wilber, to the effect that the Merger will qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code; and
 
Austin Associates delivers an updated written fairness opinion to Wilber dated as of the date of this document.
 
 
5

 
 
Unless prohibited by law, either of us could elect to waive a condition designed for the benefit of the waiving party that has not been satisfied and complete the Merger anyway.

Fees and Expenses; Termination Fee.  Wilber and Community Bank System will each pay its own expenses in connection with the Merger, except that the parties will share equally all filing fees paid to the SEC in connection with the registration statement for the Merger, and all costs associated with the printing and mailing of this document.  If, however, the Merger Agreement is terminated under certain circumstances, Wilber must pay a termination fee of $4,000,000 plus all out-of-pocket expenses incurred by Community Bank System and its subsidiaries in connection with the transactions contemplated by the Merger Agreement, up to a maximum of $500,000 in the aggregate.  Generally, the termination fee and expenses will become payable in connection with a competing third party offer to acquire Wilber or a material portion of its stock or assets.

Termination.  Either of Wilber or Community Bank System may call off the Merger under certain circumstances, including if:

 
both parties consent in writing to the termination;
 
the Merger is not completed before May 31, 2011, unless the Merger was not completed principally because the party seeking to terminate breached a covenant or obligation of the Merger Agreement;
 
Wilber and Community Bank System are not able to obtain required governmental approvals, after all appeals and requests for reconsideration have been exhausted;
 
any governmental entity issues a final and non-appealable order to prohibit the completion of the Merger;
 
Wilber shareholders do not approve the Merger Agreement at the special meeting;
 
the other party materially breaches, and does not cure within 30 days, any of the representations, warranties or covenants it has made under the Merger Agreement, and the breach entitles the non-breaching party to not complete the Merger;
 
the Wilber Board of Directors fails to recommend, or withdraws its approval of, the Merger, or fails to include its recommendation in the registration statement;
 
Wilber’s Board of Directors recommends to Wilber shareholders a “Superior Proposal,” as defined in the Merger Agreement, or Wilber signs a letter of intent, definitive agreement or similar document with respect of a Superior Proposal, provided that Wilber may not terminate the Merger Agreement under this provision unless it has complied with the specified procedures set forth in the Merger Agreement.

In addition, Community Bank System may call off the Merger under certain circumstances, including if:

 
Wilber’s delinquent loans (as more fully described on page [  ]) exceed $32.160 million;
 
Wilber’s Board of Directors withdraws, modifies or changes its approval or recommendation of the Merger Agreement in a manner adverse to Community Bank System;
 
Wilber fails to send its shareholders, within 10 business days of the commencement of a tender or exchange offer in respect of the Wilber common stock, a statement that the Wilber Board of Directors recommends rejection of the tender or exchange offer; or
 
Wilber fails to issue a press release announcing its Board’s opposition to a publicly announced Takeover Proposal (as defined in the Merger Agreement) within three business days of Community Bank System’s request to do so.
 
 
6

 
 
In the event that the conditions to close the Merger are not satisfied, or waived, Community Bank System can terminate the Merger Agreement without completing the Merger, even if the shareholders of Wilber have already voted to approve the Merger Agreement.

Financial Interests of Wilber Management in the Merger (Page [   ])

In considering the recommendation of the Wilber Board of Directors, you should be aware that certain of the Directors and executive officers of Wilber have financial interests in the Merger that are different from, and may conflict with, interests of other Wilber shareholders.  There interests include: (1) payments of director fees to the two Wilber Directors, Brian R. Wright and Alfred S. Whittet, who will serve on Community Bank System’s and Community Bank’s Boards of Directors following the consummation of the Merger, (2) payments of advisory board fees to the remaining Wilber Directors who will not be appointed to serve on Community Bank System’s Board but will serve on an advisory board, and (3) certain retention bonus payments that may be subject to approval by Wilber Bank’s regulators.  These interests are described in more detail in the section of this proxy statement/prospectus entitled “The Merger — Interests of Wilber’s Directors and Executive Officers in the Merger” beginning on page [ ].  The Wilber Board knew about these interests and determined that they did not affect the benefits to Wilber shareholders of the Merger.

Directors of Community Bank System and Community Bank Following the Merger (Page [   ])

If the Merger is completed, two of Wilber’s Directors, Brian R. Wright and Alfred S. Whittet, will be appointed to serve as members of Community Bank System’s Board of Directors, in addition to the 14 current Directors of Community Bank System.  These two new Directors of Community Bank System will also be appointed to serve on the Board of Directors of Community Bank.  In addition, Community Bank System has also agreed to nominate the two designees of Wilber on the Board of Directors of Community Bank System at the 2011 Annual Meeting and to recommend that Community Bank System shareholders vote in favor of their reelection.

Wilber and Community Bank System Must Obtain Regulatory Approvals to Complete the Merger (Page [  ])

Community Bank System must make filings with or obtain approvals from certain regulatory authorities to effect the Merger.  In addition, before Wilber 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 Wilber 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 with the NYSE.
 
 
7

 
 
There are Differences in Shareholder Rights (Page [   ])
 
The rights of Wilber shareholders as such are currently governed by New York law and Wilber’s certificate of incorporation and bylaws.  If the Merger is completed, certain Wilber shareholders will become shareholders of Community Bank System and their rights will be governed by Delaware law and Community Bank System’s certificate of incorporation and bylaws.  There are certain differences in the rights of shareholders of the two companies.  These differences are described in more detail in the section of this proxy statement/prospectus entitled “Comparison of Rights of Holders of Wilber Common Stock and Community Bank System Common Stock” beginning on page [ ].

 
8

 

SELECTED HISTORICAL FINANCIAL DATA

The following information is provided to assist you in analyzing the financial aspects of the Merger.  This information shows selected historical consolidated financial data for Community Bank System and Wilber.  Community Bank System and Wilber has derived this information from each company’s audited consolidated financial statements for the years ended December 31, 2005 through 2009, and its unaudited financial statements for the nine months ended September 30, 2009 and 2010.  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 analysis contained in the annual, quarterly and other reports filed with the SEC.  For information on how to obtain these reports filed by each company, please refer to “Where You Can Find More Information” on page [  ].

Community Bank System, Inc.
Selected Historical Financial Data

 
Nine Months ended
September 30,
(Unaudited)
Years ended December 31,
 
2010
2009
2009
2008
2007
2006
2005
     
(in thousands, except share and per share data)
Summarized
Income Statement Data:
             
Loan interest income
$134,618
$138,992
$185,119
$186,833
$186,784
$167,113
$147,608
Investment interest income
51,654
47,950
63,663
64,026
69,453
64,788
71,836
Interest expense
50,721
64,390
83,282
102,352
120,263
97,092
75,572
  Net interest income
135,551
122,552
165,500
148,507
135,974
134,809
143,872
Provision for loan losses
5,270
7,200
9,790
6,730
2,004
6,585
8,534
Noninterest income
67,009
61,811
83,528
73,244
63,260
51,679
48,401
Gain (loss) on investment securities & early retirement of long-term borrowings
---
7
7
230
(9,974)
(2,403)
12,195
Special charges/acquisition expenses
---
---
1,716
1,399
382
647
2,943
Noninterest expenses
132,765
135,995
184,462
157,163
141,692
126,556
124,446
Income before income taxes
64,525
41,175
53,067
56,689
45,182
50,297
68,545
     Net income
$47,426
$32,075
$41,445
$45,940
$42,891
$38,377
$50,805
               
Balance Sheet Data:
             
Cash equivalents
$66,621
$245,200
$257,812
$112,181
$4,533
$104,231
$5,039
Investment securities
1,769,149
1,497,826
1,487,127
1,395,011
1,391,872
1,229,271
1,303,117
Loans, net of unearned discount
3,080,397
3,087,093
3,099,485
3,136,140
2,821,055
2,701,558
2,411,769
Allowance for loan losses
(42,610)
(41,072)
(41,910)
(39,575)
(36,427)
(36,313)
(32,581)
Intangible assets
312,686
322,661
317,671
328,624
256,216
246,136
224,878
  Total assets
5,496,217
5,378,095
5,402,813
5,174,552
4,697,502
4,497,797
4,152,529
Deposits
3,966,335
3,888,245
3,924,486
3,700,812
3,228,464
3,168,299
2,983,507
Borrowings
831,526
858,435
856,778
862,533
929,328
805,495
653,090
Shareholders’ equity
615,800
565,900
565,697
544,651
478,784
461,528
457,595
 
 
9

 
 
   
Nine Months ended
September 30,
(Unaudited)
 Years ended December 31,
   2010 2009 2009  2008  2007  2006   2005
        (in thousands, except share and per share data)
Capital and Related Ratios:
             
Cash dividend declared per share
$0.70
$0.66
$0.88
$0.86
$0.82
$0.78
$0.74
Book value per share
18.57
17.28
17.25
16.69
16.16
15.37
15.28
Tangible book value per share
9.74
7.99
8.09
6.62
7.51
7.17
7.77
Market capitalization (in millions)
763
598
633
796
589
690
676
Tier 1 leverage ratio
7.99%
7.27%
7.39%
7.22%
7.77%
8.81%
7.57%
Total risk-based capital to risk-adjusted assets
14.13%
13.29%
13.46%
12.53%
14.05%
15.47%
13.64%
Tangible equity to tangible assets(2)
6.21%
5.15%
5.20%
4.74%
5.01%
5.07%
5.93%
Dividend payout ratio
48.9%
67.4%
69.5%
57.3%
57.1%
60.7%
43.9%
Period end common shares outstanding
33,162
32,740
32,800
32,633
29,635
30,020
29,957
Diluted weighted-average shares outstanding
33,193
32,785
32,992
30,826
30,232
30,392
30,838
               
Selected Performance Ratios:
             
Return on average assets
1.16%
0.81%
0.78%
0.97%
0.93%
0.90%
1.19%
Return on average equity
10.79%
7.77%
7.46%
9.23%
9.20%
8.36%
10.89%
Net interest margin
4.04%
3.78%
3.80%
3.82%
3.64%
3.91%
4.17%
Noninterest income/operating income (FTE)
31.3%
31.5%
31.6%
31.0%
26.1%
24.8%
27.7%
Efficiency ratio(1)
59.1%
64.7%
65.4%
62.7%
63.3%
59.9%
56.8%
               
Asset Quality Ratios:
             
Allowance for loan losses/total loans
1.38%
1.33%
1.35%
1.26%
1.29%
1.34%
1.35%
Nonperforming loans/total loans
0.58%
0.57%
0.61%
0.40%
0.32%
0.47%
0.55%
Allowance for loan losses/nonperforming loans
238%
232%
222%
312%
410%
288%
245%
Net charge-offs/average loans
0.20%
0.25%
0.24%
0.20%
0.10%
0.24%
0.33%
Loan loss provision/net charge-offs
115%
126%
131%
117%
76%
108%
110%

(1) Efficiency ratio excludes intangible amortization, gain (loss) on investment securities & debt extinguishments, goodwill impairment, and special charges/acquisition expenses. The efficiency ratio is not a financial measurement required by accounting principles generally accepted in the United States of America.  However, the efficiency ratio is used by management in its assessment of financial performance specifically as it relates to non-interest expense control and also believes such information is useful to investors in evaluating Company performance.

(2) The tangible equity to tangible asset ratio excludes goodwill and identifiable intangible assets.  The ratio is not a financial measurement required by accounting principles generally accepted in the United States of America.  However, management believes such information is useful to analyze the relative strength of the Company’s capital position and is useful to investors in evaluating Company performance.



 
10

 

Wilber
Selected Historical Financial Data

 
Nine Months ended
September 30,
(Unaudited)
Years ended December 31,
 
2010
2009
2009
2008
2007
2006
2005
     
(in thousands, except share and per share data)
Summarized
Income Statement Data:
             
Interest and Dividend Income
$32,268
$35,990
$46,838
$46,392
$46,030
$43,341
$40,310
Interest Expense
8,697
11,564
14,502
19,958
21,474
18,360
14,930
Net Interest Income
23,571
23,826
32,336
26,434
24,556
24,981
25,380
Provision for Loan Losses
3,425
2,720 
3,570
1,530
900
1,560
1,580
Net Interest Income After Provision for Loan Losses
20,146
21,106 
28,766
24,904
23,656
23,421
23,800
Noninterest Income (Excl. Investment Securities Gains, Net)
4,119
4,033
5,484
6,227
6,956
5,455
5,156
Investment Securities Gains, Net
3,619
2,622 
3,850
82
80
514
469
Noninterest Expense
20,782
20,616 
28,110
23,724
20,857
20,032
18,966
Income Before Provision for Income Taxes
7,174
7,145 
9,990
7,489
9,835
9,358
10,459
Provision for Income Taxes
1,909
1,745
2,589
1,673
2,128
2,206
2,715
Net Income
$5,265
$5,400 
$7,401
$5,816
$7,707
$7,152
$7,744
               
Per Common Share:
             
Earnings (Basic)
$0.49
$0.51 
$0.70
$0.55
$0.73
$0.66
$0.69
Cash Dividends
0.18
0.215 
0.275
0.380
0.380
0.380
0.380
Book Value
7.29
6.82 
6.82
6.42
6.61
5.99
6.08
Tangible Book Value (1)
6.86
6.38 
6.39
5.97
6.13
5.52
5.61
               
Consolidated Period-End Balance Sheet Data:
             
Total Assets
$906,905
$916,137
$906,577
$924,874
$793,680
$761,981
$752,728
Securities Available-for-Sale
219,196
192,334
173,302
216,744
237,274
228,959
235,097
Securities Held-to-Maturity
59,995
69,570
69,391
44,454
52,202
62,358
54,939
Gross Loans
540,439
597,248
587,237
583,861
445,105
406,920
404,958
Allowance for Loan Losses
10,056
9,162
8,622
7,564
6,977
6,680
6,640
Deposits
752,973
759,031
753,740
765,873
657,494
629,044
604,958
Long-Term Borrowings
57,246
56,716 
60,627
59,970
41,538
42,204
52,472
Short-Term Borrowings
13,290
19,932
12,650
21,428
15,786
18,459
19,357
Shareholders’ Equity
78,184
71,842
72,919
67,459
69,399
63,332
67,717
               
Selected Key Ratios:
             
Return on Average Assets
0.76%
0.77%
0.79%
0.67%
0.99%
0.95%
1.02%
Return on Average Equity
9.31%
10.54%
10.63%
8.35%
11.84%
11.20%
11.40%
Net Interest Margin (tax-equivalent)
3.69%
3.69%
3.77%
3.46%
3.62%
3.81%
3.82%
Efficiency Ratio (2)
72.63%
70.90%
71.25%
68.42%
61.76%
61.14%
57.67%
Dividend Payout
36.73%
42.16%
39.29%
69.09%
52.05%
57.58%
55.07%
               
Asset Quality:
             
Nonperforming Loans (3)
$23,736
$12,108
$12,880
$7,211
$6,136
$2,529
$4,918
Nonperforming Assets (4)
25,442
12,390
14,564
7,369
6,383
2,632
4,938
Net Loan Charge-Offs to Average Loans
0.47%
0.25% 
0.42%
0.19%
0.14%
0.38%
0.30%
Allowance for Loan Losses to Period-End Loans
1.86%
1.53%
1.47%
1.30%
1.57%
1.64%
1.64%
Allowance for Loan Losses to Nonperforming Loans
42%
76%
67%
105%
114%
264%
135%
Nonperforming Loans to Period-End Loans
4.39%
2.03%
2.19%
1.24%
1.38%
0.62%
1.21%

 
 
11

 

 
(1) Tangible book value numbers exclude goodwill and intangible assets associated with prior business combinations.

(2) The efficiency ratio is calculated by dividing total noninterest expense less amortization of intangibles and other real estate expense by tax-equivalent net interest income plus noninterest income other than securities gains and losses.

(3) Nonperforming loans include nonaccrual loans, troubled debt restructured loans and accruing loans 90 days or more delinquent.

(4) Nonperforming assets include nonperforming loans and OREO properties acquired through insubstance foreclosure, voluntary deed transfer, legal foreclosure or similar proceedings.  Excludes properties acquired by the Company for its own development.


 
12

 

COMPARATIVE UNAUDITED PER SHARE DATA

The following table summarizes information, for the periods indicated, about Community Bank System’s and Wilber’s historical basic earnings per share, diluted earnings per share, dividends per share and book value per share, prepared using the acquisition method of accounting.  The pro forma and pro forma per equivalent share information give 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 January 1, 2009 in the case of the earnings per share and the cash dividends data.  The pro forma information assumes that 80% of the outstanding shares of Wilber common stock will be exchanged for shares of Community Bank System common stock in the Merger.  As described elsewhere in this document, the exchange ratio may be adjusted, depending on the market price of Community Bank System common stock during a specified period before the Merger.

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 acquisition 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 Wilber with the SEC.  For information on how to obtain the reports filed by Community Bank System or Wilber, please refer to “Where You Can Find More Information” on page [  ].  You should not rely on the pro forma information as being indicative of the results that Community Bank System will achieve in the Merger.

 
Historical
Pro Forma
Per Common Share Data:
Community
Bank
System
Wilber
Combined Company
(1)(2)(3)
Wilber
Equivalent
Basic Earnings
       
  For the nine months ended September 30, 2010
$1.43
$0.49
$1.45
$0.13
  For the year ended December 31, 2009
$1.26
$0.70
$1.36
$0.12
Diluted Earnings
       
  For the nine months ended September 30, 2010
$1.42
$0.49
$1.44
$0.13
  For the year ended December 31, 2009
$1.26
$0.70
$1.35
$0.12
Cash Dividends
       
  For the nine months ended September 30, 2010
$0.70
$0.18
$0.70
$0.06
  For the year ended December 31, 2009
$0.88
$0.28
$0.88
$0.08
Book Value
       
  As of nine months ended September 30, 2010
$18.57
$7.29
$19.17
$1.69
  As of year ended December 31, 2009
$17.25
$6.82
$17.97
$1.60

(1)  The pro forma combined basic earnings and diluted earnings of Community Bank System common stock is based on the pro forma combined net income for Community Bank System and Wilber divided by total pro forma common shares or diluted common shares of the combined entities.  The pro forma information includes adjustments related to the fair value of assets and liabilities and is subject to adjustment as additional information becomes available and as additional analysis are performed.  The pro forma information does not include transactional costs or anticipated cost savings or adjustments related to the fair value of assets and liabilities.

(2)  The pro forma combined book value of Community Bank System common stock is based on the pro forma combined common stockholders’ equity of Community Bank System and Wilber divided by total pro forma common shares of the combined entities.  The pro forma information does not include transactional costs or anticipated cost savings or adjustments related to the fair value of assets and liabilities.

 
13

 
 
(3)  Cash dividend amounts are the same as historical because no change in dividend policy is expected as a result of the Merger.

 
14

 


RISK FACTORS

In addition to the other information included in this document, you should consider the matters described below carefully in determining whether to approve the Merger Agreement.

Risks Related to the Merger

The value of the Community Bank System common stock you receive in the Merger may vary.

If you elect to receive shares of Community Bank System common stock in the Merger, or if you receive shares of Community Bank System common stock in the Merger as a result of the allocation procedure, an appropriate number of shares of Wilber common stock you own will be automatically converted into shares of Community Bank System common stock based upon the exchange ratio.  The exchange ratio is a floating exchange ratio if the average closing sale price of Community Bank System common stock over 10 trading days is equal to or greater than $19.71 per share, or equal to or less than $25.35 per share, based upon the quotient (rounded to the nearest one-thousandth) obtained by dividing $9.50 by the average market price for such period.  If the average closing sale price of Community Bank System common stock over 10 trading days before the Merger is greater than $25.35, the exchange ratio will be fixed at 0.3748 and if the average closing sale price is less than $19.41 over 10 trading days before the Merger, the exchange ratio is fixed at 0.4820.  As a result, the value of the shares of Community Bank System common stock that you will receive in the Merger will not be known at the time you make your election as to the form of merger consideration or at the time you vote on the approval of the Merger Agreement at the special meeting, and the value may go up or down as the market price of Community Bank System common stock fluctuates.  Similarly, the value of Community Bank System common stock to be issued in the Merger may be more or less than the cash merger consideration of $9.50 per share.  The specific dollar value of Community Bank System common stock you receive upon completion of the Merger will depend on the market value of Community Bank System common stock at the time of completion of the Merger.  The share price of Community Bank System common stock is by nature subject to the general price fluctuations in the market for publicly traded equity securities which has historically experienced some degree of volatility.  Wilber and Community Bank System cannot predict the market price of Community Bank System common stock at any time before or after the completion of the Merger.

You may not receive the form of merger consideration that you elect, which could have an effect on your tax situation.

No more than 20% of the outstanding shares of Wilber common stock will be exchanged for cash and no more than 80% of the outstanding shares of Wilber common stock will be exchanged for  Community Bank System common stock.  Accordingly, unless you elect to receive a mixture of cash for 20% of your Wilber shares and Community Bank System common stock for 80% of your Wilber shares, or unless you have 100 or fewer shares of Wilber common stock and elect to receive only cash, there is no assurance that you will receive the form of consideration that you elect with respect to all shares of Wilber 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 that 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.

 
15

 
 
Wilber will be subject to business uncertainties and contractual restrictions while the Merger is pending.
 
 
Uncertainty about the effect of the Merger on employees and customers may have an adverse effect on Wilber and consequently on Community Bank System.  These uncertainties may impair Wilber’s ability to attract, retain and motivate key personnel until the Merger is consummated, and could cause customers and others that deal with Wilber to seek to change existing business relationships with Wilber.  Retention of certain employees by Wilber may be challenging while the Merger is 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 to remain with Community Bank System, Community Bank System’s business following the Merger could be harmed.  In addition, the Merger Agreement restricts Wilber 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 Wilber 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 Prior to Completion of the Merger; Covenants” commencing on page [ ] of this proxy statement/prospectus for a description of the restrictive covenants applicable to Wilber.

The fairness opinion obtained by Wilber will not reflect changes in circumstances subsequent to the date of the fairness opinion.

Austin Associates has delivered to the Board of Directors of Wilber its opinion dated as of [       ], 2011.  The opinion of Austin Associates states that as of such date, and based upon and subject to the factors and assumptions set forth therein, the merger consideration to be paid to the holders of the outstanding shares of Wilber common stock pursuant to the Merger Agreement was fair from a financial point of view to such holders.  Changes in the operations and prospects of Wilber or Community Bank System, general market and economic conditions and other factors that may be beyond the control of Wilber or Community Bank System, and on which Austin Associates’ opinions were based, may significantly alter the value of Wilber or the prices of shares of Community Bank System common stock or Wilber common stock by the time the Merger is completed.  The 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.  Wilber’s Board of Directors’ recommendation that Wilber common shareholders vote “FOR” adoption of the Merger Agreement, however, is made as of the date of this proxy statement/prospectus. For a description of the opinion that Wilber received from Austin Associates, please refer to “The Merger — Opinion of Austin Associates,” commencing on page [ ].  For a description of the other factors considered by Wilber’s Board of Directors in determining to approve the Merger and the other transactions contemplated in the Merger Agreement, please refer to “The Merger — Background of the Merger,” and “The Merger — Wilber’s Reasons for the Merger; Recommendation of Wilber’s Board of Directors,” commencing on page [ ] and page [ ], respectively.

Community Bank System may fail to implement the Merger successfully, achieve savings and realize the other anticipated benefits from the Merger because of difficulties in integrating the two business operations.

The integration of our companies following the Merger will be complex and time-consuming and will present us with challenges.  As a result, Community Bank System may not be able to operate the combined company as effectively as it expects, including any data conversion into Community Bank’s core processing platform.  Community Bank System may also fail to achieve the anticipated potential benefits of the Merger as quickly or as cost effectively as we anticipate or may not be able to achieve those benefits at all.  Specifically, Community Bank System will face significant challenges integrating the two companies’ organizations, procedures and operations in a timely and efficient manner and retaining key personnel.  During the third quarter of 2010, Community Bank System converted its core loan, deposit and financial reporting information technology platform from an out-sourced, third-party provided system to an in-house, integrated solution.  Although Community Bank System expects to benefit from the enhanced functionality and process efficiencies of the new system, the conversion continues to include meaningful execution risk.  In addition, the management of Community Bank System will have to dedicate substantial effort to integrating our two companies and, therefore, its focus and resources may be diverted from other strategic opportunities and from operational matters.
 
 
16

 

In addition, certain employees of Wilber and Wilber Bank may not be employed after the Merger.  Employees of Wilber and Wilber Bank that Community Bank System wishes to retain may elect to terminate their employment as a result of the Merger, 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 Community Bank following the Merger or cause inconsistencies in standards, controls, procedures and policies that adversely affect the ability of Community Bank System and Community Bank to maintain relationships with Wilber and Wilber Bank customers and employees or to achieve the anticipated benefits of the Merger.

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 from the OCC, Federal Reserve Board and various bank regulatory and other authorities.  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 Wilber or Community Bank System conducts it business.  Although Community Bank System and Wilber do not currently expect that any 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.

Some of the Directors and executive officers of Wilber may have interests and arrangements that may have influenced their decisions to support or recommend that you adopt the Merger Agreement.
 
 
The interests of some of the Directors and executive officers of Wilber may be different from those of other Wilber common shareholders, and Directors and officers of Wilber may be participants in arrangements that are different from, or in addition to, those of other Wilber common shareholders.  These interests include: (1) payments of director fees to the two Wilber Directors, Brian R. Wright and Alfred S. Whittet, who will serve on Community Bank System’s and Community Bank’s Boards of Directors following the consummation of the Merger, (2) payments of advisory board fees to the remaining Wilber Directors who will not be appointed to serve on Community Bank System’s Board but will serve on an advisory board (which will advise Community Bank on the deposit, lending and financial services activities in Wilber’s market area and generally work to ensure a smooth transition of business relationships and the continued development of business relationships throughout Wilber’s market area), and (3) retention bonus payments to Joseph Sutaris, Executive Vice President and Chief Financial Officer, and Jeffrey Lord, Regional President, to encourage such executive officers to remain with Wilber during the integration of the parties' organizations, procedures and operations and completion of the Merger.  These interests are described in more detail in the section of this proxy statement/prospectus entitled “The Merger — Interests of Wilber’s Directors and Executive Officers in the Merger” beginning on page [ ].
 
 
17

 
 
The shares of Community Bank System common stock to be received by Wilber common shareholders as a result of the Merger will have different rights from the shares of Wilber common stock they currently hold.
 
 
The rights associated with Wilber common stock are different from the rights associated with Community Bank System common stock. See the section of this proxy statement/prospectus entitled “Comparison of Common Shareholder Rights” commencing on page [ ].
 
The market price of Community Bank System common stock after the Merger may be affected by factors different from those affecting Wilber common stock or Community Bank System common stock currently.
 
 
The businesses of Community Bank System and Wilber differ in some respects 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 Wilber.  For a discussion of the businesses of Community Bank System and Wilber and of certain factors to consider in connection with those businesses, see the documents incorporated by reference into this proxy statement/prospectus and referred to under “Where You Can Find More Information” on page [ ].

Wilber common shareholders will have a reduced ownership and voting interest after the Merger and will exercise less influence over management of the combined organization.
 
 
Wilber’s common shareholders currently have the right to vote in the election of the Board of Directors of Wilber and on other matters affecting Wilber.  Upon the completion of the Merger, each Wilber common shareholder who receives shares of Community Bank System common stock will become a shareholder of Community Bank System with a percentage ownership of the combined organization that is much smaller than the shareholder’s percentage ownership of Wilber.  It is expected that the former common shareholders of Wilber 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. Because of this, Wilber’s common shareholders will have significantly less influence on the management and policies of Community Bank System than they now have on the management and policies of Wilber.

Wilber shareholders who make elections may be unable to sell their shares in the market pending the Merger.

Wilber shareholders may elect to receive cash, stock or mixed consideration in the Merger by completing an election form to be mailed separately to each shareholder.  Elections will require that shareholders making the election turn in their Wilber stock certificates.  This means that during the time between when the election is made and the date the Merger is completed, Wilber shareholders will be unable to sell their Wilber common stock.  If the Merger is unexpectedly delayed, this period could extend for a significant period of time.  Wilber shareholders 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.

 
18

 
 
If the Merger is not consummated by May 31, 2011, either Community Bank System or Wilber may choose not to proceed with the Merger.
 
 
Either Community Bank System or Wilber may terminate the Merger Agreement if the Merger has not been completed by May 31, 2011, unless the failure of the Merger to be completed has resulted from the material failure of the party seeking to terminate the Merger Agreement to perform its obligations.

Two class action lawsuits have been filed against Wilber and the members of the Wilber Board of Directors, as well as Community Bank System, challenging the Merger, and an adverse judgment in such lawsuits may prevent the Merger from becoming effective or from becoming effective within the expected timeframe.

Wilber and the members of the Wilber Board of Directors are named as defendants in two purported class action lawsuits brought by certain Wilber shareholders challenging the Merger, seeking, among other things, to enjoin the defendants from consummating the Merger on the agreed-upon terms.  Community Bank System is also named as a defendant in these lawsuits.  See “Litigation Relating to the Merger” for more information about the class action lawsuits related to the Merger that has been filed.

One of the conditions to the closing of the Merger is that no action has been instituted, pending or threatened in writing, nor any order, decree or injunction issued by a court or agency of competent jurisdiction that enjoins or prohibits the consummation of the Merger shall be in effect.  As such, the fact that lawsuits have been instituted is grounds for either Wilber or Community Bank System to terminate the Merger Agreement and, if the plaintiffs are successful in obtaining an injunction prohibiting the defendants from consummating the Merger on the agreed upon terms, then such injunction may prevent the Merger from becoming effective, or from becoming effective within the expected timeframe, even if Wilber and Community Bank System waive this closing condition.

Termination of the Merger Agreement could negatively impact Wilber.
 
 
If the Merger Agreement is terminated, there may be various consequences.  For example, if the Merger Agreement is terminated and Wilber’s Board of Directors seeks another merger or business combination, Wilber shareholders cannot be certain that Wilber will be able to find a party willing to pay an equivalent or greater price than the price Community Bank System has agreed to pay in the Merger or that such party has the same level of experience in merger and acquisition transactions.  In addition, Wilber’s businesses could be impacted adversely by the failure to timely consummate the Merger, without realizing any of the anticipated benefits of completing the Merger, or the market price of Wilber common stock could decline to the extent that the current market price reflects a market assumption that the Merger will be completed.  In addition, termination of the Merger Agreement would increase the possibility of downgrades by Wilber’s credit rating agencies or adverse regulatory actions which could adversely affect Wilber’s businesses and require Wilber to raise additional capital to comply with the OCC Formal Agreement described on page [  ].  Furthermore, if the Merger Agreement is terminated under certain circumstances, Wilber may be required to pay a termination fee of $4.0 million, plus expenses up to $500,000, to Community Bank System.  See “Termination; Termination Fee” beginning on page [ ].

 
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The Merger Agreement limits Wilber’s ability to pursue alternatives to the Merger.

The Merger Agreement contains “no-shop” provisions that, subject to limited exceptions, limit Wilber’s ability to initiate, solicit, encourage or knowingly facilitate any inquiries or competing third-party proposals, or 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 Wilber.  In addition, Wilber has agreed to pay Community Bank System a termination fee in the amount of $4.0 million, plus expenses up to $500,000, in the event that Community Bank System terminates the Merger Agreement for certain reasons.  These provisions might discourage a potential competing acquiror that might have an interest in acquiring all or a significant part of Wilber 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 might result in a potential competing acquiror proposing to pay a lower per share price to acquire Wilber than it might otherwise have proposed to pay.  Until the Merger Agreement is adopted by Wilber’s shareholders, Wilber can consider and participate in discussions and negotiations with respect to an alternative unsolicited bona fide acquisition proposal (subject to its obligation to pay a termination fee under certain circumstances) so long as the Wilber Board of Directors determines in good faith, after reasonable inquiry and consultation with its financial advisors, that failure to do so would result in a violation of its fiduciary duties to Wilber shareholders under New York law and that such alternative acquisition proposal constitutes a superior proposal or would reasonably be likely to result in a superior proposal.  Wilber has agreed to keep Community Bank System apprised of developments, discussions and negotiations relating to any such acquisition proposal.

Risk Factors Related to Community Bank System

Community Bank System may pursue future acquisitions and investments that could adversely affect our business.

In the future, Community Bank System may continue to make acquisitions of and investments in businesses that could complement or expand our business.  If Community Bank System identifies an acquisition candidate, it may not be able to successfully negotiate or finance the acquisition or integrate the acquired businesses into our existing business.  To complete future acquisitions, Community Bank System may issue equity securities, incur debt, assume contingent liabilities or have amortization expenses and write-downs of acquired assets, which could cause our earnings per share to decline.

Changes in interest rates affect Community Bank System’s profitability and assets.

Changes in prevailing interest rates may hurt Community Bank System’s business.  It derives its income mainly from the difference or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities.  In general, the larger the spread, the more it earns.  When market rates of interest change, the interest it receives on its assets and the interest it pays on its liabilities will fluctuate.  This can cause decreases in Community Bank System’s spread and can affect its income.

Changes in market interest rates could reduce the value of Community Bank System’s financial assets.  Fixed-rate investments, mortgage-backed and related securities and mortgage loans generally decrease in value as interest rates rise.  In addition, interest rates affect how much money Community Bank System can lend.  For example, when interest rates rise, loan originations tend to decrease.

If Community Bank System is unsuccessful in managing the effects of changes in interest rates, its financial condition and results of operations could suffer.

Regional economic factors may have an adverse impact on our business.

Substantially all of Community Bank System’s business before the Merger is with customers in Upstate New York and Northeastern Pennsylvania.  Following the Merger, an increased portion of our business will be with customers in Upstate New York.  Most of our customers are individuals and small and medium-sized businesses which are dependent upon the regional economy.  Adverse changes in economic and business conditions in our markets could adversely affect our borrowers, their ability to repay their loans and to borrow additional funds or buy financial services and products from us, and consequently our financial condition and performance.

 
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Community Bank System faces strong competition from other banks and financial institutions which can hurt its business.

Community Bank System conducts its banking operations in a number of competitive local markets.  In those markets, it competes against commercial banks, savings banks, savings and loans associations, credit unions, mortgage banks, brokerage firms, and other financial institutions.  Many of these entities are larger organizations with significantly greater financial, management and other resources than Community Bank System has, and they offer the same or similar banking or financial services that it offers in its markets.  Moreover, new and existing competitors may expand their business in or into Community Bank System’s markets.  Increased competition in its markets may result in a reduction in loans, deposits and other sources of its revenues.  Ultimately, Community Bank System may not be able to compete successfully against current and future competitors.

Community Bank System depends on dividends from its banking subsidiary for cash revenues, but those dividends are subject to restrictions.

Community Bank System’s ability to satisfy its obligations and pay cash dividends to its shareholders is primarily dependent on the earnings of and dividends from Community Bank, its subsidiary bank.  However, payment of dividends by the bank subsidiary is limited by dividend restrictions and capital requirements imposed by bank regulations.

Community Bank System’s ability to pay dividends is also subject to its continued payment of interest that it owes on certain subordinated junior debentures issued by Community Bank System in connection with trust preferred securities offerings.  Community Bank System has the right to defer payment of interest on the subordinated junior debentures for a period not exceeding 20 quarters.  If Community Bank System defers interest payments on the subordinated junior debentures, it will be prohibited, subject to certain exceptions, from paying cash dividends on its common stock until it pays all deferred interest and resume interest payments on the subordinated junior debentures.  Community Bank has not, and does not presently expect, to defer such interest payments.

Anti-takeover provisions may prevent or discourage takeover attempts in which Community Bank System’s shareholders may receive a premium.

After the Merger, certain Wilber shareholders will become shareholders of Community Bank System.  Community Bank System’s certificate of incorporation and by-laws contain provisions that could make it more difficult for a third party to acquire, or could discourage a third party from attempting to acquire, control of Community Bank System.  These provisions allow Community Bank System’s Board of Directors to issue, without shareholder approval (subject to rules of the New York Stock Exchange, if applicable), preferred stock with rights senior to those of its common stock and impose various procedural and non-procedural requirements that could make it more difficult to effect certain corporate actions.  The certificate of incorporation of Community Bank System also provides for a classified or “staggered” Board of Directors, a supermajority vote requirement for Board and shareholder approval of certain business combination transactions and a prohibition against written consents in lieu of a shareholders’ meeting.

 
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The foregoing provisions are intended to avoid costly takeover battles and lessen Community Bank System’s exposure to coercive takeover attempts at a unfair price, and are designed to maximize shareholder value in connection with unsolicited takeover attempts.  The provisions, however, could reduce the premium that potential acquirors might be willing to pay in an acquisition, which may in turn reduce the market price that investors might be willing to pay in the future for shares of Community Bank System common stock.

Community Bank System operates in a highly regulated environment and may be adversely affected by changes in laws and regulations.

Currently, Community Bank System and its subsidiaries are subject to extensive regulation, supervision, and examination by regulatory authorities.  For example, Community Bank System is regulated by the Federal Reserve Board and Community Bank is regulated by the Federal Deposit Insurance Corporation (the “FDIC”) and the OCC.  Such regulators govern the activities in which Community Bank System and its subsidiaries may engage.  These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the classification of assets by a bank, and the adequacy of a bank’s allowance for credit losses.  Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on Community Bank System and its operations.  Because Community Bank System’s business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change.  There can be no assurance that proposed laws, rules and regulations, or any other law, rule or regulation, will not be adopted in the future, which could make compliance more difficult or expensive or otherwise adversely affect Community Bank System’s business, financial condition or prospects.

Recent legislation regarding the financial services industry may have a significant adverse effect on Community Bank System’s operations.
 
 
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law.  The Dodd-Frank Act implements a variety of far-reaching changes and has been called the most sweeping reform of the financial services industry since the Great Depression.  Many of the provisions of the Dodd-Frank Act will directly affect Community Bank System’s ability to conduct its business, including:

      Imposition of higher prudential standards, including more stringent risk-based capital, leverage, liquidity and risk-management requirements, and numerous other requirements on “systemically significant institutions,” currently defined to include, among other things, all bank holding companies with assets of at least $50 billion (although neither Wilber nor Community Bank System fall within this definition of systemically significant institution, these standards may apply to their business);
 
 
      Mandates requiring the Federal Reserve Board to establish standards for determining whether interchange fees charged by certain financial institutions are reasonable and proportional to the costs incurred by such institution;
 
 
      Repeal of the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts;
 
 
      Increase in the FDIC assessment for depository institutions with assets of $10 billion or more and increases in the minimum reserve ratio for the Deposit Insurance Fund;
 
 
 
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      Establishment of a consumer financial protection bureau with broad authority to implement new consumer protection regulations and, for bank holding companies with $10 billion or more in assets, to examine and enforce compliance with federal consumer laws;
 
 
      Application to bank holding companies above $15 billion in assets of regulatory capital requirements similar to those applied to banks, which requirements exclude, on a phase-out basis, all trust preferred securities and cumulative preferred securities from Tier 1 capital (except for preferred stock issued under the Troubled Asset Relief Program, which will continue to qualify as Tier 1 capital as long as it remains outstanding); and
 
 
      Establishment of new rules and restrictions regarding the origination of mortgages.

Many provisions in the Dodd-Frank Act remain subject to regulatory rule-making and implementation, the effects of which are not yet known, including mandates requiring the Federal Reserve Board to establish compensation guidelines covering regulated financial institutions.  The provisions of the Dodd-Frank Act and any rules adopted to implement those provisions as well as any additional legislative or regulatory changes may impact the profitability of Community Bank System’s business activities, may require that it changes certain of its business practices, may materially affect its business model or affect retention of key personnel, may require us to raise additional regulatory capital and could expose Community Bank System to additional costs (including increased compliance costs).  These and other changes may also require us to invest significant management attention and resources to make any necessary changes and may adversely affect its ability to conduct its business as previously conducted or its results of operations or financial condition.
 
 
Community Bank System may be subject to more stringent capital requirements.
 
 
As discussed above, the Dodd-Frank Act would require the federal banking agencies to establish stricter risk-based capital requirements and leverage limits to apply to banks and bank holding companies. Under the legislation, the federal banking agencies would be required to develop capital requirements that address systemically risky activities.  The capital rules must address, at a minimum, risks arising from significant volumes of activity in derivatives, securitized products, financial guarantees, securities borrowing and lending and repurchase agreements; concentrations in assets for which reported values are based on models; and concentrations in market share for any activity that would substantially disrupt financial markets if the institutions were forced to unexpectedly cease the activity. These requirements, and any other new regulations, could adversely affect Community Bank System’s ability to pay dividends, or could require it to reduce business levels or to raise capital, including in ways that may adversely affect its results of operations or financial condition.

Increases to the allowance for credit losses may cause Community Bank System’s earnings to decrease.

Community Bank System’s customers may not repay their loans according to the original terms, and the collateral securing the payment of those loans may be insufficient to pay any remaining loan balance.  Hence, Community Bank System may experience significant loan losses, which could have a material adverse effect on its operating results.  Community Bank System makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans.  In determining the amount of the allowance for credit losses, Community Bank System relies on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors.  If Community Bank System’s assumptions prove to be incorrect, Community Bank System’s allowance for credit losses may not be sufficient to cover losses inherent in Community Bank System’s loan portfolio, resulting in additions to the allowance.  Material additions to the allowance would materially decrease its net income.

 
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Community Bank System’s emphasis on the origination of commercial loans is one of the more significant factors in evaluating its allowance for credit losses.  As Community Bank System continues to increase the amount of these loans, additional or increased provisions for credit losses may be necessary and as a result would decrease Community Bank System’s earnings.

Bank regulators periodically review Community Bank System’s allowance for credit losses and may require Community Bank System to increase its provision for credit losses or loan charge-offs.  Any increase in Community Bank System’s allowance for credit losses or loan charge-offs as required by these regulatory authorities could have a material adverse effect on its results of operations and/or financial condition.

Concentration of loans in Community Bank System’s primary market area may increase risk.

Community Bank System’s success depends primarily on the general economic conditions in Upstate New York and Northeastern Pennsylvania, as nearly all of Community Bank System’s loans are to customers in these markets. Accordingly, the local economic conditions in Upstate New York and Northeastern Pennsylvania have a significant impact on the ability of borrowers to repay loans.  In addition, the Merger will expand Community Bank System’s market to additional counties in Upstate New York.  As such, a decline in real estate valuations in this market would lower the value of the collateral securing those loans.  A significant weakening in general economic conditions such as inflation, recession, unemployment, or other factors beyond its control could also negatively affect Community Bank System’s financial results.

Community Bank System’s expanding branch network may affect its financial performance.

Community Bank System has expanded its branch network both by acquiring financial institutions and establishing de novo branches.  At September 30, 2010, Community Bank System operated 147 branches across Upstate New York and Northeast Pennsylvania.  Upon completion, the Merger will add 22 branches in seven additional counties to Community Bank System’s branch network.  Community Bank System cannot assure that its ongoing branch expansion strategy will be accretive to earnings, or that it will be accretive to earnings within a reasonable period of time.  Numerous factors contribute to the performance of a new branch, such as a suitable location, qualified personnel, and an effective marketing strategy.  Additionally, it takes time for a new branch to gather sufficient loans and deposits to generate enough income to offset its expenses, some of which, like salaries and occupancy expense, are relatively fixed costs.

Any future FDIC insurance premiums may adversely affect Community Bank System’s earnings.

Community Bank System is generally unable to control the amount of premiums that it is required to pay for FDIC insurance.  If there are additional bank or financial institution failures, Community Bank System may be required to pay even higher FDIC premiums than the recently increased levels.  These announced increases and any future increases or required prepayments of FDIC insurance premiums may adversely impact Community Bank System’s earnings.

 
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Risk Factors Related to Wilber

Commercial real estate and business loans increase the combined entity’s exposure to credit risks.

At September 30, 2010, Wilber’s portfolio of commercial real estate and business loans totaled $293.788 million, or 54.22% of total loans.  These types of loans generally expose the bank to a greater risk of nonpayment and loss than residential real estate loans because repayment of such loans often depends on the successful operations and income stream of the borrowers.  Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans.  Also, many of Wilber’s borrowers have more than one commercial loan outstanding.  Consequently, an adverse development with respect to one loan or one credit relationship can expose Wilber to a significantly greater risk of loss compared to an adverse development with respect to a residential real estate loan.  Wilber targets its business lending and marketing strategy towards small to medium-sized businesses.  These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities.  If general economic conditions negatively impact these businesses, Wilber’s results of operations and financial condition may be adversely affected.

Wilber’s asset quality may deteriorate prior to completion of the Merger.

Wilber’s nonperforming assets were $25.442 million at September 30, 2010 and $12.376 million at June 30, 2010, compared to $14.564 million at December 31, 2009.  Nonperforming assets as a percentage of total assets were 2.80% at September 30, 2010 and 1.32% at June 30, 2010, compared to 1.61% at December 31, 2009 and 1.38% at September 30, 2009.  Net charge-offs for the third quarter of 2010 were $740,000, compared to $246,000 in the same period of 2009.  The allowance for credit losses increased to $10.056 million at September 30, 2010, compared to $8.622 million at December 31, 2009, and $9.162 million at September 30, 2009.  Should these adverse trends continue, they may have an adverse effect on Wilber’s financial and capital positions, and may differ from Community Bank System’s estimates thereof.  The Merger Agreement provides that if delinquent loans (defined as (i) all loans with principal and/or interest that are 30-89 days past due, (ii) all loans with principal and/or interest that are at least 90 days past due and still accruing, (iii) all loans with principal and/or interest that are nonaccruing, (iv) loans which constitute troubled debt restructurings under Generally Accepted Accounting Principles or applicable law, (v) Other Real Estate Owned and (vi) net charge-offs from August 31, 2010 through the effective time of the Merger) exceed $32.160 million then Community Bank System can terminate the Merger Agreement.

Wilber has entered into a Formal Written Agreement with the Office of the Comptroller of the Currency.

Wilber’s primary regulator is the OCC.  On October 13, 2010, Wilber Bank and the OCC entered into a Formal Written Agreement based on the findings of the OCC during their on-site examination of Wilber Bank as of March 22, 2010.  Since the completion of the examination, the Board of Directors of Wilber Bank and its management have aggressively worked to address the findings of the OCC examination, and have already successfully implemented initiatives and strategies to address and resolve a number of the issues noted in the Formal Written Agreement.  Wilber Bank continues to work in cooperation with its regulators to bring its policies and procedures into conformity with directives; however, there is no guarantee that the measures outlined in the Formal Written Agreement will have the intended results.  See “Formal Agreement with Office of the Comptroller of the Currency” on page [  ].


 
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A WARNING ABOUT FORWARD-LOOKING INFORMATION


Wilber and Community Bank System have each made forward-looking statements in this document and in certain documents that are referred to in this document.  These forward-looking statements are subject to risks and uncertainties.  These statements are based on the beliefs and assumptions of each respective company’s management, and on information currently available to that management.  Forward-looking statements include statements preceded by, followed by or that include the words “will,” “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions.

Although Wilber and Community Bank System believe these forward-looking statements are reasonable, you should not place undue reliance on the forward-looking statements, which are based on current expectations.  Actual results may differ materially from those expressed in our forward-looking statements.

Forward-looking statements are not guarantees of performance.  They involve risks, uncertainties and assumptions.  The future results of Community Bank System following completion of the Merger may differ materially from those expressed in these forward-looking statements.  You should note that many factors, some of which are discussed under “Risk Factors”, may affect these results and are beyond our ability to control or predict.  For those statements, Wilber and Community Bank System claim the protection of the safe harbor contained in the Private Securities Litigation Reform Act of 1995.


 
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THE COMPANIES

Community Bank System

Community Bank System is a Delaware corporation registered as a bank holding company under the BHCA.  Community Bank System was incorporated in April 1983.  At September 30, 2010, Community Bank System had on a consolidated basis approximately $5.5 billion in total assets, $4.0 billion in total deposits, $3.0 billion in total loans and shareholders’ equity of $616 million.  Its common stock is publicly traded on the New York Stock Exchange under the symbol “CBU.”  Community Bank System, with its principal executive offices in DeWitt, New York, is the parent company of Community Bank.

Community Bank is a commercial banking franchise with 147 customer facilities and 135 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 deemphasis 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 reflects 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 offer 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.

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 [  ].

The Wilber Corporation

Wilber is a New York corporation that was originally incorporated in 1928.  Wilber held and disposed of various real estate assets until 1974. In 1974, Wilber and its real estate assets were sold to Wilber Bank, a national bank established in 1874.  Wilber’s real estate assets were used to expand the banking house of Wilber Bank.  Wilber was an inactive subsidiary of Wilber Bank until 1982.  In 1983, under a plan of reorganization, Wilber was re-capitalized, acquired 100% of the voting stock of Wilber Bank, and registered as a bank holding company pursuant to the BHCA.
 
 
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        The business of Wilber consists primarily of the ownership, supervision, and control of Wilber Bank.  Wilber Bank is chartered by the OCC, and its deposits are insured up to applicable limits by the FDIC.  Wilber, through Wilber Bank and Wilber Bank’s subsidiaries, offers a full range of commercial and consumer financial products, including business, municipal, and consumer loans, deposits, trust and investment services, and credit-related insurance products.  Wilber Bank serves its customers through 22 full-service branch banking offices and two loan production offices located in eight counties in Central and Upstate New York, as well as an ATM network, and electronic / Internet banking services.

Wilber’s and Wilber Bank’s main office is located at 245 Main Street, Oneonta, New York, 13820.  Wilber Bank employed 261 full-time equivalent employees at December 31, 2010.  On September 30, 2010, the Company had $907 million in assets, $829 million in liabilities and $78 million in shareholders’ equity.  Wilber Bank’s website address, which also serves as Wilber’s website address, is www.wilberbank.com.

Wilber Bank’s principal business is to act as a financial intermediary and lending institution in the Central New York communities it serves by obtaining funds through customer deposits and institutional borrowings, lending the proceeds of those funds to its customers, and investing excess funds in debt securities and short-term liquid investments.  Its investment activities primarily consist of purchases of U.S. Treasury, U.S. Government Agency, and U.S. Government Sponsored Entities obligations, as well as municipal, mortgage-backed, and high quality corporate debt instruments.  Wilber Bank also offers  personal trust, agency, estate administration, and retirement planning services for individuals, as well as custodial and investment management services to institutions.

Wilber Bank’s subsidiaries include Wilber REIT, Inc. and Western Catskill Realty, LLC.  Wilber REIT, Inc. is wholly - owned by the bank and primarily holds mortgage-related assets.  Western Catskill Realty, LLC is a wholly - owned real estate holding company, which primarily holds foreclosed and other real estate.  In 2007, Wilber acquired Provantage Funding Corporation, a New York State licensed mortgage banking company based in Clifton Park, New York (Saratoga County). In  2008, Provantage Funding Corporation was merged into Wilber Bank and now operates as Provantage Home Loans (“Provantage”), a division of Wilber Bank.

For additional information concerning the business of Wilber and its financial condition, results of operations and prospects, you should refer to the documents Wilber has filed with the SEC.  See “Where You Can Find More Information” on page [   ].

 
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SPECIAL MEETING OF WILBER SHAREHOLDERS

General

Wilber will hold a special meeting of its shareholders on [          ], 2011 at [   ].m., Eastern time, at [                                   ].  At the special meeting, Wilber shareholders will vote upon a proposal to approve the Merger Agreement and the proposal to adjourn or postpone the special meeting of shareholders.

Record Date; Voting Power

Holders of record of Wilber common stock at the close of business on [                  ], 2011, may vote at the special meeting.  This date is called a “record date.” As of the record date, there were [    ] issued and outstanding shares of Wilber common stock held by approximately [          ] holders of record.  Wilber shareholders have one vote per share on any matter that may properly come before the special meeting.  Brokers who hold shares of Wilber common stock as nominees will not have discretionary authority to vote these shares without instructions from the beneficial owners.  Any shares of Wilber 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.”  These broker non-votes will have the same effect as a vote against the Merger Agreement.

Vote Required

The presence in person or by proxy of the holders of a majority of the shares of Wilber common stock outstanding on the record date will constitute a quorum for the transaction of business at the special meeting.  Wilber will count abstentions and broker non-votes for purposes of establishing the presence of a quorum at the special meeting.  The approval of the proposal to approve the Merger Agreement requires the affirmative vote of the holders of two-thirds (2/3) of the outstanding shares of Wilber common stock at the special meeting.  Broker non-votes and abstentions will have the effect of a vote against the proposal to approve the Merger Agreement.

On the record date, the executive officers and Directors of Wilber, including certain of their related parties, had voting power with respect to an aggregate of [        ] shares of Wilber common stock, or approximately [   ]% of the shares of Wilber common stock then outstanding.  All of the Directors and executive officers of Wilber have agreed in writing to vote in favor of the approval of the Merger Agreement all of the shares of Wilber common stock that they are entitled to vote.

On the record date, to the knowledge of Community Bank System, its Directors and executive officers did not beneficially own any shares of Wilber common stock.

Recommendation of the Wilber Board

The Board of Directors of Wilber has unanimously adopted and approved the Merger Agreement and the transactions contemplated by it.  The Board believes that the Merger is fair to and in the best interests of the Wilber shareholders.  It unanimously recommends that Wilber shareholders vote FOR approval of the Merger Agreement.  You are also asked to vote FOR the proposal to adjourn or postpone the special meeting of shareholders.  Wilber could use any adjournment or postponement for the purpose of allowing additional time to solicit proxies.  See “Wilber’s Reasons for the Merger; Recommendation of Wilber’s Board of Directors” starting on page [  ].
 
 
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Solicitation and Revocation of Proxies

Wilber has enclosed a form of proxy with this document.  Shares represented by a proxy will be voted at the special meeting as specified in the proxy.  Proxies that are properly signed and dated but which do not have voting instructions will be voted by the proxy holders FOR the approval of the Merger Agreement, 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.

Wilber and Community Bank System are asking you to vote by Internet, by telephone or by completing, dating and signing the accompanying proxy card and returning it promptly in the enclosed postage-paid envelope, whether or not you intend to attend the special meeting in person.

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

 
filing with Secretary of Wilber prior to the special meeting, at Wilber’s principal executive offices, either a written revocation of the proxy or a duly executed proxy containing a later date;
 
submitting a new vote by telephone or on the Internet before the special meeting; or
 
attending the special meeting and voting in person.  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.

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

Wilber will bear the cost of solicitation of proxies.  Wilber and Community Bank System will share equally the cost of printing and mailing this document.  In addition to solicitation by mail, Directors, officers and employees of Wilber may solicit proxies from shareholders 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.  Although it has not determined to do so as of the date of this document, Wilber may also engage a proxy solicitation firm to aid in the solicitation of proxies.  Wilber expects to pay customary fees and reimburse certain out-of-pocket expenses of any proxy solicitation firm engaged by it.  Wilber also expects to make arrangements with brokerage firms, fiduciaries and other custodians who hold shares of record as nominees to forward this document and other solicitation materials to the beneficial owner of these shares.  Wilber will reimburse these brokerage firms, fiduciaries and other custodians for their reasonable out-of-pocket expenses in connection with this solicitation.  Under certain circumstances, Wilber must reimburse Community Bank System’s expenses incurred in connection with the Merger.  Please see “Termination Fee and Expenses” on page [  ].

Other Matters

Wilber is unaware of any matter to be presented at the special meeting other than the proposal to approve the Merger Agreement.  If other matters are properly presented at the special meeting, the persons named in the proxy will have authority to vote all properly executed proxies in accordance with their judgment on any such matter.  Proxies that have been designated to vote against approval of the Merger Agreement will not be voted in favor of any proposal to adjourn or postpone the special meeting for the purpose of soliciting additional proxies to approve the Merger Agreement.
 
 

 
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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 thus must be qualified 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

Effect of the Merger; Management.  The Merger Agreement provides that, after approval by the  shareholders of Wilber and the satisfaction or waiver of the other conditions to the Merger, Wilber will merge with and into Community Bank System, which will continue as the surviving corporation.  The certificate of incorporation and bylaws of Community Bank System will be the certificate of incorporation and bylaws of Community Bank System after the Merger.  The Directors and officers of Community Bank System immediately prior to the Merger will be the Directors and officers of Community Bank System after the Merger until they resign or until their successors are duly elected and qualified.  In addition, Brian R. Wright and Alfred S. Whittet, each currently a director of Wilber, will be elected to the Board of Directors of Community Bank System following the Merger.

Bank Merger.  Immediately following the Merger of Community Bank System and Wilber, the parties expect to merge Wilber Bank with and into Community Bank, with Community Bank being the continuing bank.  After the bank merger, Community Bank System intends to operate the existing business of Wilber Bank as additional branches of Community Bank using the name Community Bank.

Closing; Effectiveness of the Merger.  Wilber and Community Bank System will close the Merger on the first business day, or any other day they mutually agree to, after the satisfaction or waiver of all conditions to the Merger Agreement and after they obtain all necessary regulatory approvals.  The Merger will become effective on the date and at the time that Community Bank System and Wilber file a certificate or articles of merger with each of the Delaware Secretary of State and the New York Secretary of State.

The parties are working to complete the Merger in the second quarter of calendar year 2011, but they must first obtain the necessary regulatory approvals and the approval of Wilber shareholders at the special meeting, and satisfy other conditions.  They 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

Community Bank System has historically sought both organic growth and expansion through strategic acquisitions.  The company has acquired and successfully integrated eight whole bank acquisitions and three different branch acquisitions in the last 10 years, and in so doing, significantly expanded its upstate New York and northeastern Pennsylvania banking franchise.  Consistent with this strategy, in 2010, Community Bank System’s Board of Directors continued to discuss and analyze market conditions, the mergers and acquisitions landscape and potential opportunities for growth with its senior management and Janney Montgomery Scott LLC (“Janney”), which has served as a financial advisor and investment banking firm to Community Bank System since 2000.  These discussions included a review of the operating results and financial characteristics of a number of community banks, including Wilber Bank.  Among other attractive features, Wilber Bank operates an established branch network in the Central New York market and, like Community Bank, is regulated by the OCC.  On July 7, 2010, Community Bank System’s President and Chief Executive Officer, Mark E. Tryniski, sent an introductory email to Brian Wright, the Chairman of Wilber’s Board of Directors, and proposed a meeting.  Mr. Wright responded that he would like to meet but could not do so until September.

 
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Wilber’s Board of Directors also regularly reviews its operating environment and opportunities to build value for its shareholders.  Beginning in 2007, the Board began to examine whether it could continue to generate sufficient earnings to support its historical dividend payments, while still contributing enough retained earnings to capital to support growth.  Among other factors, the Board considered that its traditional Central New York markets are growing slowly or declining, both economically and demographically, and that increases in its compliance and general administrative expenses were outpacing its ability to increase revenue and, consequently, earnings per share.

In 2008 , Wilber’s Board of Directors adopted a strategic plan which continued the expansion of its geographic markets within Central New York State.  The plan called for growth in earning assets, primarily real estate and non-real estate secured commercial loans, in new, more densely populated markets, including the greater Capital District region and the greater Syracuse, New York markets.  As envisioned in the plan, the company expanded its operations into the Capital District and around Syracuse and began to originate an increased volume of residential and commercial real estate loans.  As a result of the execution of the plan, Wilber’s total loans increased from $406.9 million at December 31, 2006 to $583.9 million at December 31, 2008, a $177 million or 43.5% increase over a two-year period.

During 2008, downward economic trends nationally and in the mid-Atlantic region began to have a negative effect on Wilber, as interest rates fell to historic lows, financial markets experienced extreme volatility, capital markets froze, and consumer confidence stalled.  These negative trends resulted in loan repayment problems, increased loan loss provisions and a significant increase in delinquent and non-performing loans.  Many of Wilber’s commercial real estate borrowers, in particular, were adversely affected by decreased tenant occupancy rates, and were unable to make their contractual loan payments and/or pay the associated real estate taxes on the properties financed by Wilber.  This increased the level of troubled loans and charge offs, requiring  increases in Wilber’s provision for loan losses, which produced weaker earnings for the company.

Even as these pressures mounted, Wilber Bank remained well capitalized under OCC standards. Nonetheless, as the weakness in general economic conditions persisted and the level of nonperforming assets increased, Wilber’s Board of Directors took steps to strengthen the company’s capital.  In May 2009, the Board of Directors cut the company’s quarterly dividend from its long-established historical amount of $.095 per share to $.06 per share, where it remained until being suspended in the fourth quarter of 2010.  Wilber Bank also severely curtailed its lending and devoted more resources to loan administration and loan workouts.

In September 2009, as a result of a growing number of criticized loans and weaknesses in credit administration, Wilber Bank became subject to more stringent regulatory oversight by the OCC.  Among other remedial actions, Wilber Bank was required to: (i) improve its loan portfolio management; (ii) reduce its credit risk; (iii) improve collateral documentation; (iv) revise its written loan policy; (v) conform its charge-off practices to regulatory call report requirements; (vi) implement a policy to ensure proper management of other real estate owned; (vii) maintain a program to ensure an adequate loan loss allowance; (viii) develop a three year capital program to enable the bank to remain “well capitalized” under regulatory guidelines, and adopt a conforming dividend policy; and (ix) adopt a strategic plan addressing the bank’s risk profile, earnings performance and growth.  These requirements were formalized in an agreement between Wilber Bank and the OCC entered into on October 13, 2010. See “Formal Agreement with the Office of the Comptroller of the Currency” on page [  ].  In August 2010, Douglas C. Gulotty, the bank’s former President and Chief Executive Officer, departed and was replaced on an interim basis by Alfred S. Whittet, a director of the bank and the company and the immediate past President and Chief Executive Officer of both Wilber Bank and Wilber.  Mr. Whittet was appointed to these positions on a permanent basis in October 2010.  On November 22, 2010, Mr. Whittet resigned his positions with Wilber Bank and James M. Mack was appointed as its interim President and Chief Executive Officer.  Mr. Whittet’s resignation was unrelated to regulatory oversight, and he continues to serve as President and Chief Executive Officer of Wilber.

 
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The combination of Wilber’s asset quality problems and regulatory limitations on its business led its Board of Directors to evaluate  the company’s prospects as an independent community bank and to explore alternative choices for its future.  Beginning in July, 2010, the Board of Directors held a series of meetings with its financial advisor, Sandler O’Neil & Partners, LLP (“Sandler”), during which it considered alternative strategies for dealing with these challenges.  Wilber’s Board examined two different possible paths: raising additional capital and resuming the strategic plan or entering into a business combination with another financial institution.  The Board of Directors reviewed many factors, including, but not limited to, its current and pending regulatory status, anticipated increasing regulatory compliance costs and related burdens, current and future anticipated FDIC insurance premiums, as well as the anticipated dilutive impact of raising new capital and the cumulative impact of these factors on future earnings and shareholder dividends.  The Board of Directors agreed that raising capital given all relevant conditions would be difficult and would likely require significant participation from existing shareholders and negatively affect the price of the common stock.  The Board of Directors believed Wilber’s core franchise value would command a premium to the then current stock price and decided to explore merger opportunities.  A strategic planning meeting was held on July 28, 2010, which was attended by William Hickey, Sandler’s co-head of investment banking, at which Wilber’s Board of Directors decided to further consider its strategic options at its regularly scheduled monthly Board meeting to be held on July 30, 2010.  At the July 30th meeting, the Board decided to engage Sandler to solicit expressions of interest in a business combination from other financial institutions.

In August 2010, Wilber’s senior management worked with Sandler to develop a Confidential Information Memorandum containing financial, operational and other confidential information about the company for distribution to potential merger partners.  During the same period, Sandler identified and contacted a number of banking organizations to determine their level of interest in a merger with Wilber.  As part of that process, Sandler contacted Mark Tryniski, Community Bank System’s President and Chief Executive Officer on August 4, 2010.  Mr. Tryniski indicated an interest in Wilber and made arrangements for Community Bank System to sign a confidentiality agreement which would allow Community Bank System to receive the Confidential Information Memorandum when it was available for distribution to interested parties.  Mr. Tryniski then contacted the Chairman of Community Bank System’s Board of Directors, David C. Patterson, and the Chair of the Board’s Strategic Planning and Executive Committee, Nicholas DiCerbo, to inform them about the discussions.  On August 5, 2010, Mr. Tryniski contacted Edward Losty, a Managing Director at Janney who specializes financial institutions, and informed him about the discussions and on that date, Sandler and Community Bank System entered into a confidentiality agreement.

At Wilber’s August 27, 2010 Board of Directors meeting, Mr. Hickey of Sandler advised the Directors that nine companies, including Community Bank System, had been contacted and expressed interest in receiving the Confidential Information Memorandum.  He also informed the Board that Bidder A, a banking company based in another state, had verbally expressed an interest in paying $8.00 per share to Wilber’s shareholders with the consideration being 100% in the form of Bidder A common stock.  Clifford Weber, a partner in Hinman, Howard & Kattell, LLP, counsel to Wilber and Wilber Bank, explained in detail the Directors’ fiduciary duties when considering merger proposals.  At the direction of the Board of Directors, on August 30, 2010, Sandler sent a Confidential Information Memorandum to Community Bank System and the five other companies that had signed confidentiality agreements.

 
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Working with Janney, Community Bank System reviewed the information about Wilber in the Confidential Information Memorandum, developed an analysis of a possible transaction and considered the terms for a preliminary indication of interest.  During this period, representatives from Janney and Sandler discussed the bidding process and a possible transaction.

By letter dated August 31, 2010, Bidder A offered to acquire all of Wilber’s common stock in an all stock exchange transaction in which Wilber’s shareholders would receive from .3947 to .4474 shares of Bidder A stock for each of their shares of Wilber stock.  Based upon the average closing price of Bidder A’s stock for the two month period between June 27, 2010 and August 27, 2010, this exchange ratio represented value of between $7.50 and $8.50 per share of Wilber stock.  On September 3, 2010, Sandler informed Wilber’s management team that Community Bank System was interested in pursuing a deal.  On September 7, 2010, Mr. Tryniski and Brian Wright, the Chairman of Wilber and Wilber Bank, met in DeWitt, New York and had general discussions regarding their respective organizations.

On September 8, 2010, Mr. Tryniski discussed the Confidential Information Memorandum and a transaction analysis prepared by Janney and senior management with the Strategic Planning and Executive Committee of Community Bank System’s Board of Directors, together with other Directors present.  The transaction analysis included information on Wilber Bank’s branch network and Wilber’s senior management, financial position and operating results, as well as pro forma financial information and an overview of comparable deal terms and consideration.  Following the presentation, the committee authorized management to continue discussions regarding a potential transaction with Wilber and to submit a preliminary non-binding indication of interest consistent with the presentation at the meeting.

Community Bank System submitted a written preliminary non-binding indication of interest to Sandler on September 9, 2010, outlining the key terms of a proposed merger transaction, subject to, among other matters, completion of satisfactory due diligence, regulatory and board approvals, and the negotiation and execution of a definitive agreement.  The preliminary indication of interest proposed a total merger consideration of $107.15 million or $10.00 per share in a combination of 20% cash and 80% stock.  Bidder B, a New York based bank holding company, also delivered a written non-binding expression of interest by letter dated September 9, 2010.  In the letter, Bidder B offered a per share price of $8.75 per share.

Wilber’s Board of Directors met on September 10, 2010 to consider the proposals of Community Bank System, Bidder A and Bidder B.  Mr. Hickey reviewed the three bids in detail and explained pricing methodologies, forms of merger consideration and transactions based on fixed exchange ratios and fixed prices, as well as possible reasons for pricing adjustments, such as movements in the acquiror’s stock price and deterioration in the asset quality of the selling institution.  The Board of Directors participated in an extensive discussion with Mr. Hickey about the three bids, including, but not limited to, the forms of consideration, pro forma ownership by Wilber shareholders, dividend accretion, the regulatory environment, earnings potential, perceived franchise value and management capabilities.  Following this discussion, the Board of Directors resolved to invite Community Bank System and Bidder A to conduct due diligence at Wilber’s offices in Oneonta.  Bidder A and Community Bank System conducted on site due diligence at Wilber’s Oneonta, New York offices during the weekends of September 11-12 and September 18-19, respectively.

On September 22, 2010, Community Bank System submitted a revised indication of interest together with a proposed form of merger agreement.  The revised indication of interest provided for a total merger consideration of $101.8 million, or $9.50 per share, in a combination of 20% cash and 80% stock.  The revised indication of interest also included the appointment of two Directors chosen by Wilber to the Boards of the resulting bank and the bank holding company and proposed that the Merger Agreement contain a definition of material adverse effect related to deterioration in Wilber Bank’s loan portfolio as to be mutually agreed upon by the parties.  Bidder A also submitted a revised indication of interest on September 22, 2010.  In that proposal, Bidder A offered an all stock transaction at a fixed exchange ratio of .549, which equated to $10.00 per share of Wilber’s common stock, for an aggregate transaction value of $107.2 million.
 
 
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At a September 24, 2010 meeting, Wilber’s Board of Directors considered the Bidder A and the Community Bank System proposals, both of which exceeded the Board of Directors’ expectations about the value of Wilber.  Mr. Hickey was present at the meeting and made an extensive oral presentation, discussing among other things:

 
that both offers included two seats on the Board of Directors of the surviving company and the creation of an advisory board for two years;
 
that Wilber Bank’s non-performing or underperforming loans were likely to increase prior to year’s end;
 
that both offers were close to the median when compared to recent sales of banks nationally and in the Mid-Atlantic region;
 
that Community Bank System had: high stock valuation, strong asset quality, a stable stock price, superior and consistent liquidity in its stock as compared to Bidder A’s stock, capital ratios, while considered to be well capitalized for regulatory purposes, were somewhat below that of other peer group institutions, a dividend payout ratio of approximately 50%, no publicly disclosed regulatory issues, experience in and growth through acquisitions, 150 locations in New York State and northern Pennsylvania, concentration in rural areas which could limit further marketability of the combined entities, majority ownership by institutional investors, strong management, and status as an established, conservative, OCC-regulated community bank; and
 
that Bidder A had: no publicly disclosed regulatory issues, experience in growth through acquisition, status as a thrift institution with a commercial banking platform, an aggressive loan growth strategy, 10 locations in New York, a volatile stock price, underperformance vis-à-vis its peer group, asset quality issues, majority ownership by institutional investors, a possibly higher upside potential for increased stock price in the long run, and strong management.

The Board then discussed extensively the relative merits of each offer.  Mr. Hickey assisted the Board’s deliberations by participating in the general discussion and answering Directors’ questions about the balance sheets, results of operations and other financial and operating characteristics of the two institutions.  The material factors the Board of Directors considered included:

 
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that the price and dividend payouts were comparable;
 
that the Community Bank System offer included a fixed price within upper and lower limits, while the Bidder A offer included a fixed exchange ratio fluctuating with the relative market prices, thus making the Community Bank System offer more advantageous if its stock prices were to fall and the Bidder A offer more advantageous if its stock prices were to rise;
 
the likelihood of stock price fluctuation;
 
Community Bank System’s steady earnings history;
 
Bidder A’s uneven earnings history;
 
Community Bank System’s superior market liquidity;
 
the business strategies of each company;
 
the market faced by community banks;
 
likely shareholder expectations and preferences;
 
the similarity of Bidder A’s business plan to Wilber’s 2007-2008 strategic plan;
 
that the OCC might favor the Community Bank System offer;
 
that both offers would provide a significant premium over Wilber’s market price;
 
the likely “social impact” of each deal;
 
that Community Bank System’s stock would likely provide stable dividend income but possibly less growth opportunity;
 
that, unlike Bidder A, Community Bank System was regulated by, and had experience dealing with, the OCC;
 
that Community Bank System would not have to obtain its shareholders’ approval, while Bidder A would be required to obtain such approval;
 
that Bidder A’s stock possibly had more price appreciation potential;
 
that Community Bank System’s offer consisted of 80% stock and 20% cash, as opposed to Bidder A’s all stock offer;
 
that Bidder A’s loan portfolio might have more credit risk; and
 
that Bidder A, as a thrift institution, might have more difficulty integrating a commercial bank into its operations.

After weighing the merits of the two proposals, the Board of Directors instructed management to proceed with the negotiation of a definitive Merger Agreement with Community Bank System and to engage Austin Associates as an independent advisor to assess the fairness of the Community Bank System proposal to Wilber’s shareholders from a financial perspective.

On October 4, 2010, a team of Wilber officers and employees performed a due diligence review of Community Bank System records on site at its offices in DeWitt, New York.  The review did not disclose any facts or circumstances that, in the judgment of the reviewers, could materially adversely effect the financial condition or results of operations of the combined organization.

Counsel for Wilber and Community Bank System negotiated most of the material terms of the Merger Agreement during the first two weeks of October, 2010.  At a meeting of Wilber’s Board of Directors held on October 13, 2010, Mr. Weber briefed the Directors on the negotiations with Community Bank System.  He reported that several issues remained to be resolved including, but not limited to, the indemnification period for director liability, the procedure for appointing two of Wilber’s Directors to the Community Bank System Board of Directors, termination fees and expenses, the treatment of severed employees not covered by employment agreements, limits on expenditures pending the closing of the transaction, and disclosure of the formal agreement with the OCC.  Mr. Weber outlined the next steps in the business combination process and advised the Directors to carefully consider Wilber’s representations and warranties in the definitive agreement.

On October 19, 2010, Wilber filed a Form 8-K with the SEC announcing that it had entered into a formal agreement with the OCC.

On October 20, 2010, at its regular Board meeting, Community Bank System’s management reviewed with the Board the proposed terms of the definitive Merger Agreement and other ancillary agreements as negotiated to that point, and reviewed open items being discussed with Wilber and its counsel.  George J. Getman, Community Bank System’s Executive Vice President and General Counsel, reviewed the terms of the proposed Merger Agreement in detail with the Board and discussion ensued on the terms and conditions of the proposed agreements.  Community Bank System’s management and representatives from Janney also presented an update of its analysis as previously presented to the Board, which the Board discussed at length, after which the Board authorized management to continue to negotiate the definitive Merger Agreement with changes acceptable to Mr. Tryniski within the parameters presented to the Board. The parties, through their legal counsel, continued to negotiate the final details of the Merger Agreement and ancillary agreements over the next two days.

 
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At Wilber’s Board of Directors meeting on October 21, 2010, a representative of Austin Associates presented its analysis of the proposed transaction and described its conclusion (and the reasons therefore) that the transaction was fair to the company’s shareholders from a financial point of view. See “Opinion of Austin Associates” beginning on page [___].

On October 22, 2010, the Board of Directors of Wilber and the Board of Directors of Community Bank System each met to review and approve the final Merger Agreement and ancillary agreements.  Each Board unanimously approved the Merger Agreement and ancillary agreements and authorized management to execute the Merger Agreement and other related transaction documents.  Later that day, Mr. Tryniski and Mr. Whittet executed and delivered the Merger Agreement on behalf of their respective companies.  Prior to the opening of the markets on the next business day, October 25, 2010, the parties issued a joint press release to announce the execution of the Merger Agreement and each filed a Form 8-K with a copy of the executed Merger Agreement and the press release.

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:

 
the complementary geographical locations of Wilber’s branch network, which will augment Community Bank System’s operations in the market areas in Upstate New York where Community Bank System already has a significant presence;
 
the opportunity to further diversify Community Bank System’s geographical markets and customer base as a whole, by increasing the size of its New York operations through the Merger, and to do so in smaller markets similar to those in which it currently operates;
 
Community Bank System’s past experience and success in the acquisition and integration of a bank holding company with operations in Upstate New York;
 
the fact that the Merger is expected to be accretive to operating earnings per share of Community Bank System in 2011, exclusive of one-time acquisition related charges;
 
the potential for the combined company to enhance non-interest income growth by providing enhanced and additional financial products and services to the customers of Wilber in the areas of benefit plan administration, investment management, comprehensive cash management, brokerage services and insurance;
 
the business, operations, technology, asset quality, competitive position, stock price performance, financial condition and results of operations of Wilber on an historical and a prospective basis;
 
the anticipated operating efficiencies, cost savings and opportunities for revenue enhancements of the combined company following the completion of the Merger, and the likelihood that they would be achieved after the Merger;
 
the possible range of the exchange ratios for the Merger and the resulting relative interests of Community Bank System shareholders in the common stock of the combined company, and the amount of total cash consideration to be paid in the Merger;
 
the fact that the mixture of merger consideration includes a combination of cash and stock in which shareholders would have an election right, but no more than 20% of Wilber common stock would be exchanged for cash;
 
the collar range on the exchange ratio in the Merger Agreement, which would limit the possible dilution experienced by Community Bank System shareholders as a result of fluctuations in the market price of Community Bank System while the Merger is pending;
 
the deal protection provided by the termination fee of $4,000,000, plus the reimbursement of out-of-pocket transaction expenses of up to $500,000, payable under certain circumstances in the event of the termination of the Merger Agreement due to a competing offer or certain other reasons;
 
the intended tax treatment of the Merger as a tax-free reorganization; and
●             the likelihood of receiving all of the regulatory approvals required for the Merger.

 
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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 “Forward-Looking Statements” beginning on page [     ].

Wilber’s Reasons for the Merger; Recommendation of Wilber’s Board of Directors

Wilber’s Board of Directors reviewed and discussed the Merger with the company’s management and its financial and legal advisors in unanimously determining that the Merger was advisable and is fair to, and in the best interests of, Wilber and its shareholders.  In reaching its determination, Wilber’s Board of Directors considered a number of factors, including, among others, the following:

 
the Board’s understanding of the presentations of Wilber’s management and financial advisor regarding Community Bank System’s business, operations, management, financial condition, asset quality, earnings and growth prospects;
 
the results of management’s due diligence investigation of Community Bank System and the reputation, business practices and experience of Community Bank System and its management, including their belief that Community Bank System is a financially healthy, well run bank holding company that is deeply committed to its customers, employees, and the communities that it serves;
 
the Board’s view that the size of the institution and related economies of scale, as well as diversification of product offerings, beyond the level it believed to be reasonably achievable on an independent basis, was becoming increasingly important to continued success in the current financial services environment;
 
the Board’s view of potential synergies resulting from a combination of Wilber and Community Bank System;
 
the liquidity of Community Bank System’s common stock;
 
Community Bank System’s steady dividend payment history;
 
the fact that Community Bank System did not need to obtain approval from its shareholders, unlike Bidder A which did need to obtain shareholder approval, thereby eliminating a potential requirement which could contribute to uncertainty about the transaction;
 
the fact that Wilber shareholders will receive predominantly shares of Community Bank System common stock in the Merger, which would allow Wilber shareholders to participate in a significant portion of the future performance of the combined Wilber and Community Bank System businesses, and the value to Wilber shareholders represented by that consideration;
 
Community Bank System’s agreement to appoint two Wilber Directors to the Boards of Directors of Community Bank System and Community Bank and to establish an advisory board comprised of the remaining Wilber and Wilber Bank Directors in order to provide continuity and leadership growth, development, productivity, profitability and strategic options;
 
the Board’s preference for a transaction with a fixed price, subject to adjustment, as opposed to a fixed exchange ratio;
 
that Community Bank System’s offer represented a 55.48% premium over the market price of the Wilber’s common stock on October 21, 2010, the last day prior to the announcement of the Merger on which the Wilber stock was traded;
 
Community Bank System’s commitment to continue a significant presence in Wilber’s Central New York markets and the growth potential of the combined institution including the potential opportunities relating to the Marcellus Shale gas deposits;
 
the Board’s judgment that both institutions’ regulation and supervision by the OCC  would facilitate the Merger;
 
Wilber’s right to terminate the Merger Agreement if its Board of Directors, in the exercise of its fiduciary duty, determined that the company should enter into a competing acquisition proposal;
 
the review by Wilber’s Board of Directors with its legal and financial advisors of the structure of the Merger and the financial and other terms of the Merger Agreement, including the adequacy of the merger consideration, not only in relation to the current market price of Wilber common stock, but also in relation to the historical, present and anticipated future operating results and financial position of Wilber; and
 
the financial information and analyses presented by Austin Associates in its opinion that was delivered to the Wilber Board, which is included as Appendix B to this proxy statement/prospectus and described under “Opinion of Austin Associates” beginning on page [    ].  SHAREHOLDERS ARE URGED TO READ THE OPINION IN ITS ENTIRETY.
 
 
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Wilber’s Board of Directors also considered potential risks relating to the Merger, including the following:

 
the risks described in the section entitled “Risk Factors” beginning on page [        ];
 
the challenges associated with seeking the regulatory approvals required to complete the Merger in a timely manner;
 
the potential for diversion of management and employee attention, and for employee attrition, during the period prior to the completion of the Merger and the potential effect on Wilber’s business and relations with customers, service providers and other stakeholders, whether or not the Merger is completed;
 
the requirement that Wilber conduct its business in the ordinary course and the other restrictions on the conduct of Wilber’s business prior to completion of the Merger, which may delay or prevent Wilber from undertaking business opportunities that may arise pending completion of the Merger;
 
the risk that potential benefits and synergies sought in the Merger may not be realized or may not be realized within the expected time period, and the risks associated with the integration of Wilber and Community Bank System;
 
the fact that the merger consideration could be reduced if the asset quality of Wilber’s loans deteriorates prior to the closing of the Merger;
 
the fact that certain provisions of the Merger Agreement prohibit Wilber from soliciting, and limit its ability to respond to, proposals for alternative transactions;
 
the requirement that Wilber submit the Merger Agreement to its shareholders even if its Board of Directors withdraws its recommendation; and
 
the fact that if Wilber or Community Bank System terminates the Merger Agreement because Wilber accepts an alternative acquisition proposal, Wilber is obligated to pay to Community Bank System a termination fee in the amount of $4,000,000, which may deter others from proposing an alternative transaction that may be more advantageous to Wilber shareholders.
 
 
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The Wilber Board of Directors evaluated the factors described above, and this evaluation included asking questions of Wilber’s management and its legal and financial advisors.  The foregoing discussion of the information and factors considered by the Wilber Board of Directors is not exhaustive, but includes all material factors considered by the Wilber Board.  In view of the wide variety of factors considered by the Wilber Board of Directors in connection with its evaluation of the Merger and the complexity of these matters, the Wilber Board of Directors did not consider it practical to, nor did it attempt to, quantify, rank or otherwise assign relative weights to the specific factors that it considered in reaching its decision.  In considering the factors described above, individual members of the Wilber Board of Directors may have given different weights to different factors.  Wilber’s Board of Directors realized there can be no assurance about future results, including results expected or considered in the factors listed above.  However, the Board of Directors concluded the potential positive factors outweighed the potential risks of completing the Merger.  The Wilber Board believes that the Merger is fair to, and in the best interests of, Wilber and Wilber shareholders.  Accordingly, the Wilber Board has unanimously approved the Merger Agreement and unanimously recommends that Wilber shareholders vote “FOR” approval of the Merger Agreement and the proposal to adjourn or postpone the special meeting.

Please note that this explanation of the Wilber 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 “Forward-Looking Statements” beginning on page [     ].

Opinion of Austin Associates

Wilber retained Austin Associates on October 1, 2010 to issue a fairness opinion in connection with the terms of the Merger Agreement.  Wilber retained a primary financial advisor, legal counsel and a tax expert with respect to the Merger and has separately requested Austin Associates to evaluate the overall fairness of the terms of the transaction from a financial point of view.  Wilber selected Austin Associates to issue the fairness opinion on the basis of Austin Associates’ knowledge of Wilber and Austin Associates’ experience and expertise in representing community banks in similar transactions.  In the ordinary course of its investment banking business, Austin Associates is regularly engaged in the valuation of financial institutions and their securities in connection with mergers and acquisitions and other corporate transactions.

Austin Associates did not participate in the negotiation of the Merger Agreement.  At the October 22, 2010 meeting at which the Wilber Board considered and approved the Merger Agreement, Austin Associates delivered to the Board its opinion that, as of such date, the terms of the Merger Agreement were fair, from a financial point of view, to Wilber and its shareholders.  The full text of Austin Associates’ opinion is attached as Annex B to this proxy statement/prospectus.  The description of the opinion set forth below is qualified in its entirety by reference to the opinion.

 
40

 
 
You should consider the following when reading the discussion of Austin Associates’ opinion in this document:

 
You should read the opinion in its entirety for a full discussion of the procedures followed, assumptions made, matters considered, and qualifications and limitations of the review undertaken by Austin Associates in connection with its opinion.
 
Austin Associates expressed no opinion as to the price at which Community Bank System’s or Wilber’s common stock would actually be trading at any time.
 
Austin Associates’ opinion does not address the relative merits of the Merger and the other business strategies considered by Wilber’s Board, nor does it address the Wilber Board’s decision to proceed with the Merger.
 
Austin Associates’ opinion to Wilber’s Board rendered in connection with the Merger does not constitute a recommendation to any Wilber shareholder as to how he or she should vote at the special meeting.

The preparation of a financial fairness opinion involves various determinations as to the most appropriate methods of financial analysis and the application of those methods to the particular circumstances.  It is, therefore, not readily susceptible to partial analysis or summary description.  In connection with rendering its opinion, Austin Associates performed a variety of financial analyses.  Austin Associates believes that its analyses and the factors considered in its analyses, without considering all other factors and analyses could create an incomplete or inaccurate view of the analyses and the process underlying the rendering of Austin Associates’ opinion.  No limitations were imposed by Wilber’s Board or its management upon Austin Associates with respect to the investigations made or the procedures followed by Austin Associates in rendering its opinion.

In performing its analyses, Austin Associates made numerous assumptions with respect to industry performance, business and economic conditions, and other matters, many of which are beyond the control of Community Bank System and Wilber and may not be realized.  Any estimates contained in Austin Associates’ analyses are not necessarily predictive of future results or values, and may be significantly more or less favorable than the estimates.  Estimates of values of companies do not purport to be appraisals or necessarily reflect the prices at which the companies or their securities may actually be sold.  Unless specifically noted, none of the analyses performed by Austin Associates was assigned a greater significance by Austin Associates than any other.  The relative importance or weight given to these analyses is not affected by the order of the analyses or the corresponding results.  The summaries of financial analyses include information presented in tabular format.  The tables should be read together with the text of those summaries.

With respect to the internal projections and estimates for Wilber, the publicly available earnings estimates used for Community Bank System, and the projections of transaction costs, purchase accounting adjustments and expected cost savings prepared by and/or reviewed with the managements of Community Bank System and Wilber, Community Bank System’s and Wilber’s management confirmed that they reflected the best currently available estimates and judgments of management of the future financial performance of Wilber and Community Bank System, respectively, and Austin Associates assumed that such performance would be achieved.  Austin Associates expressed no opinion as to such financial projections and estimates or the assumptions on which they are based.  Austin Associates also assumed that there has been no material change in Wilber or Community Bank System assets, financial condition, results of operations, business or prospects since the date of the most recent financial statements made available to it.  Austin Associates assumed in all respects material to its analysis that Wilber and Community Bank System will remain as going concerns for all periods relevant to its analyses, that all of the representations and warranties contained in the Agreement are true and correct, that each party to the Merger Agreement will perform all of the covenants required to be performed by such party under the Merger Agreement, and that the conditions precedent in the Merger Agreement are not waived.  Finally, Austin Associates relied upon the advice Wilber has received from its legal, accounting and tax advisors as to all legal, accounting and tax matters relating to the Merger and the other transactions contemplated by the Merger Agreement.

 
41

 
 
Austin Associates relied, without independent verification, upon the accuracy and completeness of the information it reviewed for the purpose of rendering its opinion.  Austin Associates did not undertake any independent evaluation or appraisal of the assets and liabilities of Community Bank System or Wilber, nor was it furnished with any appraisals.  Austin Associates did not review any individual credit files of Community Bank System or Wilber, and assumed that Community Bank System’s and Wilber’s allowances are, in the aggregate, adequate to cover inherent credit losses.  Austin Associates’ opinion is based on economic, market and other conditions existing on the date of its opinion.

In rendering its opinion, Austin Associates made the following assumptions:

 
that all material governmental, regulatory and other consents and approvals necessary for the consummation of the Merger would be obtained without any adverse effect on Wilber, Community Bank System or on the anticipated benefits of the Merger;
 
that Wilber and Community Bank System have provided all of the information that might be material to Austin Associates in its review; and,
 
that the financial projections it reviewed were reasonably prepared on a basis reflecting the best currently available estimates and judgment of the management of Wilber and Community Bank System as to the future operating and financial performance of Wilber and Community Bank System, respectively.

In connection with its opinion, Austin Associates reviewed:

 
the Merger Agreement;
 
the process used to identify prospective buyer-candidates and solicit indications of interest that resulted in multiple transaction proposals, from which Community Bank System was selected by the Board of Wilber to negotiate the Merger Agreement;
 
certain publicly available financial statements and other historical financial information of Wilber that Austin Associates deemed relevant;
 
certain publicly available financial statements and other historical financial information of Community Bank System that Austin Associates deemed relevant;
 
financial projections for Wilber for the years ending December 31, 2010 through 2012 as prepared by and reviewed with management of Wilber;
 
publicly available median earnings estimates for Community Bank System for the years ending December 31, 2010, December 31, 2011 and December 31, 2012 and, in each case, as reviewed with Community Bank System’s senior management;
 
the pro forma financial impact of the Merger on Community Bank System, based on assumptions relating to transaction expenses, purchase accounting adjustments, cost savings and revenue enhancements determined by and discussed with senior management of Community Bank System;
 
publicly reported historical price and trading activity for Wilber and Community Bank System common stock, including a comparison of certain financial and stock market information for Wilber and Community Bank System with similar publicly available information for certain other companies the securities of which are publicly traded;
 
the financial terms of certain recent business combinations in the commercial banking industry, to the extent publicly available;
 
the terms of the formal written agreement entered into between Wilber and the OCC dated as of October 13, 2010;
 
the current market environment generally and the banking environment in particular; and
 
such other information, financial studies, analyses and investigations as Austin Associates considered relevant.

 
42

 
 
Austin Associates also discussed with certain members of senior management of Wilber the business, financial condition, results of operations and prospects of Wilber, and held similar discussions with certain members of senior management of Community Bank System regarding the business, financial condition, results of operations and prospects of Community Bank System.

The following is a summary of the material factors considered and analyses performed by Austin Associates in connection with its opinion provided to the Wilber Board of Directors on October 22, 2010.  The summary does not purport to be a complete description of the analyses performed by Austin Associates.  Capitalized terms used herein without definition shall have the meanings given to such terms in the Merger Agreement.

The Process for Soliciting Indications of Interest.  Sandler O’Neill, Wilber’s primary financial advisor, screened potential buyer candidates based on asset size, market capitalization, geographic market, financial capacity, perceived regulatory status, and Sandler O’Neill’s market knowledge.  Sandler O’Neill reviewed such information with the Board of Wilber, and was instructed to contact nine organizations.  Six of nine organizations executed confidentiality agreements and received a confidential information memorandum that provided detailed information regarding the business and operations of Wilber.  Each organization was asked to submit a specific written indication of interest to acquire Wilber.  Three written proposals were received, and two parties were invited for due diligence.  Following due diligence, two final bids were received; and the Board selected Community Bank System to negotiate the Merger Agreement.

Formal Agreement between Wilber and Office of the Comptroller of the Currency.  Wilber entered into a formal regulatory enforcement action with the OCC effective October 13, 2010.   The terms of the formal agreement are more fully described under the heading “Formal Agreement with Office of the Comptroller of the Currency” of this proxy statement/prospectus.

Summary of Financial Terms of Agreement.  Austin Associates reviewed the financial terms of the Merger Agreement, including the form of consideration, the exchange ratio for the stock portion of the purchase price, and the resulting value per share to be received by Wilber common shareholders pursuant to the proposed Merger.

The financial terms of the Merger Agreement provide that each share of Wilber common stock issued and outstanding shall be converted at the election of the shareholder into either (i) shares of Community Bank System common stock based upon the Exchange Ratio; (ii) cash, at the rate of $9.50 for each share of Wilber Common Stock; or (iii) a combination of shares of Community Bank System common stock and cash such that eighty (80%) percent of such shareholder’s aggregate Wilber stock shall be converted into Community Bank System stock based upon the Exchange Ratio and twenty (20%) of such shareholder’s aggregate Wilber stock shall be converted into the right to receive cash, at the rate of $9.50 for each Wilber share.  The shareholder election is subject to allocation procedures to ensure that eighty percent (80%) of Wilber common stock in the aggregate shall be converted into and become shares of Community Bank System common stock and twenty (20%) of Wilber common stock shall be converted into the right to receive cash.  Fractional shares will not be issued and cash will be paid in lieu thereof as provided in the Merger Agreement.

 
43

 
 
The Exchange Ratio shall be calculated as follows: (a) if the Community Bank System Market Price is equal to or greater than $19.71, or equal to or less than $25.35, then a quotient (rounded to the nearest one-thousandth) obtained by dividing $9.50 by the Community Bank System Market Price; (b) if the Community Bank System Market Price is greater than $25.35, then the Exchange Ratio shall be fixed at 0.3748; and (c) if the Community Bank System Market Price is less than $19.71, then the Exchange Ratio shall be fixed at 0.4820.  The Community Bank System Market Price shall equal the average closing sale price of a share of Community Bank System common stock over the ten (10) consecutive trading days immediately prior to the Closing Date on the NYSE, as reported in The Wall Street Journal.

Based on 10,719,382 common shares of Wilber outstanding and a Community Bank System Market Price between $19.71 and $25.35, the value of the transaction is approximately $101.8 million.  Austin Associates calculated that the value of $101.8 million represented:

 
132 percent of book value at June 30, 2010;
 
141 percent of tangible book value at June 30, 2010;
 
19.2 times core net income for the 12 months ended June 30, 2010; and
 
4.6 percent premium over tangible book value as a percent of core deposits as of June 30, 2010.

Wilber Financial Performance and Market Trading Data versus Peers.  Austin Associates compared selected results of Wilber’s operating performance to those of 17 publicly traded banks in the Mid-Atlantic Region having total assets between $800 million and $1.25 billion.  Austin Associates considered this group of financial institutions comparable to Wilber on the basis of asset size and geographic location.

This peer group consisted of the following companies:


Company Name
Symbol
 
Company Name
Symbol
1.  Center Bancorp, Inc.
CNBC
 
10.  Codorus Valley Bancorp
CVLY
2.  Royal Bancshares of Pennsylvania
RBPAA
 
11.  Penseco Financial Services
PFNS
3.  Shore Bancshares, Inc.
SHBI
 
12.  Unity Bancorp Inc.
UNTY
4.  Chemung Financial Corporation
CHMG
 
13.  Berkshire Bancorp Inc.
BERK
5.  Franklin Financial Services
FRAF
 
14.  Tri-County Financial Corp.
TCFC
6.  ACNB Corporation
ACNB
 
15.  Bank of Utica
BKUT
7.  Bridge Bancorp Inc.
BDGE
 
16.  Adirondack Trust Co.
ADKT
8.  AmeriServe Financial, Inc.
ASRV
 
17.  First Keystone Corporation
FKYS
9.  Republic First Bancorp
FRBK
     
 
 
44

 
 
Austin Associates noted the following selected financial measures for the peer group as compared to Wilber:

 
Peer Financial Performance
   
 
25th Pct
Median
75th Pct
 
   Wilber
Total Assets ($Mils)
$856.7
$934.3
$986.6
 
$929.3
Tier 1 Leverage Ratio
8.36%
9.40%
10.59%
 
7.85%
Total Risk Based Capital Ratio
13.18%
13.91%
15.90%
 
13.91%
LTM PTPP / Average Assets
1.09%
1.48%
1.76%
 
1.15%
LTM Core Return on Average Assets
0.21%
0.78%
1.11%
 
0.57%
LTM Core Return on Average Equity
1.87%
9.43%
10.49%
 
7.29%
LTM Efficiency Ratio
70.8%
63.3%
62.0%
 
71.9%
NPAs / Total Assets
2.72%
2.06%
0.79%
 
2.64%
NPAs / (Tangible Equity + ALLL)
29.7%
17.1%
9.5%
 
29.7%
 
 
PTPP = Pre-Tax Pre-Provision income
 
Core = Net income excluding extraordinary items and securities gains/(losses)
 
NPAs = Nonperforming Assets
 
ALLL = Allowance for Loan and Lease Losses
 
LTM = last 12 months

This comparison indicated that Wilber performed between the 25th percentile and the median of the peer group in overall profitability.  Wilber’s Tier 1 Leverage ratio was below the 25th percentile of the peer group, while the Total Risk Based Capital Ratio equaled the peer median.  In terms of asset quality, Wilber’s level of NPAs approximate the 25th percentile of the peer group when measured both as a percentage of total assets and as a percentage of tangible equity plus ALLL.  The following presents a summary of the market trading data of Wilber compared to this same peer group:

 
Peer Market Trading Data
   
As of 10/13/2010
25th Pct
Median
75th Pct
 
   Wilber
Market Capitalization ($Mils)
$42.7
$66.0
$88.9
 
$64.3
Price / Tangible Book Value Per Share
62%
94%
137%
 
89%
Price / LTM Core EPS
8.6
10.3
14.0
 
12.1
Current Dividend Yield
0.00%
2.44%
4.73%
 
4.00%
MRQ Dividend Payout Ratio
0.0%
23.1%
53.5%
 
60.0%
LTM Average Daily Volume
1,054
2,919
10,615
 
9,282
 
 
EPS = Earnings Per Share
 
MRQ = Most Recent Quarter

As of October 13, 2010, Wilber common stock traded below the peer median price to tangible book multiple, but above the peer median price to LTM Core EPS.  Wilber’s dividend yield was above the median of the guideline group and Wilber’s dividend payout exceeded the 75th percentile of the peer group.  Average daily stock trading volume of Wilber was slightly below that of the 75th percentile of the peer group.

Comparable Transaction Analysis.  Austin Associates compared the financial performance of certain selling institutions and the prices paid in selected transactions to Wilber’s financial performance and the transaction multiples being paid by Community Bank System for Wilber.  Austin Associates first reviewed certain information relating to Mid-Atlantic bank and thrift sale transactions from January 1 to October 13, 2010 involving sellers with total assets between $300 million and $2.5 billion.  The following table highlights the results of this guideline transaction comparison:

 
45

 

 
Median
   
   
Mid-
   
 
Atlantic
 
Wilber (1)
Seller’s Financial Performance
     
Total Assets
$536.6
 
$929.3
Tangible Equity / Assets
7.20%
 
7.84%
Return on Average Assets
-1.25%
 
0.57%
Return on Average Equity
-14.82%
 
7.29%
Efficiency Ratio
82.7%
 
71.9%
Nonperforming Assets/Assets
4.24%
 
2.64%
       
Deal Transaction Multiples
     
Price/Tangible Book Value Ratio
102%
 
141%
Price/LTM Earnings
NM
 
19.2
Premium/Core Deposits
3.0%
 
4.6%

                      (1)   Wilber’s financial performance and deal transaction multiples based on LTM core net income ending June 30, 2010.

Eight transactions met the first transaction criterion.  Seven of the eight selling banks in this group reported a net loss in the most recent twelve months prior to deal announcement.   Further, the median NPA to assets ratio measured 4.24 percent.  In contrast, Wilber reported a profit during the year prior to deal announcement, and a lower NPA to assets ratio of 2.64 percent.   The indicated price to tangible book ratio being paid by Community Bank System for Wilber of 141 percent is significantly higher than the median price to tangible book ratio of 102 percent for this transaction group.

Austin Associates also reviewed bank and thrift sale transactions nationally since January 1, 2009 involving sellers under a formal regulatory enforcement action.  Of these fifteen transactions, only nine had pricing information.  The largest seller in this transaction group had $258 million in total assets.  All nine sellers reported a LTM net loss and eight of the nine sellers reported a LTM efficiency ratio greater than 100 percent.  The level of NPAs for these sellers was also significantly higher than for Wilber, with the median NPAs/Total Assets ratio equaling 6.45 percent, compared 2.64 percent for Wilber.  The reported price to tangible book value ratios for these deals ranged between 52 percent and 100 percent, significantly lower than the 141 percent ratio being paid by Community Bank System for Wilber.

A third group of comparable transactions was reviewed consisting of all deals nationally announced between January 1 and October 13, 2010, involving a selling bank that was profitable over the LTM period prior to deal announcement, and with assets between $500 million and $2.0 billion.  Only three transactions met this criterion.

 
46

 
 
   
Deals with Profitable Sellers
   
             
   
Deal #1
Deal #2
Deal #3
 
Wilber (1)
Seller’s Financial Performance
           
Total Assets
 
$1,047.6
$612.7
$840.1
 
$929.3
Tangible Equity / Assets
 
7.04%
6.19%
8.48%
 
7.84%
Return on Average Assets
 
0.67%
0.40%
0.14%
 
0.57%
Return on Average Equity
 
8.09%
5.07%
1.68%
 
7.29%
Efficiency Ratio
 
73.0%
80.3%
67.8%
 
71.9%
Nonperforming Assets/Assets
 
0.90%
2.07%
2.03%
 
2.64%
             
Deal Transaction Multiples
           
Price/Tangible Book Value Ratio
 
200%
91%
109%
 
141%
Price/LTM Earnings
 
26.8
7.4
66.6
 
19.2
Premium/Core Deposits
 
13.4%
NA
1.3%
 
4.6%

 
(1)   Wilber’s financial performance and deal transaction multiples based on LTM core net income ending June 30, 2010.

The price to tangible book multiple that Community Bank System is paying for Wilber of 141 percent is above two of the three subject transactions.  The highest price to tangible book value ratio of 200 percent involved a selling bank with a NPA to assets ratio of 0.90 percent, significantly lower than Wilber’s NPA ratio of 2.64 percent.

Discounted Cash Flow Value Matrix for Wilber.  Austin Associates performed a discounted cash flow (“DCF”) analysis that estimated the present value per share of Wilber’s common stock.  The DCF analysis was based on financial projections prepared by and reviewed with Wilber management.  The analysis assumed no dividends would be paid through 2012 and earnings per share were projected at $0.68 for 2012.  The zero dividend assumption was based on the recent initiation of the Bank’s regulatory enforcement action.  For this analysis, a 13% discount rate was used.  Utilizing a terminal value price-to-earnings multiple range of 11.0 to 13.0 times, along with varying levels of 2012 net income, resulted in the following per share indications of value:


Change to 2012Y
 
Terminal Value P/E Multiple
Net Income
 
11.0
12.0
13.0
-20%
 
$4.55
$4.96
$5.38
0%
 
$5.69
$6.20
$6.72
+20%
 
$6.82
$7.44
$8.06

Community Bank System Financial Performance and Market Trading Data versus Peers.  Austin Associates compared selected results of Community Bank System’s operating performance to those of 19 publicly traded banks in the Mid-Atlantic region having total assets between $2.0 billion and $12.0 billion.  Austin Associates considered this group of financial institutions comparable to Community Bank System on the basis of asset size and geographic location.

 
47

 
 
This peer group consisted of the following companies:

Company Name
Symbol
 
Company Name
Symbol
 1.  Capital Source Inc.
CSE
 
11. Tompkins Financial Corporation
TMP
 2.  Wilmington Trust Corporation
WL
 
12. Hudson Valley Holding Corp.
HUVL
 3.  Signature Bank
SBNY
 
13. Lakeland Bancorp
LBAI
 4.  National Penn Bancshares
NPBC
 
14. Sterling Bancorp
STL
 5.  F.N.B. Corporation
FNB
 
15. Metro Bancorp Inc.
METR
 6.  First Commonwealth Financial
FCF
 
16. Financial Institutions Inc.
FISI
 7.  NBT Bancorp Inc.
NBTB
 
17. Bancorp Inc.
TBBK
 8.  S&T Bancorp Inc.
STBA
 
18. Intervest Bancshares Corp.
IBCA
 9.  Sandy Spring Bancorp Inc.
SASR
 
19. Univest Corp of Pennsylvania
UVSP
10. Sun Bancorp Inc.
SNBC
     

Austin Associates noted the following selected financial measures for the peer group as compared to Community Bank System:

 
Peer Financial Performance
   
 
25th Pct
Median
75th Pct
 
Community Bank System
Total Assets ($Bils)
$2.2
$3.5
$7.4
 
$5.4
Tangible Common Equity / Assets
6.86%
7.33%
8.89%
 
5.57%
Tier 1 Leverage Ratio
8.78%
9.41%
10.88%
 
7.75%
Total Risk Based Capital Ratio
13.12%
14.54%
15.57%
 
13.87%
LTM PTPP / Average Assets
1.03%
1.68%
1.88%
 
1.75%
LTM Core Return on Average Assets
-0.57%
0.34%
0.74%
 
1.11%
LTM Core Return on Average Equity
-4.94%
3.52%
6.53%
 
10.50%
LTM Efficiency Ratio
68.1%
61.0%
58.3%
 
61.6%
NPAs / Total Assets
3.18%
1.90%
1.13%
 
0.41%
NPAs / (Tangible Equity + ALLL)
30.9%
19.7%
12.1%
 
6.8%

This comparison indicated that Community Bank System exceeded the 75th percentile of the peer group in overall profitability and asset quality, while Community Bank System ranked below the 25th percentile in tangible common equity to assets and Tier 1 leverage.  The following presents a summary of the market trading data of Community Bank System compared to this same peer group:

 
Peer Market Trading Data
   
As of 10/13/2010
25th Pct
Median
75th Pct
 
Community Bank System
Market Capitalization ($Mils)
$211.4
$411.6
$771.2
 
$803.8
Price / Tangible Book Value per Share
104%
133%
174%
 
281%
Price / LTM Core EPS
13.9
21.6
26.3
 
13.5
Price / 2011 EPS Estimate
12.1
13.8
15.6
 
12.8
Price / 2012 EPS Estimate
9.4
10.4
12.1
 
11.7
Dividend Yield
0.12%
0.70%
3.44%
 
3.96%
MRQ Dividend Payout Ratio
0.0%
21.2%
49.1%
 
50.0%
LTM Average Daily Volume
48,081
83,805
426,098
 
185,987

 
48

 

Community Bank System traded above the 75th percentile of the peer group as measured by price to tangible book, but slightly below the peer 25th percentile in price to LTM Core EPS.  Community Bank System exceeded the 75th percentile of the guideline group in both dividend yield and MRQ dividend payout.

Of the 19 banks included in the peer group, only three reported a LTM Core ROAE greater than 10 percent.  These three banks reported a price to tangible book value ratio of between 165 percent and 199 percent compared to 281 percent for Community Bank System.  The price to LTM core EPS multiples for the three banks was between 12.0 and 13.4, as compared to 13.5 for Community Bank System (based on Community Bank System market price of $24.24 as of October 13, 2010).  Community Bank System’s dividend yield of 3.96 percent was higher than that of the three banks with Core ROAE of more than 10 percent.

Discounted Cash Flow Value Matrix for Community Bank System.  Austin Associates performed a DCF analysis that estimated the present value per share of Community Bank System’s common stock.  The DCF analysis was based on Community Bank System’s projected earnings as derived from median analyst estimates for the remainder of 2010 through 2012, and modified slightly based on discussions with Community Bank System management.  EPS estimates of $1.87 for 2010, $1.95 for 2011, and $2.07 for 2012 were assumed for this analysis.  The 2012 EPS estimate matches the consensus analyst estimate.  The DCF analysis assumed dividends per share of $0.94 for 2010, $0.96 for 2011, and $1.04 for 2012.  The resulting DCF value matrix is based on a 12% discount rate.  Utilizing a terminal value price-to-earnings multiple range of 12.0 to 14.0 times, along with varying levels of 2012 net income, resulted in the following per share indications of value:

Change to 2012Y
 
Terminal Value P/E Multiple
Net Income
 
12.0
13.0
14.0
-10%
 
$19.17
$20.61
$22.05
0%
 
$21.09
$22.69
$24.29
+10%
 
$23.01
$24.78
$26.54

Pro Forma Merger Analysis and Per Share Results.  Austin Associates analyzed the potential pro forma effect of the Merger assuming the following: (1) the Merger is completed at the end of the fourth quarter of 2010 at an Exchange Ratio of 0.392 (assumes Community Bank System Market Price of $24.24), (2)  cost savings equal to 20% of Wilber’s stand-alone projected overhead, with 80% of the savings realized in 2011 and 100% realized in 2012, (3) zero revenue enhancements; (4) transaction costs of $1.0 million for Community Bank System and $7.0 million for Wilber, (5) purchase accounting adjustments, including a $12.5 million discount against Wilber’s loan portfolio; and, (6) a core deposit premium of $9.3 million, amortized straight-line over 7 years.  Management of Community Bank System confirmed the reasonableness of the cost savings, revenue enhancement and transaction cost assumptions for Wilber; Austin Associates selected the remaining assumptions based on its experience, together with targeted preliminary pro forma capital ratio levels as stated by Community Bank System management.  Based on the above assumptions, the pro forma estimated closing tangible equity to assets ratio would equal 5.84 percent and the Tier 1 Leverage ratio would equal 7.37 percent; both of these measures were in the ranges indicated by Community Bank System management.

 
49

 
 
Austin Associates calculated the effect of the proposed transaction to Wilber’s pro forma equivalent book value per share, tangible book value per share, earnings per share, and dividends per share.  All pro forma per share amounts have been adjusted for the Exchange Ratio.  Presented below are summary results from this analysis:


   
Projected
Earnings Per Share
 
2011
2012
Pro-Forma Equivalent
 
$0.77
$0.84
Stand-Alone
 
$0.56
$0.68
% Change
 
38.2%
22.8%
$ Change
 
$0.21
$0.15

   
Projected
Book Value Per Share
 
2011
2012
Pro-Forma Equivalent
 
$7.86
$8.29
Stand-Alone
 
$7.97
$8.65
% Change
 
-1.4%
-4.2%
$ Change
 
($0.11)
($0.36)

   
Projected
Tangible Book Value Per Share
 
2011
2012
Pro-Forma Equivalent
 
$4.25
$4.69
Stand-Alone
 
$7.54
$8.22
% Change
 
-43.6%
-42.9%
$ Change
 
($3.29)
($3.53)


   
Projected
Dividends Per Share
 
2011
2012
Pro-Forma Equivalent
 
$0.38
$0.41
Stand-Alone
 
$0.00
$0.00
% Change
 
NA
NA
$ Change
 
$0.38
$0.41
Actual Stand-Alone DPS (1)
 
$0.24
$0.24
% Change
 
58.3%
70.8%
$ Change
 
$0.14
%0.17
 
                   (1)  Based on Wilber’s dividend rate of $0.06 per quarter ($0.24 per year) as of September 30, 2010.
 

Austin Associates’ Compensation and Other Relationships with Wilber and Community Bank System.  Austin Associates rendered its fairness opinion to the Board of Directors of Wilber in connection with the Merger and has received a fee of $125,000 for its services.  Austin Associates’ fee was not, in any way, contingent on completion of the Merger or on the issuance of a favorable opinion.  Wilber has agreed to indemnify Austin Associates against certain liabilities arising out of its engagement.  Austin Associates does not have any other existing or pending engagements with either Wilber or Community Bank System.

Summary.  Based on the preceding summary discussion and analysis, and subject to the qualifications described herein, Austin Associates determined the terms of the Merger Agreement to be fair, from a financial point of view, to Wilber and its shareholders.

 
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The opinion expressed by Austin Associates was based on market, economic and other relevant considerations as they existed and could be evaluated as of the date of the opinion.  Events occurring after the date of issuance of the opinion, including, but not limited to, changes affecting the securities markets, the results of operations or material changes in the financial condition of either Community Bank System or Wilber could materially affect the assumptions used in preparing this opinion.


Voting and Affiliate Agreements with Directors and Executive Officers of Wilber

Community Bank System has entered into a voting agreement with each Director and executive officer of Wilber.  Pursuant to the agreement, each Director and executive officer of Wilber has agreed to vote in favor of the Merger Agreement all of his or her shares of Wilber common stock that he or she is entitled to vote.  The Merger Agreement also requires Wilber to use its best efforts to cause each of its “affiliates” (as defined in the Securities Act) to enter into an affiliate agreement designed to ensure compliance with Rule 145 under the Securities Act which provides a safe harbor for resales of securities by insiders.  All of the Directors and executive officers have executed the affiliates agreement.  Mr. Wright also agreed that in addition to complying with Rules 144 and 145 under the Securities Act, he will not sell more than 150,000 shares in any calendar month without the consent of Community Bank System.

Financial Interests of Certain Wilber Directors and Executive Officers in the Merger

Certain members of management and Directors of Wilber have financial interests in the Merger that are different from, and may conflict with, interests of other Wilber shareholders.  The Wilber Board of Directors was aware of these interests and considered them in approving the Merger Agreement.   These interests are as follows:

Indemnification; Directors’ and Officers’ Insurance

Community Bank System has agreed to indemnify all Directors, officers, and employees of Wilber for a period of six years to the fullest extent permitted by law against:

 
all liabilities and expenses relating to claims, proceedings, or investigations resulting from the person’s status as a Director, officer, or employee of Wilber or any Wilber subsidiary, whether pertaining to matters existing prior to the Merger and whether asserted prior to or after the Merger; and
 
all liabilities and expenses relating to claims, proceedings or investigations arising out of the Merger Agreement or the Merger.

Community Bank System has also agreed that all rights to indemnification and all limitations on liability existing in favor of Wilber’s Directors, officers and employees provided in Wilber’s certificate of incorporation, bylaws or similar governing documents with respect to matters occurring prior to the Merger will continue in full force and effect for a period of six years after the Merger.  Community Bank System has agreed to honor those commitments as though it were the indemnifying party.
 
Community Bank System will maintain Wilber’s existing directors’ and officers’ liability insurance policy, or a policy providing comparable coverage amounts on terms no less favorable, covering those persons for a period of six years from the date of the Merger, subject to certain maximum cost limits.

 
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Advisory Board

Following the Merger, Community Bank System will invite the former members of Wilber’s Board of Directors, other than Brian R. Wright and Alfred S. Whittet who will be appointed to the Board of Directors of Community Bank System, to serve on an advisory board.  The President and Chief Executive Officer of Community Bank System will also serve on the advisory board.  The advisory board will advise Community Bank on the deposit, lending and financial services activities in Wilber’s former market area and generally work to ensure a smooth transition of business relationships and the continued development of business relationships throughout Wilber’s former market area.  The Merger Agreement provides that the advisory board will be maintained for two years after the Merger, and each member of the advisory board will be paid for each meeting of the advisory board he or she attends at a rate equal to $5,000 per quarter divided by the number of meetings held in any given quarter.  The Merger Agreement provides for the continuation of the advisory board for at least two years following the effective time of the Merger.

Continued Director Fees

Two current Directors of Wilber, Brian R. Wright and Alfred S. Whittet, will become directors of Community Bank System and Community Bank.  As such, they will receive directors’ fees and benefits in accordance with Community Bank System’s policies on compensation of non-employee Directors from time to time.  See “Directors” on page [   ] for more information.

Retention Payments

Certain retention payments will be paid to Joseph Sutaris, Executive Vice President and Chief Financial Officer, and Jeffrey Lord, Regional President.  These officers previously executed Retention Bonus Agreements with Wilber and such payments may be subject to approval by Wilber Bank’s regulators.  See the section entitled “The Merger — Regulatory Approvals and Notices for the Merger” beginning on page [] for further details about the payments.

Material Federal Income Tax Consequences

Generally.  The following discussion addresses the material Federal income tax considerations of the Merger that are generally applicable to Wilber shareholders.  The following discussion does not deal with all Federal income tax considerations that may be relevant to certain Wilber shareholders in light of their particular circumstances, such as shareholders who:

 
are dealers in securities;
 
are insurance companies or tax-exempt organizations;
 
are subject to alternative minimum tax;
 
hold their shares as part of a hedge, straddle or other risk reduction transaction;
 
are foreign persons; or
 
acquired their Wilber common stock through stock options or otherwise as compensation.

In addition, it does not address the tax consequences of the Merger under foreign, state, or local tax laws or the tax consequences of transactions completed before or after the Merger, such as the exercise of options or rights to purchase Wilber common stock in anticipation of the Merger.

The following discussion is based on the Internal Revenue Code, applicable Treasury Regulations, judicial decisions, and administrative rulings and practice, all as of the date of this document, all of which are subject to change.  Any change could be applied to transactions that were completed before the change, and could affect the accuracy of the statements and conclusions in this discussion and the tax consequences of the Merger to Community Bank System, Wilber and Wilber shareholders.
 
 
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Neither Wilber nor Community Bank System has requested or will request a ruling from the Internal Revenue Service with regard to any of the tax consequences of the Merger.  Hinman, Howard Kattell, LLP, Wilber’s attorneys, has rendered an opinion as of [                          ], 2011 and, as a condition to the completion of the Merger, will again render an updated opinion at the closing of the Merger, to Wilber to the effect that:

 
the Merger constitutes a tax-free “reorganization” within the meaning of Section 368(a);
 
the Merger will not result in the recognition of gain or loss for federal income tax purposes to Wilber or Community Bank System;
 
Wilber shareholders will not recognize gain or loss if they receive only shares of Community Bank System common stock in the Merger, but gain or loss will be recognized by Wilber shareholders with respect to cash received in lieu of fractional shares;
 
each Wilber shareholder will recognize gain, but not loss, on the exchange in the Merger of Wilber common stock for Community Bank System common stock and cash, in an amount equal to the lesser of the amount of gain realized by the Wilber shareholder with respect to the exchange or the amount of cash received;
 
each Wilber shareholder’s total tax basis in the Community Bank System common stock received in the Merger will be the same as the total tax basis of the shares of Wilber common stock exchanged in the Merger, decreased by the amount of any cash received in the Merger and any tax basis allocable to fractional shares, if any, of Community Bank System common stock for which cash is received, and increased by the amount of gain recognized by Wilber shareholder with respect to cash received; and
 
each Wilber shareholder’s holding period in the Community Bank System common stock issued in the Merger will include the period during which the Wilber shareholder held the Wilber common stock exchanged in the Merger, provided that he or she held the Wilber common stock as capital assets at the effectiveness of the Merger.

The opinion assumes that the Merger will take place in the manner described in the Merger Agreement.  The tax opinion also assumes the truth and accuracy of certain factual representations that have been made by Wilber which are customarily given in transactions of this kind.

Caveat.  Wilber shareholders should recognize that the opinion of Hinman, Howard and Kattell, LLP is not binding on the Internal Revenue Service or the courts.  If the Internal Revenue Service were to assert successfully that the Merger is not a reorganization within the meaning of Section 368(a) of the Internal Revenue Code, then each shareholder of Wilber would be required to recognize gain or loss equal to the difference between (1) the fair market value of all Community Bank System common stock, and the amount of cash, received in the Merger and (2) the tax basis in the Wilber common stock surrendered in the Merger.  If this were to occur, each Wilber shareholder’s total initial tax basis in the Community Bank System common stock received would be equal to its fair market value, and the holding period for the Community Bank System common stock would begin the day after the Merger.  Assuming that any cash received would not be treated as dividend as described above, the gain or loss would be a long-term capital gain or loss if the holding period for the Wilber common stock was more than one year and the Wilber common stock was a capital asset in the hands of a Wilber shareholder.

The preceding discussion does not purport to be a complete analysis of all potential tax consequences of the Merger that may be relevant to a particular Wilber shareholder.  You are urged  to consult with your own tax advisors regarding the specific tax consequences of the Merger to you, including the applicability and effect of foreign, state, local, and other tax laws.
 
 
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Accounting Treatment of the Merger

The Merger will be accounted for as a “business combination,” as that term is used under generally accepted accounting principles, for accounting and financial reporting purposes, with Community Bank System treated as the acquirer.  Under the acquisition method of accounting, the assets (including identifiable intangible assets) and liabilities (including executory contracts and other commitments) of Wilber as of the effective time of the Merger will be recorded at their respective fair values and added to those of Community Bank System.  Any excess of purchase price over the fair values is recorded as goodwill.  Consolidated financial statements of Community Bank System issued after the Merger would reflect these fair values and would not be restated retroactively to reflect the historical financial position or results of operations of Wilber.
 

Resales of Community Bank System Common Stock

The shares of Community Bank System common stock to be issued to Wilber shareholders in the Merger will be registered under the Securities Act.  These shares may be traded freely and without restrictions by a Wilber shareholder if he or she is not an “affiliate” of Wilber at the time of the special meeting.  As defined by the Securities Act, an affiliate of Wilber is any person or entity that directly or indirectly controls, is controlled by or is under common control with Wilber.  Affiliates generally include Directors, executive officers and 10% or greater shareholders of Wilber.  Under most circumstances, affiliates must comply with Rule 145 under the Securities Act before selling any Community Bank System common stock they receive in the Merger.

Under Rule 145, during the one-year period after the completion of the Merger, affiliates of Wilber may resell shares of Community Bank System common stock received by them in the Merger only through unsolicited “brokers transactions” or in transactions directly with a “market maker,” as those terms are defined in Rule 144 under the Securities Act.  In addition, during this one-year period after the Merger, the number of shares to be sold by an affiliate (together with certain related persons) may not exceed the greater of:

 
1% of the total number of the outstanding shares of Community Bank System common stock; or
 
the average weekly trading volume of Community Bank System common stock during the four calendar weeks preceding the proposed sale.

After the end of one year from the Merger, an affiliate would be able to sell Community Bank System common stock received in the Merger without the requirements or limitations described above, provided that Community Bank System was current with its periodic filings with the SEC.  Two years after the Merger, an affiliate would be able to sell the shares of Community Bank System common stock received in the Merger without any restrictions.

In addition, persons who become affiliates of Community Bank System after the Merger may resell shares of Community Bank System common stock issued in the Merger, subject to similar limitations and certain filing obligations specified in Rule 144. 

The Merger Agreement requires Wilber to use its reasonable best efforts to cause any person who is identified by us as an affiliate of Wilber for purposes of Rule 145 to deliver to Community Bank System, within 30 days of the date of the Merger Agreement, an agreement which contains provisions intended to ensure compliance with the Securities Act and Rule 145.

 
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New York Stock Exchange Listing

Community Bank System has agreed to make an application to list the shares of its common stock to be issued in the Merger on the NYSE.  The stock must be authorized for listing on the NYSE, subject to official notice of issuance, for the Merger to be completed.

Regulatory Approvals and Notices for the Merger

Under the Merger Agreement, Wilber and Community Bank System have agreed to submit applications for all necessary regulatory approvals and to give all requisite notices to governmental agencies regarding both the Merger and the merger of Wilber Bank and Community Bank.  These include approvals of and notices to the OCC and the Federal Reserve Board.

The closing of the Merger is conditioned upon the receipt of all approvals of regulatory authorities required for both mergers, the expiration of all notice periods and waiting periods after the grant of regulatory approvals, and the satisfaction of all conditions contained in any regulatory approvals.

The Comptroller of the Currency.  The Merger is subject to approval by the OCC.  Community Bank filed an application on January [  ], 2011 and expects the processing of the application to be completed by [                            ], 2011.

The Merger may not be completed until the 15th day following the date of the approval by the OCC.  During this 15-day period, the United States Department of Justice may comment adversely on the Merger or challenge the Merger on antitrust grounds.  The commencement of an antitrust action would stay the effectiveness of the OCC approval unless a court specifically orders otherwise.

You should be aware that the approval by the OCC:

 
reflects only its views that the Merger does not contravene applicable competitive standards imposed by law and is consistent with regulatory policies relating to safety and soundness;
 
is not an opinion of the OCC that the Merger is financially favorable to the shareholders of Wilber or that the OCC has considered the adequacy of the terms of the Merger; and
 
is not an endorsement of or recommendation for the Merger.

Federal Reserve Board.  Under federal regulations, the Merger is eligible for an expedited review process which requires Community Bank System to file certain information with the Federal Reserve Board in connection with the Merger and the Federal Reserve Board determines if a full application is required.  Community Bank System made the filing with the Federal Reserve Board on January [   ], 2011.

Federal Deposit Insurance Corporation.  Between 1999 and September 2010, Wilber entered into Retention Bonus Agreements with a select group of key employees, including 16 currently employees, who were considered to be critical to the integration of continued banking operations in a business combination, such as the Merger.  In order to encourage such individuals to remain employees through the completion of any such business combination, each key employee, based upon his or her contributions to Wilber, was offered a retention payment ranging from 33% of his or her salary to 150% of his or her salary.  These payments will only be made upon the satisfaction of all of the conditions set forth in the respective Retention Bonus Agreement and may be subject to approval by the FDIC and the OCC.  The payment amounts, if any, may be limited by the regulators.

 
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Litigation Relating to the Merger

On November 3, 2010, a shareholder of Wilber filed a lawsuit in the New York Supreme Court captioned Robert E. Becker v. The Wilber Corporation, et al., Index No. 20101266 (Otsego County).  On November 17, 2010, another shareholder filed a lawsuit in the New York Supreme Court captioned Richard N. Soules v. The Wilber Corporation, et al., Index No. 20101317 (Otsego County).  Both lawsuits are brought on behalf of a putative class of Wilber’s common shareholders and seek an order that they are properly maintainable as class actions.

Both complaints name Wilber, Wilber’s Directors, and Community Bank System as defendants and allege that the Director Defendants breached their fiduciary duties by failing to maximize shareholder value in connection with the Merger and allege that Community Bank System aided and abetted those alleged breaches of fiduciary duty.  The complaints allege that the Director Defendants improperly favored Community Bank System and discouraged alternative bids by agreeing to the Merger Agreement’s non-solicitation provision and termination fee provision.  Plaintiffs allege that pursuant to the Merger Agreement, Community Bank agreed to appoint two of Wilber’s directors to the Boards of Community Bank System and Community Bank, effective upon the closing of the Merger.  Plaintiffs further allege that Community Bank System agreed to establish an advisory board of Community Bank, made up of the current directors of Wilber.  The complaints also allege that the directors and officers of Wilber entered into voting agreements to vote their shares of Wilber common stock in favor of the Merger Agreement.  In addition, the complaints allege that the consideration to be received by Wilber’s common shareholders is inadequate and unfair.  The complaints seek declaratory and injunctive relief to prevent the consummation of the Merger, a constructive trust over any benefits improperly received by defendants, and costs including plaintiffs’ attorneys’ and experts’ fees.

Community Bank System and Wilber have answered the complaints and moved for summary judgment dismissing the cases.  Plaintiff in the Becker action has served discovery demands requesting the production of documents by Defendants.

Plaintiffs have moved to consolidate the Becker and Soules lawsuits into one action.  They also seek the appointment of Robert Becker and Richard Soules as Co-Lead Plaintiffs and their respective attorneys as Co-Lead Counsel.

Plaintiffs have moved for leave to amend their complaints, to file one consolidated amended complaint.  Plaintiffs also seek permission to file an amended pleading once the Form S-4 Registration Statement is filed.

Each of Community Bank System and Wilber believes the claims asserted are without merit and intends to vigorously defend against these lawsuits.

Formal Agreement with Office of the Comptroller of the Currency

On October 13, 2010, Wilber Bank entered into a formal written agreement (the “Formal Agreement”) with the OCC, Wilber Bank’s primary regulator.  The Formal Written Agreement became effective on October 13, 2010 and will remain in effect and enforceable until it is modified, waived or terminated in writing by the OCC.  A copy of the Formal Written Agreement was filed as Exhibit 10.1 to the Current Report on Form 8-K filed by Wilber on October 19, 2010.

 
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Entry into the Formal Agreement is based on the findings of the OCC during their on-site examination of Wilber Bank as of March 22, 2010.  Since the completion of the examination (the “OCC Exam”), the Board of Directors of Wilber Bank and its management have aggressively worked to address the findings of the OCC Exam, and have already successfully implemented initiatives and strategies to address and resolve a number of the issues noted in the Formal Agreement.  Wilber Bank continues to work in cooperation with its regulators to bring its policies and procedures into conformity with directives.

Under the terms of the Formal Agreement, Wilber Bank is required to take the following actions: (i) adopt and implement a written action plan detailing the Board’s assessment of actions required to correct Wilber Bank’s deficiencies noted in certain OCC exams, along with a timeline for the implementation of such a plan; (ii) ensure continuation of a competent full-time President to carry out the Board’s policies and adequately manage the day-to-day operations of Wilber Bank; (iii) develop, implement and adhere to a written program to improve Wilber Bank’s loan portfolio management and correct each deficiency cited in certain OCC exams; (iv) develop, implement and adhere to a written program to reduce the high level of credit risk; (v) make a diligent effort to obtain credit information on all loans lacking such information and ensure that proper collateral documentation is in place; (vi) protect Wilber Bank’s interest in assets criticized by the OCC; (vii) review and revise its written loan policy; (viii) reverse or charge off all interest that has accrued and is contrary to regulatory call report  requirements;  (ix) adopt, implement and adhere to a policy to ensure proper management of other real estate owned; (x) continue to review the adequacy of Wilber Bank’s allowance for loan losses and maintain a program to ensure an adequate allowance; (xi)  develop, implement and adhere to a three year capital program to include, without limitation, specific plans for maintaining adequate capital, remain “well capitalized”, and a dividend policy that permits declaration of dividends only when in compliance with the capital program and when certain other conditions are met;  (xii) adopt, implement and adhere to a written strategic plan establishing, among other things, objectives for Wilber Bank’s overall risk profile, earnings performance and growth and (xiii) correct each violation of law, rule or regulation cited in the two most recent regulatory examination reports and implement procedures to avoid future violations.

Additionally, Wilber Bank is required to submit periodic progress reports to the OCC regarding various aspects of the foregoing actions.  Wilber Bank’s Board shall appoint a compliance committee to monitor and coordinate the Bank’s performance under the Formal Agreement.  As of the date of this document, Wilber has developed and submitted a detailed action plan to address the Formal Agreement.  The action plan included activities to cure the deficiencies delineated within the Formal Agreement.  The Board of Directors and management believes that it has made significant progress with respect to the Formal Agreement and is now in substantial compliance with a majority of the requirements contained within the Formal Agreement.

 No Appraisal or Dissenters’ Rights

Under Section 910 of the New York Business Corporation Law, shareholders may, under certain circumstances, exercise a right of dissent from certain limited corporate actions and obtain payment for the fair value of their shares.  However, this right of dissent and appraisal under Section 910 of the New York Business Corporation Law is not available to holders of Wilber’s common stock in connection with the Merger.  Section 910 of the New York Business Corporation Law provides that shareholders do not have dissenters’ rights with respect to a merger if, on the record date, the stock held by such shareholders is listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the Financial Industry Regulatory Authority, formerly known as the National Association of Securities Dealers, Inc.  Because Wilber’s common stock is listed on the NYSE Amex, Wilber shareholders will not have any appraisal or dissenters’ rights with respect to the Merger.

 
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THE MERGER AGREEMENT

Conversion of Wilber Common Stock

At the effective time of the Merger, each outstanding share of Wilber common stock will be converted into, at the election of each Wilber shareholder, either:

 
·
a number of shares of Community Bank System common stock equal to the applicable exchange ratio for each share of Wilber common stock owned.  The exchange ratio will be:

 
·
if the market price (as determined below) of Community Bank System common stock is greater than $25.35, in which case the exchange ratio will be equal to 0.3748; or

 
·
if the market price of Community Bank System common stock is less than $19.71, in which case the exchange ratio will be equal to 0.4820; or

 
·
if the market price of Community Bank System common stock is equal to or greater than $19.71, or equal to or less than $25.35, the quotient (rounded to the nearest one-thousandths of a share) obtained by dividing $9.50 by the market price of Community Bank System common stock; or

 
·
cash at the rate of $9.50 for each share of Wilber common stock owned; or

 
·
a combination of shares of Community Bank System common stock for 80% of the aggregate number of shares of Wilber common stock owned and cash for 20% of the aggregate number of shares of Wilber common stock owned, using the same exchange rates for stock and cash described above.

As used above, the “market price” of Community Bank System common stock is equal to the average closing sale price of Community Bank System common stock over the 10 trading day period immediately prior to the closing date of the Merger.

You may obtain current market quotation for the Community Bank System common stock from a number of sources.  The market price of the Community Bank System common stock will fluctuate between the date of this document and the date of the Merger and after the Merger.  Therefore, the value of the shares of Community Bank System common stock that Wilber shareholders may receive in the Merger may increase or decrease prior to and after the Merger, and may be more or less than the amount of cash consideration being offered in the Merger.

The applicable exchange ratio for the Merger may be adjusted appropriately if Community Bank System changes the number of outstanding shares of its common stock before the Merger through any stock split, recapitalization, reclassification or other similar change, or sets a record date for any of the foregoing events prior to the completion of the Merger.

Community Bank System will not issue any fractional shares in the Merger.  Instead, you will receive cash in an amount equal to the product of (1) the average closing sale price of Community Bank System common stock over the 10 trading days immediately prior to the closing date of the Merger, and (2) the fraction of a share of Community Bank System common stock that you would have otherwise been entitled to receive in the Merger.  Community Bank System will pay no interest on any cash in lieu of fractional shares.  American Stock Transfer will serve as exchange agent and will be responsible for sending you any cash payment you have a right to receive.

 
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At the effective time of the Merger, you will no longer have any rights as a holder of Wilber common stock, but you will, upon proper surrender of your Wilber common share certificates, have the rights of a holder of Community Bank System common stock.  For a comparison of the rights you have as a holder of Wilber common stock to the rights you will have as a holder of Community Bank System common stock, please read “Material Differences in the Rights of Shareholders” beginning on page [    ].

Election Procedures

Subject to the allocation procedures described in the next section, you will have the right to elect to receive with respect to your shares of Wilber common stock either: all Community Bank System common stock, all cash, or a mixture of shares of Community Bank System common stock for 80% of the shares of Wilber common stock you own, and cash for 20% of the shares of Wilber common stock you own.

All Stock Election.  If you make the all stock election, you will receive a number of shares of Community Bank System common stock equal to the applicable exchange ratio determined in accordance with the section captioned “Conversion of Wilber Common Stock” above, for each share of Wilber common stock you own, subject to the allocation procedures described below.

All Cash Election.  If you make the all cash election, you will receive $9.50 in cash for each share of Wilber common stock you own, subject to the allocation procedures described below.

Mixed Election.  If you make the mixed election, you will receive (i) $9.50 in cash for 20% of the total number of shares of Wilber common stock you own, and (ii) shares of Community Bank System common stock, based upon the applicable exchange ratio, for 80% of the total number of shares of Wilber common stock you own.

Non-Election Shares.  If you do not make an election as to whether you wish to receive all cash, all Community Bank System common stock, or a mixture of 80% stock and 20% cash, or if you do not make a valid election on a timely basis, you will automatically be deemed to have made the mixed election.

Representative Shares.  Record holders of shares of Wilber common stock who hold those shares as nominees, trustees or in other representative capacities may submit multiple election forms/letters of transmittal, provided that those record holders certify that each of the election forms/letters of transmittal covers all of the shares of Wilber common stock held for the benefit of a particular beneficial owner.

Under the terms of the Merger Agreement, no more than 20% of the outstanding shares of Wilber common stock will be converted into the right to receive cash, and no more than 80% the outstanding shares of Wilber common stock will be converted into the right to receive Community Bank System common stock.  Therefore, if the elections result in an oversubscription of either stock or cash, American Stock Transfer will follow the procedures for allocating Community Bank System common stock and cash described below under “Allocation Mechanism.”  Accordingly, Wilber and Community Bank System cannot guarantee that you will receive the form of merger consideration that you elect with respect to all of the shares of Wilber common stock you own.

 
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Election Form/Letter of Transmittal.  You will receive an election form/letter of transmittal and other appropriate and customary transmittal materials in a separate mailing.  The election form/letter of transmittal will allow you to make either the all cash election, the all stock election or the mixed election.  This document is being mailed to each Wilber shareholder who was a holder of record as of the close of business on [                     ], the record date for the special meeting.  American Stock Transfer will send each Wilber shareholder who was a holder of record as of the close of business on [   ], 2011 the election form/letter of transmittal and make available an election form/letter of transmittal to any person who becomes a holder of Wilber common stock subsequent to [                    ], 2011 and up and until the close of business on the business day prior to the election deadline.  Wilber and Community Bank System currently expect the election deadline to be 5:00 p.m., Eastern time, on [                     ], 2011, but will notify you if there is a change in the deadline.

If you wish to elect the type of merger consideration you will receive in the Merger, you should carefully review and follow the instructions to the election form/letter of transmittal.  If you do not make a valid election prior to the election deadline with respect to any of your shares of Wilber common stock, those shares are deemed to be subject to the mixed election.

To make a valid election, you must submit a properly completed election form/letter of transmittal so that it is actually received by the exchange agent at or prior to the election deadline in accordance with the instructions to the election form/letter of transmittal.  An election form/letter of transmittal will be deemed properly completed only if accompanied by stock certificates (or an appropriate guarantee of delivery of stock certificates as set forth in the notice of guaranteed delivery included with the election form/letter of transmittal from a firm that is a member of a registered national securities exchange or a commercial bank or trust company having an office or correspondent in the United States, provided that the stock certificates are in fact delivered to the exchange agent within three business days after the date of execution of the guarantee of delivery) representing all shares of Wilber common stock covered by the election form/letter of transmittal (or appropriate evidence as to the loss, theft or destruction, appropriate evidence as to the ownership of that certificate by the claimant, and appropriate and customary identification).

You may revoke an election at any time prior to the election deadline, and you may either resubmit a new election or simply withdraw the prior election.  If you wish to change an election, you may resubmit the election form/letter of transmittal in accordance with the election procedures, so long as the resubmitted election form/letter of transmittal is received by the election deadline.  If you wish to withdraw an election, you must provide written notice of withdrawal to the exchange agent by 5:00 p.m. local time, on the day prior to the election deadline.  In the event of a withdrawal of an election, the exchange agent will, upon receiving a written request from you, return the certificates of Wilber common stock (or guarantee of delivery, if applicable) submitted by you, and you will be deemed to have made a mixed election unless you resubmit another election form/letter of transmittal in accordance with the election procedures.  The exchange agent will have reasonable discretion to determine whether any election, change, or withdrawal request has been properly or timely made and to disregard immaterial defects in any election form/letter of transmittal, and any good faith decisions of the exchange agent and Community Bank System regarding these matters will be binding and conclusive.  Neither Community Bank System nor the exchange agent will be under any obligation to notify any person of any defects in an election form/letter of transmittal.

Deposit of Merger Consideration.  As soon as practicable after the completion of the Merger, Community Bank System will deposit with American Stock Transfer, the transfer agent for its common stock and the exchange agent for the Merger, certificates representing the shares of Community Bank System common stock to be issued in the Merger and cash payable in the Merger, by wire transfer of immediately available funds.
 
 
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Letter of Transmittal.  As soon as practicable after the completion of the Merger, the exchange agent will send a letter of transmittal to each person who was a Wilber shareholder at the effective time of the Merger but did not previously and properly surrender shares of Wilber common stock to the exchange agent pursuant to valid elections prior to the election deadline (other than Wilber shareholders who have exercised their appraisal rights under New York law). This mailing will explain how to surrender shares of Wilber common stock (if these shares have not already been surrendered) in exchange for the merger consideration the holder is entitled to receive under the Merger Agreement.

Dividends; Closing of Transfer Books.  Declaration of dividends by Community Bank System after the Merger will include dividends on all Community Bank System common stock issuable in the Merger.  However, no dividend or other distribution payable to the holders of record of Community Bank System common stock at or as of any time after the completion of the Merger will be paid to the former Wilber shareholders until they physically surrender their certificates as described above (or, if applicable, follow procedures for lost, stolen, destroyed or mutilated certificates), and no interest will be paid on any dividend or distribution.  After the completion of the Merger, the stock transfer books of Wilber will close and there will be no more transfers on the transfer books of Wilber.  If any certificates formerly representing shares of Wilber common stock are presented for transfer after the Merger, those certificates will be cancelled and exchanged for certificates representing Community Bank System common stock and/or checks for cash, as provided in the Merger Agreement, and the shares represented by those certificates will be treated as shares subject to the mixed election if no election form has been presented by the holder by the election deadline.

Lost, Stolen, Destroyed or Mutilated Certificates.  If any certificate formerly representing Wilber common stock is lost, stolen, destroyed or mutilated, Community Bank System can require its holder to give an affidavit to that effect and to deliver an indemnity agreement and/or post a bond in an amount that Community Bank System may direct as indemnity against any claim that may be made by another party with respect to the certificate.  Once these requirements have been satisfied, the exchange agent will issue a certificate representing an appropriate number of shares of Community Bank System common stock.

Allocation Mechanism

Pursuant to the terms of the Merger Agreement, no more than 20% of the outstanding Wilber common stock will be converted into the right to receive cash in the Merger, and no more than 80% of the outstanding Wilber common stock will be converted into the right to receive shares of Community Bank System common stock in the Merger.  Therefore, depending on the aggregate elections made by the Wilber shareholders for each election category, all-cash and all-stock elections are subject to a pro rata allocation to preserve these limitations on the amount of cash to be paid and the number of shares of Community Bank System common stock to be issued in the Merger.  However, the shares of Wilber common stock held by the following type of Wilber shareholders are not subject to this allocation mechanism:

 
shareholders owning 100 or fewer shares of Wilber common stock, who elect to receive all cash for their shares, will receive all cash.

As a result, unless this exception applies to you and your shares, you may receive a mix of cash and stock even if you make the all-cash election or the all-stock election.
 
 
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Reduction of Shares Entitled to Receive Cash.  If, at the election deadline, the holders of more than 20% of the total number of outstanding shares of Wilber common stock have elected to receive cash pursuant to the all-cash election or the mixed election or have properly exercised their appraisal rights under New York law, then Community Bank System will remove a certain number of shares otherwise subject to the all-cash election and instead treat those shares as being subject to the all-stock election, so that a number of shares equal, as nearly as possible, to 20% of the total number of outstanding shares of Wilber common stock will be exchanged for cash in the Merger or subject to appraisal rights.  Community Bank System will determine the number of shares to be allocated on a pro rata basis in relation to the total number of shares subject to the all-cash election (excepting out the number of shares subject to the all-cash election made by shareholders with 100 or fewer shares).  Wilber shareholders who have made the mixed election will not be required to have more than 80% of their shares of Wilber common stock converted into shares of Community Bank System in the Merger.  Notice of this allocation shall be provided to each Wilber shareholder who had made the all-cash election but will receive stock consideration because of the allocation, after the completion of the Merger.

Increase of Shares Entitled to Receive Cash.  If, at the election deadline, the holders of less than  20% of the total number of outstanding shares of Wilber common stock have elected to receive cash pursuant to the all-cash election or the mixed election, then Community Bank System will remove a certain number of shares otherwise subject to the all-stock election and instead treat those shares as being subject to the all-cash election, so a number of shares equal, as nearly as possible, to 20% of the total number of outstanding shares of Wilber common stock will be exchanged for cash in the Merger. Community Bank System will determine the number of shares to be allocated on a pro rata basis in relation to the total number of shares subject to the all-cash election.  Wilber shareholders who have made the all-stock election or the mixed election will not be required to have more than 20% of their shares of Wilber common stock converted into cash.  Notice of this allocation shall be provided promptly to each Wilber shareholder who had made the all-stock election but will receive cash consideration because of the allocation, after the completion of the Merger.

The allocation described above will be computed and completed by Community Bank System as soon as practicable after completion of the Merger.

Because the Federal income tax consequences of receiving cash, Community Bank System common stock, or both cash and Community Bank System common stock will be different, you are strongly urged to read carefully the information set forth under the caption “The Merger ¾ Material Federal Income Tax Consequences” and to consult your own tax advisors for a full understanding of the Merger’s tax consequences to you. In addition, because the value of the Community Bank System common stock will fluctuate, the economic value per share received by Wilber shareholders who receive the stock consideration may, as the date of the effective time  of the Merger or as of the date of the receipt of the consideration by them, be more or less than the amount of cash consideration per share received by Wilber shareholders who receive cash consideration.

Representations and Warranties

In the Merger Agreement, each party makes customary representations and warranties about themselves concerning various business, legal, financial, regulatory and other pertinent matters.  These representations and warranties will not survive after the Merger.  Under certain circumstances, each of party may decline to complete the Merger if the inaccuracy of the other party’s representations and warranties has a material adverse effect on the other party.

Conditions to the Merger

Mutual Conditions.  Before either of us will be obligated to complete the Merger, the following conditions must have been satisfied:
 
 
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Wilber shareholders approve the Merger Agreement, and all other corporate actions necessary on the part of each party to authorize the Merger are taken;
 
Wilber and Community Bank System receive all approvals or consents required by law or mutually deemed necessary from any applicable governmental agency, all applicable notice or waiting periods under all laws expire, and all conditions contained in the approvals or consents, if any, are satisfied;
 
the SEC declares effective the registration statement covering the Community Bank System common stock to be issued in the Merger, and the registration statement is not the subject of any stop order or any actual or threatened proceeding seeking a stop order;
 
Community Bank System receives all necessary authorizations and permits from state securities agencies or commissions for the issuance of its common stock in the Merger, or confirms that no authorizations or permits are required;
 
there is no order, decree or injunction in effect which prohibits the completion of the Merger, and there is no actual or threatened governmental action or proceeding that prevents the completion of the Merger;
 
the NYSE lists the Community Bank System common stock to be issued to the Wilber shareholders in the Merger, subject to official notice of issuance; and
 
Hinman, Howard & Kattell, LLP, Wilber’s attorneys deliver an opinion to Wilber to the effect that the Merger will qualify as a tax-free reorganization under Section 368 of the Internal Revenue Code, and as to certain other related matters.

Conditions to Obligations of Wilber.  Before Wilber will be obligated to complete the Merger, the following additional conditions must have been satisfied:

 
the representations and warranties of Community Bank System contained in the Merger Agreement are true in all material respects on the date of the Merger Agreement and on the closing date.  The representations and warranties may contain inaccuracies if, taken together, they would not have a material adverse effect on Community Bank System;
 
Community Bank System has materially performed its obligations under the Merger Agreement which are intended to be performed before the closing;
 
Community Bank System has delivered a customary closing certificate as to the above two matters;
 
Wilber receives a written fairness opinion from Austin Associates, its financial advisors, dated within five days of the mailing of this document; and
 
the registration statement covering the Community Bank System common stock to be issued in the Merger includes as an exhibit an opinion of Bond, Schoeneck & King, Community Bank System’s outside counsel, concerning certain customary matters related to the Community Bank System common stock to be issued in the Merger.

Conditions to Obligations of Community Bank System.  Before Community Bank System will be obligated to complete the Merger, the following additional conditions must have been satisfied:

 
the representations and warranties of Wilber contained in the Merger Agreement are true in all material respects on the date of the Merger Agreement and on the closing date.  The representations and warranties may contain inaccuracies if, taken together, they would not have a material adverse effect on Wilber;
 
under Section 3.7 of the Merger Agreement, if delinquent loans (defined as (i) all loans with principal and/or interest that are 30-89 days past due, (ii) all loans with principal and/or interest that are at least 90 days past due and still accruing, (iii) all loans with principal and/or interest that are nonaccruing, (iv) loans which constitute troubled debt restructurings under Generally Accepted Accounting Principles or applicable law, (v) Other Real Estate Owned and (vi) net charge-offs from August 31, 2010 through the effective time of the Merger) exceed $32.160 million then Community Bank System can terminate the Merger Agreement.  As of November 30, 2010, the amount of delinquent loans totals $28.530 million;
 
Wilber has materially performed its obligations under the Merger Agreement which are intended to be performed before the closing;
●             Wilber has delivered a customary closing certificate as to the above two matters; and
 
to the extent that any contract or agreement of Wilber requires the consent of or waiver from any other party because of the Merger, Wilber receives the consent or waiver unless the failure to receive the same will not have a material adverse effect on Wilber.
 
 
 
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Unless prohibited by law, any of the conditions to the Merger may be waived by the applicable party.  As described below, if these conditions are not satisfied or waived, each of us may have a right to terminate the Merger Agreement under certain circumstances.

Termination

Either Wilber or Community Bank System may terminate the Merger Agreement at any time before the completion of the Merger if:

 
both parties consent in writing to the termination pursuant to the authorization of the respective Boards of Directors;
 
the other party materially breaches, and does not cure within 30 days of written notice to the extent curable, any of the representations or warranties or any covenant or agreement it has made under the Merger Agreement and the breach entitles the party seeking to terminate to not complete the Merger;
 
the parties are not able to obtain required governmental approvals, and all appeals and requests for reconsideration have been exhausted;
 
any governmental entity issued a final and non-appealable order to prohibit the completion of the Merger;
 
Wilber shareholders do not approve the Merger Agreement at a special meeting called for that purpose; or
 
the Merger is not completed on or before May 31, 2011, unless the Merger was not completed principally because the party seeking to terminate breached a covenant or obligation of the Merger Agreement.

In addition, Community Bank System may terminate the Merger Agreement at any time before the completion of the Merger if:

 
Wilber’s Board of Directors withdraws, modifies or changes its approval or recommendation of the Merger Agreement or the transactions contemplated by the Merger Agreement in a manner adverse to Community Bank System, or Wilber did not include in this proxy statement/prospectus the recommendation of its Board of Directors in favor of the approval of the Merger Agreement or the transactions contemplated by it, or the Board of Directors of Wilber resolves to take any of the foregoing actions;