EMPLOYMENT AGREEMENT

This sets forth the terms of the Employment Agreement made effective as of August 1, 2004, and amended as of December 31, 2008 between (i) COMMUNITY BANK SYSTEM, INC., a Delaware corporation and registered bank holding company, and COMMUNITY BANK, N.A., a national banking association, both having offices located in Dewitt, New York (collectively, the "Employer"), and (ii) BRIAN D. DONAHUE, an individual currently residing at Olean, New York ("Employee").  This Agreement is effective as of August 1, 2004 and supersedes the Employment Agreement between the parties dated September 1, 2002.  This Agreement was amended December 31, 2008 in accordance with Internal Revenue Code Section 409A.

IN CONSIDERATION of the promises and mutual agreements and covenants contained herein, and other good and valuable consideration, the parties agree as follows:

1.            Employment .

(a)            Term .  Employer shall employ Employee, and Employee shall serve, as Chief Banking Officer and Executive Vice President of Employer for a term commencing on August 1, 2004 and ending on December 31, 2009 ("Period of Employment"), subject to termination as provided in paragraph 3 hereof.

(b)            Salary .  During the period August 1, 2004 through December 31, 2004, Employer shall pay Employee base salary at the annual rate of $200,000.00 ("Base Salary").  For calendar year 2005, Employer shall pay Employee Base Salary at the annual rate of $230,000.00.  Employee's Base Salary for calendar years after 2005 shall be determined by the Board of Directors of Employer ("Board"), or an authorized committee of the Board, in accordance with Employer's regular practice for reviewing and adjusting base salary for executive employees.  Employee's Base Salary is payable in accordance with Employer's regular payroll practices for executive employees.

(c)            Incentive Compensation .  Employee shall be entitled to annual incentive compensation opportunities pursuant to the terms of the "Management Incentive Plan" (which term includes any successor plan or incentive compensation arrangement) which has been approved by the Board to cover Employee and other key personnel of Employer.  Upon termination of Employee's employment pursuant to subparagraph 3(a), 3(b), 3(c) or paragraph 6, Employee shall be entitled to a pro rata portion (based on Employee's complete months of active employment in the applicable year) of the annual incentive award that is payable with respect to the year during which the termination occurs or, in the case of a termination upon Employee's disability pursuant to subparagraph 3(c), the date the Disability Period began.

(d)           Until such time as Employee relocates his principal residence to the Syracuse, New York area, which relocation shall occur by a date to be agreed upon by the parties (but in no event shall such date be earlier than January 1, 2009), Employee shall be entitled to perform his services for Employer from offices in Dewitt, New York and Olean, New York.  After such mutually agreed-upon date, Employee shall perform his services for Employer from an office in Dewitt, New York.

2.            Duties during the Period of Employment .  Employee shall have full responsibility, subject to the control of the Board and Employer's President and Chief Executive Officer or authorized designee, for the supervision of all aspects of Employer's banking business and operations, and the discharge of such other duties and responsibilities to Employer as may from time to time be reasonably assigned to Employee by the Board or Employer's President and Chief Executive Officer.  Employee shall report to the President and Chief Executive Officer of Employer or the President and Chief Executive Officer's designee.  Employee shall devote Employee's best efforts to the affairs of Employer, serve faithfully and to the best of Employee's ability and devote all of Employee's working time and attention, knowledge, experience, energy and skill to the business of Employer, except that Employee may affiliate with professional associations, business and civic organizations.  Employee shall serve on the Board of Directors of, or as an officer of Employer's affiliates, without additional compensation if requested to do so by the Board of Directors of Employer.  Employee shall receive only the compensation and other benefits described in this Agreement for Employee's duties as a Director of Employer.

3.            Termination .  Employee's employment by Employer shall be subject to termination as follows:

(a)            Expiration of the Term .  This Agreement shall terminate automatically at the expiration of the Period of Employment unless the parties enter into a written agreement extending Employee's employment, except for the continuing obligations of the parties as specified hereunder.

(b)            Termination Upon Death .  This Agreement shall terminate upon Employee's death.  In the event this Agreement is terminated as a result of Employee's death, Employer shall continue payments of Employee's Base Salary for a period of 90 days following Employee's death to the beneficiary designated by Employee on the "Beneficiary Designation Form" attached to this Agreement as Appendix A.  Employee's beneficiary shall be free to dispose of any restricted stock previously granted to Employee by Employer.  Additionally, Employer shall treat as immediately exercisable all unexpired stock options issued by Employer and held by Employee that are not exercisable or that have not been exercised, so as to permit the Beneficiary to purchase the balance of Community Bank System, Inc. ("CBSI") Stock not yet purchased pursuant to said options until the end of the full exercise period provided in the original grant of the option right, determined without regard to Employee's death or termination of employment.

(c)            Termination Upon Disability .  Employer may terminate this Agreement upon Employee's disability.  For the purpose of this Agreement, Employee's inability to perform Employee's duties hereunder by reason of physical or mental illness or injury for a period of 26 successive weeks, or such longer waiting/elimination period provided pursuant to Employer's group long-term disability policy (the "Disability Period") shall constitute disability.  The determination of disability shall be made by a majority vote of a physician selected by Employer, a physician selected by Employee and a third physician selected by the other two physicians.  During the Disability Period, Employee shall be entitled to 100% of Employee's Base Salary otherwise payable during that period, reduced by any other benefits to which Employee may be entitled for the Disability Period on account of such disability (including, but not limited to, benefits provided under any disability insurance policy or program, worker's compensation law, or any other benefit program or arrangement).  Thereafter, upon termination pursuant to this disability provision, Employee shall be free to dispose of any restricted stock granted to Employee.  Additionally, Employer shall treat as immediately exercisable all unexpired stock options issued by Employer and held by Employee that are not exercisable or that have not been exercised, so as to permit the Employee to purchase the balance of CBSI Stock not yet purchased pursuant to said options until the end of the full exercise period provided in the original grant of the option right, determined without regard to Employee's disability or termination of employment.

(d)            Termination for Cause .  Employer may terminate Employee's employment immediately for "cause" by written notice to Employee.  For purposes of this Agreement, a termination shall be for "cause" if the termination results from any of the following events:

(i)           Material breach of this Agreement;

(ii)           Documented misconduct as an executive of Employer, or any subsidiary or affiliate of Employer for which Employee is performing services hereunder including, but not limited to, misappropriating any funds or property of any such company, or attempting to obtain any personal profit (A) from any transaction to which such company is a party or (B) from any transaction with any third party in which Employee has an interest which is adverse to the interest of any such company, unless, in either case, Employee shall have first obtained the written consent of the Board;

(iii)           Unreasonable neglect or refusal to perform the duties assigned to Employee under or pursuant to this Agreement, unless cured within 60 days following Employee's receipt of written notice to Employee of such neglect or refusal;

(iv)           Conviction of a crime involving moral turpitude;

(v)           Adjudication as a bankrupt, which adjudication has not been contested in good faith, unless bankruptcy is caused directly by Employer's unexcused failure to perform its obligations under this Agreement;

(vi)           Documented and material failure to follow the reasonable, written instructions of the Board or the President and Chief Executive Officer of Employer or authorized designee, provided that the instructions do not require Employee to engage in unlawful conduct; or

(vii)           Any material and documented violation of the rules or regulations of the Office of the Comptroller of the Currency or of any other regulatory agency. Notwithstanding any other term or provision of this Agreement to the contrary, if Employee's employment is terminated for cause, Employee shall forfeit all rights to payments and benefits otherwise provided pursuant to this Agreement; provided, however, that Base Salary shall be paid through the date of termination.

(e)            Termination For Reasons Other Than Cause .  In the event Employer terminates Employee prior to December 31, 2009 for reasons other than cause, Employee shall be entitled to a severance benefit equal to the greater of (i) the sum of the annual Base Salary in effect at the time of termination and the most recent payment to Employee under the Management Incentive Plan, or (ii) amounts of Base Salary and expected Management Incentive Plan payments that otherwise would have been payable through the balance of the unexpired term of this Agreement.  Unless Employee is a “specified employee” (as determined in accordance with Internal Revenue Code Section 409A), the benefit payable pursuant to this paragraph 3(e) shall be payable in equal biweekly installments over the 12-month period that begins on the first day of the month following Employee’s termination.  If Employee is a “specified employee” (as determined in accordance with Internal Revenue Code Section 409A), then installment payments during the first six months of the 12-month installment period shall be limited to the extent required by Internal Revenue Code Section 409A, any unpaid installment amounts shall be paid immediately after such six-month period and installment payments due during the remaining six months shall be paid as scheduled.

In addition, Employer shall: (iii) permit Employee to dispose of any restricted stock granted to Employee; and (iv) treat as immediately exercisable all unexpired stock options held by Employee that are not exercisable or that have not been exercised, so as to permit Employee to purchase the balance of CBSI Stock not yet purchased pursuant to said options until the end of the full exercise period provided in the original grant of the option right determined without regard to Employee's termination of employment.

Notwithstanding the foregoing, if Employer terminates Employee for reasons other than cause and under circumstances that entitle Employee to payments and benefits under paragraph 6 of this Agreement (regarding “Change of Control”) then amounts payable under clauses (i) or (ii) of this paragraph 3(e) shall be reduced by any payments made to Employee under paragraphs 6(a)(i) and (ii).

(f)            Expiration of Term Without Renewal .  In the event that Employee's employment ends on December 31, 2009 solely because Employer chooses not to renew or extend this Agreement beyond December 31, 2009 for reasons other than cause, then Employee shall be entitled to a severance benefit equal to the sum of (i) 175 percent of the annual Base Salary in effect at the time of termination, and (ii) the most recent payment to Employee under the Management Incentive Plan.  The benefit payable under this paragraph 3(f) shall be reduced by any amounts payable to Employee under paragraphs 6(a)(i) and (ii).  Any remaining benefit described in this paragraph 3(f) shall be paid on or before March 15, 2010.

(g)           Employer shall have the right of first refusal to purchase from Employee, or from Employee's beneficiary or estate, shares of CBSI Stock (but not outstanding options) acquired pursuant to the exercise of stock options after the date of Employee's termination of employment for any reason, in the event Employee, or Employee's beneficiary or estate, elects to dispose or transfer such acquired shares.  Any purchase made pursuant to this subparagraph shall be made at a price per share equal to the closing price per share of CBSI Stock (on the principal public market on which CBSI Stock is traded; currently the New York Stock Exchange) on the trading day that immediately precedes the date of purchase.  The right of first refusal described in this subparagraph shall expire ten years from the date of Employee's termination of employment.

4.            Fringe Benefits .

(a)            Benefit Plans .  During the Period of Employment, Employee shall be eligible to participate in any employee pension benefit plans (as that term is defined under Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended), Employer-paid group life insurance plans, medical plans, dental plans, long-term disability plans, business travel insurance programs and other fringe benefit programs maintained by Employer for the benefit of its executive employees.  Participation in any of Employer's benefit plans and programs shall be based on, and subject to satisfaction of, the eligibility requirements and other conditions of such plans and programs.  Employer may require Employee to submit to an annual physical, to be performed by a physician of his own choosing.  Employee shall be reimbursed for related expenses not covered by Employer's health insurance plan, or any other plan in which Employee is enrolled.