FEDERAL RESERVE BANK of NEW YORK

33 LIBERTY STREET, NEW YORK, NY 10045-0001

March 2, 2017

George J. Getman, Esq.

Executive Vice President & General Counsel
Community Bank System, Inc.
5790 Widewaters Parkway
DeWitt, New York 13214

Dear Mr. Getman:

In connection with the application by Community Bank System, Inc. ("Community"),

DeWitt, parent company ofCom1mmity Bank, National Association ("Community Bank"),
Canton, both of New York, to merge with Merchants Bancshares ("Merchants"), and thereby
acquire Merchants Bank, both of South Burlington, Vermont, pursuant to section 3(a)(5) of the
Bank Holding Company Act of 1956, 12 U.S.C. I 842(a)(5), Federal Reserve staff requests the
following additional information:

I. Provide Exhibits B and C described on page I of the Agreement and Plan of Merger
("Merger Agreement").

2. Provide the Community Disclosure Letter and Merchants Disclosure Letter described on
page 12 of the Merger Agreement.

3. Under section 4.2(r) and (v) of the Merger Agreement, Community must provide its
written consent before Merchants or any of its subsidiaries is able to (I) enter into any
contract that would have been required to be disclosed in Section 3.2(k) of the Merchants
Disclosure Letter had it been entered into prior to the execution of the Merger Agreement
or (2) renew or enter into any non-compete, exclusivity, non-solicitation or similar
agreement that would restrict or limit, in any material respect, the operations of
Merchants or any of its subsidiaries or, after the effective time, Community or any of its
subsidiaries.

Please explain whether these provisions would enable Community, in exercising its prior
approval rights, to be involved in the management or policy of Merchants prior to the
Board's final action on the application. In this regard, please provide relevant data and
context to enable staff to determine whether these provisions would allow Community to
be involved in the ordinary course or non-ordinary course activities of Merchants during
the relevant time period.

T 212.720.6435 IF 212.720.1608 IE elieen.banko@ny.frb.org IW www.newyorkfed.org

 George J. Getman, Esq.
March 2, 2017
2

4. Pursuant to section 4. l 6(a) of the Merger Agreement, Community agrees to jointly and
severally indemnify and hold harmless each present and former director, officer and
employee of Merchants and its subsidiaries, against all liabilities incurred in connection
with any claim arising out of actions or omissions occurring before the merger of
Merchants with and into Community to the extent permissible under applicable
Law. Clarify whether section 4. l 6(a) complies with section l 8(k) of the Federal Deposit
Insurance Act, 12 U.S.C. l 828(k), and the implementing regulations of the Federal
Deposit Insurance Corporation, 12 CFR part 357. See also SR Letter 02-17 (July 8,
2002).

5. Provide actual and proforma asset quality ratios (the classified ratio and the
nonperforming assets ratio) for Community on a consolidated basis and Community
Bank as of December 31, 2016. The numerator and denominator of each calculated ratio
must be as of the same date. The asset quality ratios should be calculated as follows:

a. Focus on two separate elements: (i) internally classified assets, comprised of the
separate categories of substandard, doubtful, and loss (with relevant components
of other real estate owned ("OREO") separately identified in each category), and
(ii) nonperforming assets, comprised ofnonaccrual loans, all restructured loans,
and OREO.
b. Provide a breakdown of each category (for example, commercial real estate, oil
and gas, consumer loans) of internally classified assets and nonperforming assets.
c. For the classified assets ratio, the level of classified assets should be compared to
the total amount of tier 1 capital and allowance for loan loss reserves.
d. For the nonperforming assets ratio, the level of nonperforming assets should be
compared to the total equity capital (common stock, perpetual preferred stock,
surplus, retained earnings accumulated other comprehensive income) and the
allowance for loan loss reserves.
e. Provide details of the calculations.

6. Provide actual and pro forma loan loss reserve coverage ratios for Community on a
consolidated basis and Community Bank as of December 31, 2016. The coverage ratios
should be calculated as follows:

a. For the consolidated applicant, for numerator use the total allowance for loan loss
reserves and for the denominator use nonaccrual loans and loans past due more
than 90 days.
b. For the target bank, and/or the resultant merged bank, for the numerator use the
total allowance for loan loss reserves and for the denominator use nonaccrual
loans.
c. Provide details of the calculations.
 George J. Getman, Esq.
March 2, 2017
3

7. Provide proforma balance sheets for Community (parent-only and consolidated) and
Community Bank as of December 31, 2016. Also, provide proforma capital ratios for
Community (on a consolidated basis) and Community Bank, including the common
equity tier 1 capital ratio, tier 1 and total risk-based capital ratios, and the leverage ratio,
as of December 31, 2016. Include all adjustments to the balance sheets and details of the
calculations for each capital ratio.

8. On page xv of the bank merger application, Community Bank states that, to the extent it
does not intend to continue to offer certain loan products and services offered by
Merchants Bank post-merger, it does not believe that not offering such products and
services would have a significant impact on the target bank's communities. As an
example, Community Bank cites the fact that Merchants Bank would no longer accept
applications for FHA/VA loans (on behalf of a mortgage company), but that Community
Bank would offer loan products and programs which are not currently offered by
Merchants Bank that Community Bank believes are comparable and "equally valuable"
to its communities, such as FNMA's Home Ready Program, Community Bank's
Affordable Housing Program, and the USDA loan program. Compare the features of
FHA and VA loans for which applications are presently taken by Merchants Bank with
the features of the products and programs that Community Bank asserts are comparable,
including any features of FHA and VA loans that are not covered by Community Bank's
offerings.

9. Describe any litigation or investigations by local, state, or federal authorities involving

the applicant or any of its subsidiaries or the target or any of its subsidiaries that is
currently pending or was resolved within the last two years.

Please submit the original and one copy of your responses as soon as practicable to Ivan
Hurwitz at the Federal Reserve Bank of New York, and provide a copy of the response to the
adverse commenter. Any information for which confidential treatment is desired should be so
labeled and separately bound in accordance with section 261.15 of the Board's Rules Regarding
the Availability of Information.
 George J. Getman, Esq.
March 2, 2017
4

If you have any questions regarding this letter, please contact Gillian Burgess
(202-736-5564) of Board's Legal Division, Charles Fleet (202-452-2776) of the Board's
Division of Consumer & Community Affairs, or William Bissenas (202-728-5851) of the
Board's Supervision & Regulation Division.

Sincerely,

Eileen K. Banko
Bank Applications Officer
Bank Applications Function

cc: Board of Governors

Marva Cummings
Office of the Comptroller of Currency

U.S. Department of Justice

Eileen Leighton, Assistant Vice President

Federal Reserve Bank of Boston

Matthew Lee, Esq.

Inner City Press/Fair Finance Watch