Community Bank System
Annual Report 2012

Plain-text annual report

A C L E A R V I S I O N C O M M U N I T Y B A N K S Y S T E M, I N C. 2 0 1 2 A N N U A L R E P O R T C OMMUNITY BANK SYSTEM, INC. (NYSE:CB U) Our principal business focus is building additional value into our enterprise through organic growth in core relationships, disciplined lending, selective and strategic acquisitions and a consistent approach to business regardless of economic conditions. Marc Lichtenfeld, author of Get Rich With Dividends, had this to say about CBU in a Bloomberg Radio interview recorded in July 2012: They did not take a dime of TARP money, so right off the bat, that’s a good sign. They basically bank the way banks used to conduct business. They know their customers, they didn’t get into trouble with mortgages. They have a dividend yield just under 4% and they’ve been raising the dividend every year for 19 years. Excellent management. Approximately 30% of our revenue is derived from non-interest sources with nearly half attributable to our benefits administration and wealth management businesses. Our asset quality metrics have remained consistently and significantly better than industry and peer group averages. This approach has contributed to our being named one of the nation’s best large banks in each of the last four years, ranking 7th in 2009 and 2010, 4th in 2011 and 11th in 2012 in the annual Forbes.com analysis of America’s 100 largest TABLE O F CO NT ENT S financial institutions. As a result of our history of consistently Regional Summaries improving performance, we’ve increased our cash dividend for 20 consecutive years, a significant milestone and evidence of our belief that payment of a meaningful and growing dividend is an Vision Statement Shareholder Letter Operations Review important component of providing favorable long-term returns to Corporate Governance our shareholders. As of December 31, 2012, our 5-year cumulative Administration total return to shareholders of 69.7% was the 3rd best among the Selected Financial Highlights current 100 largest US banks by asset size. Glossary Shareholder Information 1 2 3 8 16 18 23 24 Inside Back Cover We have the first or second deposit market share in more than 70% of the towns where we have a branch location. REGIONAL MARKETS REGIONAL SUMMARIES NO RTHERN NEW YO RK SOUT HERN NE W YORK CE NTRA L NE W YORK PE NNSYLVANIA Branches Deposits 55 77 21 26 $2.0 billion $2.1 billion $0.7 billion $0.8 billion Towns 1st /2nd Market Share Financial Service Centers Administrative/Operations Centers Counties in Region 36 5 1 12 39 5 2 16 13 1 - 7 13 1 1 5 Total Market Population* 1.0 million 2.6 million 0.8 million 0.7 million *US Census estimate - 2011 1 BE ONE OF AMERICA’S BEST BANKS Community Bank operates with a clear vision of being the best bank our customers, employees, shareholders and regulators do business with. It is a vision which drives us to deliver exceptional service, products, relationships, and – above all – shareholder returns. CBU’s five-year cumulative total return to shareholders was 70% – third highest among America’s 100 largest banks. In 2012 Forbes.com once again recognized our success in achieving this vision. In its fourth annual ranking of “America’s Best and Worst Banks,” Forbes® ranked Community Bank 11th best among America’s 100 largest banks and thrifts. We have ranked 11th or higher in each of the past four years, reflecting a consistent ability to deliver superior performance across important financial health metrics. These charts display the eight financial metrics used in the annual Forbes® analysis of the “Best and Worst Banks.” Comparing CBU to the median values of the institutions included in the Forbes® analysis illustrates why we’ve ranked among the country’s best performing banks during the four years this comparison has been published. 2 12 8 4 0 3.0 2.0 1.0 0.0 3.0 2.0 1.0 0 18 12 6 0 Return on Average Equity % Net Interest Margin (FTE) % 4.2 3.8 3.4 3.0 09 10 11 12 09 10 11 12 Nonperforming Assets / Total Assets % Allowance for Loan Losses / Nonperforming Loans % 300 200 100 0 09 10 11 12 09 10 11 12 Nonperforming Loans / Loans Outstanding % Leverage Ratio % 12 8 4 0 09 10 11 12 09 10 11 12 Total Risk Based Capital Ratio % Tier 1 Risk Based Capital Ratio % 15 10 5 0 09 10 11 12 09 10 11 12 CBU Median of Top 100 Banks SHAREHOLDER LETTER – A CLEAR VI SI ON O F S UCC ESS In 2012 we achieved what Community Bank aims to accomplish each For that reason, we have always remained committed to a long-term and every year: growing and sustainable returns to our shareholders. growth strategy which focuses first and foremost on the potential for It was with a clear vision of success that we set out to meet the increased shareholder returns. challenges we knew would be in store for 2012 – persistently low interest rates, margin compression, ultra-competitive lending markets and a low-growth economy. The vision of success which steered every decision and strategy in 2012 is the same we’ve looked to for direction year-in and year-out. It focuses on just four key principles: achieve market leadership, foster local decision making, continually diversify our revenue streams and prudently pursue acquired and organic growth. Strategies change with the times, but our guiding vision of success remains clear and consistent. Celebrating 20 Consecutive Years of Dividend Growth Dividends, of course, are a critical component of growing shareholder returns. Therefore, in 2012 we were very excited to celebrate our 20th consecutive year of increasing dividends. Once again, our success in executing on our vision did not go unnoticed. In July 2012 Community Bank was added to the “S&P 1500 Dividend Aristocrats,” an index comprised of just 105 companies – and only five banks – that have increased their annual regular cash dividend payments for at least 20 consecutive years. Our annual common stock dividend has Success means being a leader in each of the markets we serve. It means increased at a rate of 8.1% per year over the last 20 years. There is promoting local decision making within our markets, empowering our no question that our enduring vision of success paved the way for this bankers to make decisions in the best interest of both their customers wonderful achievement. and our bank, on the ground and in person. It means ensuring we have Considering that there are more than 1,000 publicly traded banks and growing and varied sources of revenue, in order to maintain stable thrifts in the US, 91 of which are in the S&P 1500, and only five of those earnings streams while also providing services and products of distinct are “Dividend Aristocrats,” we are delighted that our vision of success value to our customers. And, it means pursuing balanced and measured continues to benefit our loyal shareholders. What’s more: of the five growth, simultaneously executing toward both organic expansion and “Dividend Aristocrat” banks, CBU had the highest annual total return value-adding acquisitions. to shareholders (12.1%) over the 20 years ended December 31, 2012. This year our success in executing on our vision was once again nationally recognized by Forbes.com. In January 2013, Forbes named Community Bank the 11th best bank in 2012, as measured across eight financial health metrics, among the largest 100 U.S. banks and thrifts by assets. Among 2012’s top 100 banks, Community Bank ranked third for cumulative total return to shareholders over the last five years ending December 31, 2012. Since the end of 2007 – across the entire downturn, over the course of cataclysmic shifts in regulation, and in a period when 465 banks and thrifts failed – Community Bank delivered a five-year 70% cumulative return to shareholders. Not only is this higher than all but two of the largest 100 banks in the nation, but it measures in stark contrast to the negative 6% cumulative return for the group median. We also find it powerful to see that of the top twenty banks ranked by 5-year total return, three-quarters have less than $15 billion in assets. This reality affirms our longstanding belief that bigger is not necessarily better. It’s how you extract value from the balance sheet you have which truly determines success. We’ve done so without boasting the highest annual dividend growth rate among the banks on the list. In fact, we maintain a conservative dividend payout ratio of just over 50%. Rather, we’ve achieved superior total return by ensuring we’ve always maintained considerable capital retention to continue funding ongoing organic and acquired growth, which in turn grows the earnings power of our franchise. Mark E. Tryniski, President & Chief Executive Officer (left) Nicholas A. DiCerbo, Chairman of the Board (right) 3 The success of that approach can be seen in our results over that same period: we have delivered 12.4% compound annual growth in net income over the last 20 years. Such tremendous long-term DIVIDEND GROWTH 10-year CAGR = 6.6% value creation is no mistake. While we are committed to a long- term approach to value creation, we of course also aim to grow in a disciplined manner over the short term; this is evidenced perhaps best 4 7 . 0 $ 8 6 . 0 $ 1 6 . 0 $ 8 7 . 0 $ 2 8 . 0 $ 6 8 . 0 $ 8 8 . 0 $ 4 9 . 0 $ 6 0 . 1 $ 0 0 . 1 $ in the recently concluded year. 2012 Results To execute on our clear and consistent vision, in 2012 we strategically focused on expanding our balance sheet, growing non-interest revenues, managing expenses, and integrating and extracting value from our HSBC and First Niagara branch transaction. In this productive year we accomplished each of these goals. Community Bank System earned $77.1 million in 2012, an increase of more than 5% from 2011. Improved efficiency and meaningful growth 03 04 05 06 07 08 09 10 11 12 DIVIDEND PAYOUT RATIO% 75 50 25 0 03 54.3% 04 05 06 07 08 09 10 11 12 in net interest income and non-interest income helped mitigate the National Bank, organic loan growth totaled 7%, or over $200 million, impact of margin compression and acquisition costs related to the in 2012. We saw increases across all portfolios, once again led by HSBC and First Niagara branch transactions. Excluding nonrecurring consumer lending with particular strength in residential mortgage acquisition and litigation costs in 2012, earnings per share of $2.08 and auto lending. Our strong and sustainable core deposit base and compared very well to $2.10 earned in 2011, particularly after capital position allowed us to successfully compete for and fund our considering that the industry-wide decline in net interest margin retail customers’ borrowing needs in a time of historically low rates. lowered our 2012 earnings by $0.21 per share. Like all of our banking With funding costs averaging just 83 basis points for the year, we were peers, we are experiencing substantial earnings headwinds due to well-positioned to compete for quality credit opportunities. the low-interest rate environment. Our net interest margin declined to 3.88% in 2012 from 4.07% in 2011. However, we effectively worked to combat this compression by expanding our average balance sheet by more than 15%. Mortgage originations reached record levels in 2012, growing 36% compared to 2011. With pristine asset quality (losses have averaged less than seven basis points of average loans over the last nine quarters) and new yields averaging around 4.1%, we are very pleased Balance sheet expansion stemmed from both organic efforts and with the growth of this portfolio and continue to hold the production on acquisition growth. Excluding the impact of loans acquired from our balance sheet as a high quality, low risk earning asset. Likewise, the branch transactions this year and last year’s addition of Wilber auto loan originations reached record levels in 2012, growing our total TOTAL AVERAGE SHAREHOLDER RETURN Through December 31, 2012, Including Reinvestment of Dividends 3 Years 5 Years 10 Years 15 Years portfolio to $650 million at December 31, 2012. We primarily provide customers with financing for used car purchases, and valuations on these autos have been stable and favorable. CBU 16.9 % 11.1 % 9.8 % S&P 600 Commercial Bank 11.0 % (5.4 %) (1.1 %) 6.6 % (4.4 %) 0.7 % 7.8 % 1.6 % 1.7 % Business loan demand was muted again in 2012 as the economic environment remains weak in our “Main Street” markets and across the country. Nevertheless, business lending continues to be an 10.9 % 1.7 % 7.1 % 4.5 % important component of our business model, particularly as a source NASDAQ Bank S&P 500 Dow Jones Ind. Avg. 10.9 % 2.6 % 7.3 % 5.8 % of critical deposit funding and complementary fee-generating products SOURCE: Bloomberg 4 and services. Of course, we continue to support those credit-worthy completed in December 2011. Reaching $35.9 million in revenues in customers in our markets who meet our unwavering risk-adjusted 2012, we are pleased with the growth potential our businesses in this return requirements. Regardless of whether they seek credit in this field offers. We reach a national client base with our diverse offerings, challenging environment, business customers continue to value and our highly skilled and experienced teams continuously develop our Community Bank as a trusted partner to support all their financial product and skill sets in response to marketplace needs and regulatory services needs and safeguard their deposits. changes. Likewise, our wealth management business generated Community Bank System was one of only 14 companies to become a new member of the S&P 1500 Dividend Aristocrats Index in 2012, signifying that the Company has raised its annual regular cash dividend payment for at least 20 consecutive years. 20% revenue improvement from 2011, reflecting solid organic growth in trust and asset management services. Combined, our financial services revenue grew more than 15% to $48.8 million in 2012 from $42.3 million in 2011. Over the last 10 years this revenue grew at a compound annual rate of over 15%, clearly demonstrating our ability to execute on our vision of diverse fee income growth. Perhaps most advantageously, these businesses require very little capital to operate because of their balance sheet, and so we continue to seek opportunities to grow this area both organically and through acquisitions. Core deposits grew more than 7%, or $268.4 million, on an organic We are particularly pleased to report that our solid revenue growth basis in 2012. Including those we acquired, our total deposit base at outpaced core expense growth in 2012, driving an improvement in December 31, 2012 was $5.6 billion, with core deposits comprising our core recurring efficiency ratio to 57.4% from 57.6% in 2011. 82% compared to 77% at the end of 2011. Total core deposits, which One-time costs in 2012 were principally attributable to our acquisition of exclude certificates of deposit, grew 26% from the end of 2011 to the 19 branches from First Niagara and HSBC in the third quarter – a terrific end of 2012, reflecting one of the many benefits of the First Niagara transaction which deepened our market presence in Upstate New York and HSBC branch transactions completed in the third quarter of 2012. and met all our key criteria for acquisition success. Of course, deposit growth and lower funding costs could not match the significant decline in earning asset yields we and the industry experienced in 2012. Average loan yields fell 44 basis points, while average funding costs declined 31 basis points. We expect our principal challenge in 2013 will be to continue defending and growing our earnings power in a prolonged declining margin environment. Revenue Growth a Key Factor of 2012 Success Efforts to grow our balance sheet and revenue sources were very SHAREHOLDERS’ EQUITY in millions 10-Year CAGR = 10.8% . 6 4 7 4 $ 6 7. 5 4 $ 5 1. 6 4 $ . 8 8 7 4 $ . 8 4 0 4 $ 6 . 4 4 5 $ . 5 5 6 5 $ 3 7. 0 6 $ 8 . 2 0 9 $ 6 . 4 7 7 $ successful in achieving revenue expansion this year. Even as net 03 04 05 06 07 08 09 10 11 12 interest margin declined 19 basis points in 2012, net interest income grew $21.0 million, or 10%, to $230.4 million. Non-interest income, or fee income, grew $10.0 million, or 11%, to $99.2 million. Fee income growth was an important component of our strategy in 2012, with focused investment in our financial services offerings providing key momentum. Our benefits administration and consulting businesses posted a 14% increase in revenues, principally from the CAI Benefits acquisition BOOK VALUE PER SHARE 10-year CAGR = 6.2% 9 2 . 4 1 $ 9 4 . 5 1 $ 8 2 . 5 1 $ 7 3 . 5 1 $ 6 1 . 6 1 $ 9 6 . 6 1 $ 5 2 7. 1 $ . 3 2 8 1 $ . 8 7 2 2 $ . 4 9 0 2 $ 03 04 05 06 07 08 09 10 11 12 5 Acquisition Growth Remains a Key Component of Success One of the key elements to our growth strategy is high value acquisitions. We take a disciplined approach to identifying and evaluating opportunities that arise, and we continue to have an ongoing appetite for acquisition prospects which will first and foremost create value for our shareholders. We evaluate whether we can generate earnings in a fashion that’s commensurate with the risk associated with the transaction, and whether the transaction will enable us to grow and sustain our earnings and dividend. Essentially, we appraise each opportunity to ensure its ability to create solid accretive value for our shareholders. Our 2012 acquisition of 19 branches from First Niagara and HSBC fully met these qualifications. In the third quarter we successfully completed the deal, announced in the first quarter, consisting of 16 branches from HSBC and three branches from First Niagara. We added a total of $800 million in deposits and $160 million in loans while welcoming 145 new employees to Community Bank. By proactively raising $55 million in net proceeds from a common stock offering in January, we also improved our capital position going into this transaction. CBU is a component company in more than 20 U.S. stock indices including: Russell 3,000; Russell 2,000; NYSE Financial; S&P 1500; S&P 1500 Dividend Aristocrats. With this acquisition, we were pleased to strengthen our ability to provide exceptional service to consumer, business banking and private banking clients in Upstate New York while growing our presence and acquiring new customers. We deepened our market leadership, executed an efficient and timely conversion, and subsequently consolidated five acquired branches into existing Community Bank branches to further enhance the economic and operating efficiency of the transaction. Marking our 13th whole-bank or branch acquisition since 2000, the First Niagara and HSBC deal allowed us to once again leverage strong acquisition competencies developed over the course of our growth in size and shareholder value. 6 Our longstanding vision for success remains unclouded; we are focused on achieving market leadership, preserving our decentralized decision-making process, investing in non-interest revenues and seeking advantageous growth opportunities, both organic and acquired. INVESTMENT RATIONALE n Disciplined approach to revenue and profitability growth n Successful and effective operating strategy n Excellent asset quality metrics n Dominant market share — 1st or 2nd in more than 70% of our markets n Substantial non-interest income — approximately 30% of operating revenues n Diversified financial services businesses with $48.8 million in 2012 revenues n Record of successful and accretive acquisitions n Meaningful dividend with 20 year history of increased payouts n Effective capital management strategies n NYSE listed with significant liquidity 2012 TOTAL REVENUE Grew by 10.4% in 2012 Total Revenue = $329.7 million Net Interest Income $230.4 million Non-interest Income $99.2 million 70% 30% A Clear Vision for Success in 2013 Community Bank’s success in achieving solid shareholder value creation is the outcome of daily efforts to enhance our value proposition to customers and deepen engagement within our communities. It is a proven model built on discipline and framed from the beginning with a clear vision of what constitutes success for Community Bank. Our vision for success was unclouded by the economic challenges of 2012, and it remains so as we look ahead in 2013. We expect our operating strength to continue with solid earnings, a larger balance sheet, operating efficiency, plentiful and growing capital levels and sound asset quality. With our expanded service footprint and growing investment in non-banking businesses, we are well- equipped to defend Community Bank’s earnings power in challenging economic times. Most importantly, we maintain our clear vision of value creation and will execute the necessary strategies to pursue its growth. We’re proud of our consistent track record of growing shareholder returns, and we thank you for your continued support of Community Bank System, Inc. Nicholas A. DiCerbo Chairman of the Board FINANCIAL SERVICES REVENUE in millions 10-year CAGR = 15.2% Mark E. Tryniski President and Chief Executive Officer . 4 9 3 $ . 3 2 4 $ 8 . 8 4 $ . 4 6 3 $ . 4 4 3 $ . 0 8 2 $ . 7 6 1 $ . 5 8 1 $ . 6 0 2 $ . 9 2 1 $ 03 04 05 06 07 08 09 10 11 12 7 OUR FOCUS – MARKET LEADERSHIP Operating as a community bank with local decision-making, principally Establishing a Strong Presence in Central New York in non-urban markets, and offering a broad array of banking and financial services to retail, commercial, and municipal customers – this describes our business philosophy. Following this approach, Community Bank System has grown into not only one of the largest community banks based in Upstate New York, but one of the 100 largest banks in North America, with $7.5 billion in assets and $5.6 billion in deposits. We operate more than 180 customer facilities throughout 35 counties of Upstate New York and in five counties of Northeastern Pennsylvania. We focus on mostly non-urban markets, where leadership positions can be earned. This focus has produced a market leading branch system in which we have the first or second deposit market share in more than In 2011 we entered the Central New York region by acquiring the former Wilber National Bank to extend our service area in the Central, Greater Capital District and Catskill regions. This transaction provided a significant retail presence, as well as attractive deposit share in markets contiguous to our existing service area with demographic characteristics very similar to our existing markets. With 13 Central Region branches now located in towns where we have the first or second ranked deposit market share, and with over 40% of the total deposits for Otsego County, we have a substantial presence in our newest region. Our Growing Presence in Northeast Pennsylvania 70% of the towns where we have a retail customer location. We took our successful community banking philosophy to Northeast Our branch locations dominate the financial landscape of the non-urban communities across Upstate New York. Expanding Our Northern Leadership Position Our position as a formidable banking competitor in the North Country of Upstate New York was further cemented by acquiring 18 branch-banking centers from Citizens Financial Group, Inc. in November 2008 and six additional branches from HSBC in July of 2012. We have built a very strong market presence in the 12 counties which reach from Oswego north to the Vermont and Quebec borders and cover nearly 18,000 square miles. Our 55 branch locations dominate the financial landscape in the communities of the Northern Tier where approximately one in every seven retail bank locations in the region proudly displays the Community Bank, N.A. logo. Our Solid Southern Tier Pennsylvania by acquiring First Liberty Bank & Trust in 2001. We expanded our market position by acquiring Grange National Bank and First Heritage Bank, both becoming part of First Liberty. The recent development of more efficient methods for extracting natural gas from the Marcellus Shale have had a positive economic impact on many small towns throughout Northeast Pennsylvania. Rents and royalty payments to land owners have become a source of substantial deposit growth for banks in the region, including First Liberty. BRANCH LOCATIONS 6 2 1 6 2 1 5 2 1 4 2 1 7 4 1 1 3 1 7 4 1 9 7 8 1 6 8 1 4 1 03 04 05 06 07 08 09 10 11 12 We also dominate the banking landscape across the Finger Lakes to the southwest corner of Upstate New York in the area stretching REVENUE PER EMPLOYEE 1 10-year CAGR = 2.0% in thousands from Jamestown to Elmira and north to Lake Ontario. With our strong retail franchise of 77 branch locations, we hold the number one or number two market position in eight of the 16 counties in this region, . 7 6 4 1 $ . 6 2 5 1 $ . 9 7 4 1 $ . 5 1 4 1 $ . 3 1 4 1 $ . 8 7 4 1 $ . 5 4 5 1 $ . 0 8 6 1 $ . 9 0 7 1 $ . 4 2 7 1 $ as well as in 39 local communities. Our 2012 branch acquisitions from First Niagara and HSBC further strengthened our Southern New York Region market position. 03 04 05 06 07 08 09 10 11 12 1 Per average full time equivalent employee 8 Our indirect auto lending portfolio continues to be a strong contributor to balance sheet expansion. In 2012, our record level auto loan originations led year-over-year organic loan growth of over $200 million, or 7%. Pictured above, Community Bank’s Robert Zehr (left), Vice President, Senior Indirect Marketing Manager, reviews product offerings with long-time Northern New York client John Barstow, Chairman of the Board and President of Barstow Motors, Inc. 9 ||We recently expanded our Operations Center in Canton, NY to ensure we have the capacity to accommodate future growth. RESPONSIVE LOCAL DECISION-MAKIN G We emphasize responsive, local decision-making and customer support, and we’re committed to the philosophy of serving the financial needs of customers within our local markets. Our branches are located primarily in smaller towns and cities within Upstate New York and Northeastern Pennsylvania where we have built meaningful market presence. We’re firmly convinced that the local character of our business, knowledge of our customers and their needs, and a comprehensive line of retail and business products enable us to compete effectively in our markets. With the addition of 14 branches (after consolidations) from HSBC and First Niagara, we continue working to solidify and expand the service relationship with our new customers. Focused on the Right Relationships We have always been an in-footprint lender, to customers we know in the communities we serve. strong organic growth during this period, as well as the branch and whole-bank acquisitions completed over the past five years. Our focus on identifying and satisfying the needs of our customers continues to yield solid results, as we ended 2012 with total loans of $3.9 billion, up $394 million or 11% from year-end 2011 reflecting both our branch acquisitions and strong organic growth in our consumer A Consistent Focus on Asset Quality Prudent credit management has been, and continues to be, a foundational strength of this institution. mortgage and consumer indirect installment portfolios. Business Our credit quality continues to rank among the strongest in the lending, which represents approximately one-third of our portfolio, banking industry, as it has consistently throughout the credit crisis and and includes commercial and industrial loans and mortgages on economic downturn. During 2012, our net charge-offs were 23 basis commercial properties, increased modestly during 2012 reflecting the points, compared to 111 basis points for the banking industry, and our continued soft demand and conservative growth characteristics that non-performing loans to total loans at year-end were 75 basis points, exist across most markets. While we remain focused on growing compared to the industry average of 362 basis points. Our success our business portfolio, we are committed to doing so in a manner at keeping non-performing and delinquency ratios at manageable that adheres to our strong asset quality standards and produces levels reflects our continued focus on maintaining strict underwriting acceptable margins. We continuously invest in personnel, technology standards, as well as our extensive knowledge of our local markets, and business development resources which further strengthen our economic factors and most importantly, our customers. competitive capabilities. A Core Deposit Focus Our deposit mix has been steadily evolving over the last several years reflecting the success of our focus on growing core deposit relationships through a combination of proactive marketing efforts, EXCEPTIONAL ASSET QUALITY At or for the twelve months ended December 31, 2012 CBU ACBN1 ACBN1 Assets > $1 B competitive product offerings and high quality customer service. Loan loss allowance/ NPLs2 148% 60% 58% Core deposit “non-time” accounts were 82% of our total deposits NPLs2/ loans outstanding 0.75% 3.62% 3.76% of $5.6 billion at the end of 2012. Core deposits have grown by Net charge- offs/ average loans3 0.23% 1.11% 1.17% $2.8 billion, a compound annual growth rate of 20.3%, from the end 1 ACBN = All Commercial Banks, National 2 NPLs = Nonperforming loans of 2007 through our 2012 year-end. This increase was a reflection of 3 FDIC Statistics - Net charge-off to loans 10 Our local character, extensive customer knowledge, and comprehensive product menu, along with responsive decision-making at the branch and regional levels make us a very effective competitor within our markets. 11 ||INVESTMENT IN NON-INTEREST REVENU ES Non-interest income growth has long been a key component of our strategy to create value for our shareholders and customers alike. We aim to continually diversify into new service areas while growing our existing revenue sources. Our focused investment on financial services offerings has expanded our revenue sources beyond trad- itional banking services. With this diversification, we’ve successfully developed stable earnings streams which are less dependent on interest rate cycles or capital resources. Most importantly, non-interest income is a meaningful driver of earnings power derived from services and products of distinct value to our customers. This includes the traditional products such as ATM service, debit cards and risk protection programs offered throughout the Community Bank, NA and First Liberty Bank and Trust branch network, as well as additional specialized service offerings available beyond our branch banking footprint. Employee Benefit Trust, Administration, Actuarial and Consulting Services MIX OF NON-INTEREST INCOME 2012 Total Non-interest Income = $99.2 million 47% Deposit Service Fees $46.1 million Benefit Plan Services $35.9 million Wealth Management Services 13% $12.9 million Mortgage Banking and Other $4.3 million 36% 4% FINANCIAL SERVICES REVENUE COMPOSITION 2012 Total Financial Services Revenue = $48.8 million Benefit Plan Services $35.9 million Wealth Management $12.9 million 74% 26% We entered this business in 1996 by acquiring a small benefits benefits administration offerings, which generated $35.9 million in administration firm in Central New York. Since then, we’ve expanded revenue in 2012, up 14% from 2011. through solid organic growth and four subsequent acquisitions which increased our services and product offerings and added meaningful expertise and structural support. Wealth Management, Investments, Insurance and Asset Advisory Services Our Benefit Plans Administrative Services, Inc. (BPAS) is truly a nation- of consistent organic growth mixed with productive acquisitions. wide business with wide-ranging capabilities including: defined Our wealth management services are offered across our service contribution plan benefit administration; health care and benefit plan footprint, primarily utilizing our branch system, and include: personal consulting; flexible benefit plan administration; actuarial services; and trust services; investment advisory and brokerage services; auto, As with BPAS, the success of our wealth management group is a result collective investment fund administration. Our recent acquisition of CAI Benefits in December 2011 contributed to the growing revenue prospects and strong operating returns of our homeowners, commercial and life insurance programs; and asset management. In 2012, our wealth management group continued to grow principally through organic means, and generated $12.9 million of revenues, up 20% from 2011. Over the last 10 years our financial services revenue grew at a compound annual rate of over 15%, clearly demonstrating our ability to execute on our vision of diverse fee income growth. These non- capital intensive businesses provide key earnings momentum through economic cycles and across an expanded service area beyond our branch network footprint. We’re confident that we’ll continue to realize success in these non-banking arenas as a result of continued new client generation and expanded service offerings. Our wealth management professionals are focused on the needs and goals of our clients. 12 Community Bank’s subsidiary BPAS is a national provider of benefit adminis- tration, actuarial, consulting and institutional trust services. BPAS services over 3,500 retirement plans and more than 250,000 plan participants across the United States and Puerto Rico. 13 ||LEVERAGE ORGAN IC AND ACQUIRED GROWT H O PPO RT U N I TI ES One of Community Bank’s greatest strengths is our discipline in pursuing balanced and measured growth. Our vision of success has always pointed clearly to both organic expansion and value-adding acquisitions. We operate a growth model which leverages all opportunities and directs capital to those which offer the strongest prospects for sustainable value creation. The First Niagara and HSBC branch acquisition marked our 13th whole-bank or branch acquisition since 2000. We also continue to seek financial services opportunities with the We believe that acquisition growth sets the stage for organic growth. potential to contribute meaningfully to our fee income growth, and As we’ve expanded and deepened our presence across our footprint, which are scalable businesses that can operate both within and and as we’ve invested in non-banking businesses as a core revenue outside our banking network. The relatively small amounts of capital driver, we’ve gained access to new customers, geographies, products required to acquire and operate these businesses, as well as the stable and services. With each acquisition we elevate our platforms and earnings streams makes them a compelling alternative. profile, allowing us to provide a wider range of products, enhanced service and improved convenience to our existing customers. It is a virtuous cycle with results that are illustrated by our loan and deposit For all opportunities, we evaluate the potential to generate earnings commensurate with the risk associated with the transaction, as well as whether the transaction will enable us to grow and sustain our earnings and dividend. Recent Strategic Acquisitions 2008 Acquired Philadelphia based Alliance Benefit Group MidAtlantic Acquired 18 branches from Citizens Financial Group, Inc. in Northern New York 2011 Acquired Wilber Corporation, parent company of Wilber National Bank, in Central New York Acquired CAI Benefits, Inc., a New York City and New Jersey based actuarial and retirement benefits firm 2012 Acquired 19 branches from First Niagara and HSBC in Upstate New York growth over the last 10 years. TOTAL LOANS in billions 10-year CAGR = 7.9% 4 . 2 $ 4 . 2 $ 1 . 2 $ 7 . 2 $ 8 . 2 $ 1 . 3 $ 1 . 3 $ 5 . 3 0 $ . 3 $ 9 . 3 $ 03 04 05 06 07 08 09 10 11 12 TOTAL DEPOSITS in billions 10-year CAGR = 8.4% 6 . 5 8 $ . 4 9 $ 3 $ . . 7 3 $ . 9 3 $ . 7 2 $ . 9 2 $ . 0 3 $ . 2 3 $ . 2 3 $ 03 04 05 06 07 08 09 10 11 12 Our vision of success clearly focuses on value-creating growth opportunities, and we have an ongoing appetite for acquisitions which make strategic and financial sense. We have a proven core competency for both whole-bank transactions and for multi-branch acquisitions within or adjacent to our existing geographic footprint. Our focus has been and remains primarily on non-urban markets which offer the potential to earn meaningful deposit market share. 14 We have expanded and deepened our presence across our footprint with acquisition growth, which sets the stage for organic growth. Acquisitions have accelerated the development of banking-related fee income, increased the diversity of non- interest income from new financial services businesses, and spurred incremental growth of existing revenue sources. 15 ||CORPORATE GOVERNANCE The strongest champions of Community Bank System’s vision for the future are the members of its executive management team. Led by President and Chief Executive Officer Mark Tryniski, the executive leadership includes: Scott Kingsley, Executive Vice President and Chief Financial Officer; Brian Donahue, Executive Vice President and Chief Banking Officer; and Joe Getman, Executive Vice President and General Counsel. With over 40 years of collective experience at Community Bank, the executive leadership understand and execute on the bank’s sound strategy year in and year out. Mark Tryniski has been President and Chief Executive Officer of CBU since 2006. Mark first joined the company in 2003, serving as the company’s Chief Financial Officer and later as its Executive Vice President and Chief Operating Officer. Prior to joining Community Bank, Mark was a partner with PricewaterhouseCoopers. Scott Kingsley has held his current role as Chief Financial Officer since 2004. Prior to joining CBU, Scott was Vice President and Chief Financial Officer of Ohio-based Carlisle Engineered Products, Inc. The Company’s Chief Banking Officer, Brian Donahue, has helped to develop the company’s banking operations over the past 20 years. During that time, he has held the positions of Chief Credit Officer and Senior Loan Officer of the Southern Region. Joe Getman has served as Executive Vice President and General Counsel of our company since 2008. Before joining the executive management team, Joe was a senior partner at Bond, Schoeneck & King, PLLC, during which time he provided corporate counsel to the company. COMMUNITY BANK, N.A. REGIONAL ADVISORY BOARDS First Liberty (Pa.) Edward A. Coach Michael J. Coleman John H. Graham Scott E. Henry Edward I. Johnson, Jr. Thomas A. McCullough William K. Nasser, Jr. Russell G. Newell Frank J. Niemiec James M. O’Brien Adirondack Paul M. Cantwell, Jr. William M. Dempsey Alexander C. Edwards Joseph Vernon Lamb III James R. Langley, Jr. Carl J. Madonna Kim A. Murray Central Mary C. Albrecht Olon T. Archer Thomas J. Davis Joseph P. Mirabito Benjamin C. Nesbitt James L. Seward Geoffrey A. Smith David F. Wilber III Our advisory boards provide important guidance to CBU’s leadership and Board, bringing insight into the unique needs of the bank’s different regions and customers. FROM TOP TO BOTTOM Mark Tryniski, Scott Kingsley, Brian Donahue and Joe Getman 16 BOARD OF DIREC TORS Nicholas A. DiCerbo Chairman of the Board; DiCerbo & Palumbo, Partner; Director since 1984 Brian R. Ace Laceyville Hardware, Owner; Compensation Committee, Vice Chair; Nominating/ Corporate Governance Committee; Director since 2003 Neil E. Fesette Fesette Realty, LLC and Fesette Property Management, Owner, President and CEO; Nominating/ Corporate Governance Committee, Chair; Trust Committee; Director since 2010 James W. Gibson Retired, KPMG, LLP, Partner; Compensation Committee; Director since 2009 John Parente CP Media, LLC, CEO; Strategic/ Executive Committee; Loan/ ALCO Committee, Vice Chair; Director since 2010 Mark E. Tryniski Community Bank System, Inc., President and CEO; Director since 2006 Alfred S. Whittet Retired, The Wilber Corporation, CEO; Trust Committee, Chair; Director since 2011 James A. Wilson Lead Director of the Board; Retired, Parente Randolph, LLC, Principal Partner; Nominating/ Corporate Governance Committee; Audit/ Compliance/ Risk Management Committee, Chair; Director since 2009 Mark J. Bolus Bolus Motor Lines, Inc., President and CEO; Compensation Committee, Chair; Strategic/ Executive Committee; Director since 2010 James A. Gabriel Franklin & Gabriel, Owner; Strategic/ Executive Committee; Loan/ ALCO Committee, Chair; Director since 1984 Edward S. Mucenski Pinto, Mucenski, Hooper, Van House & Company, P.C., Partner and Managing Director; Compensation Committee; Audit/ Compliance/ Risk Management Committee, Vice Chair; Director since 2010 Sally A. Steele Attorney at Law; Strategic/ Executive Committee, Chair; Director since 2003 John F. Whipple Buffamante Whipple Buttafaro, P.C., CEO; Nominating/ Corporate Governance Committee; Audit/ Compliance/ Risk Management Committee; Director since 2010 Brian R. Wright Hinman, Howard & Kattell, LLP, Attorney, Special Counsel; Nominating/ Corporate Governance Committee; Strategic/ Executive Committee; Director since 2011 All bank board members participate in the Loan/ ALCO Committee The Board of Directors sincerely thanks Paul M. Cantwell, Jr. for the dedicated service he has provided to Community Bank System over the past 12 years. Paul became a director in 2001 and served as Chairman of the Board from 2006 to 2010. Following his 2012 retirement, he will continue to provide guidance to the bank as a member of its Adirondack Advisory Board. 17 ADMIN ISTRATI ON Executive Mark E. Tryniski, President and Chief Executive Officer Scott A. Kingsley, Executive Vice President, Chief Financial Officer Brian D. Donahue, Executive Vice President, Chief Banking Officer George J. (Joe) Getman, Executive Vice President, General Counsel Credit & Branch Administration Joseph F. Serbun, Senior Vice President, Chief Credit Officer Stephen G. Hardy, Senior Vice President, Chief Credit Administrator Richard M. Heidrick, Senior Vice President, Consumer Banking Joseph E. Sutaris, Senior Vice President, Regional Banking Executive Scott J. Boser, Vice President, Retail Lending Manager George J. Burke, Vice President, Director of Mortgage Banking Mark A. Guenthner, Vice President, Special Assets Manager Noel I. Donnelly, Vice President, Special Assets Officer Cynthia L. Lefko, Vice President, Cash Management Product and Sales Manager Nancy Mastrucci, Vice President, Senior Credit Manager Judith A. Meyer, Vice President, Branch Services Administrator Tammy R. Neumann, Vice President, Regional Branch Coordinator J. Randall Palko, Vice President, Regional Branch Administrator Denise Rhoads, Vice President, Commercial Appraisal Manager Michael J. Stacey, Vice President, Collections Manager Robert Zehr, Vice President, Senior Indirect Market Manager Pamela S. Dent, Recovery Specialist Stephen B. Dupree, Reports Analyst Jennifer Hernandez, Mortgage Processing Manager Sherry Stone, Branch Services Regional Administrator Finance & Treasury Management Joseph J. Lemchak, Senior Vice President, Chief Investment Officer Shannon M. Davis, Vice President, Asset Liability Manager Susan S. Fox, Vice President, Corporate Controller Robert R. Frost, Vice President, Manager of Financial Analysis & Planning Sean M. Howard, Vice President, Portfolio Investment Officer Randy Pray, Vice President, Corporate Purchasing Manager Pamela J. Taylor, Vice President, Data Warehousing Manager Brian Fancher, Benefits Accounting Manager Laura J. Mattice, General Accounting Manager Dennelle T. Michalski, Financial Controls Manager Robert E. Pierce, Financial Reporting Manager Administration Timothy J. Baker, Senior Vice President, Director of Special Projects Bernadette R. Barber, Senior Vice President, Chief Human Resources Officer Harold M. Wentworth, Senior Vice President, Retail Banking and Marketing Kristine M. Besaw, Vice President, Senior Regional Human Resources Manager Danielle M. Cima, Associate General Counsel, Corporate Secretary Brett C. Fisk, Vice President, Director of Real Estate & Facilities Robert D. Harder, Vice President, Senior Regional Human Resources Manager Michael F. Joyce, Vice President, Director of Real Estate Diane C. Seaman, Vice President, Human Resources Manager/ Organizational Development Lorie M. Semmel, Vice President, HR Operations Manager Donna Skechus, Vice President, Special Projects Manager Donna J. Drengel, Board Secretary and Shareholder Relations John A. Puchir, Sales Manager Technology & Operations J. Michael Wilson, Senior Vice President, Chief Technology Officer Aaron S. Friot, Vice President, Director of Information Technology Robin E. Dumas, Vice President, Electronic Banking Manager Nancy M. Lewis, Vice President, Item Processing Manager Barbara L. Snyder, Vice President, Loan Operations Manager Christina E. Sullivan, Vice President, Deposit Operations Manager Tracie M. Clayson, Loan Operations Unit Manager Deanna L. Foster, Loan Operations Unit Manager Allyson B. Krieger,Technical Project Administrator Tami L. Ozogar, Loan Operations Unit Manager Frank A. Palmisano, Manager Network Administration Dale Pike, Senior Imaging Supervisor Julie A. Rhodes, Deposit Operations Unit Leader Risk Management Paul J. Ward, Senior Vice President, Chief Risk Officer Mark S. Ackerly, Vice President, Director of Information Security Melissa R. Cloce, Vice President, Compliance Manager Mark J. Houghtaling, Vice President, Credit Risk Manager Daniel P. O’Connell, Vice President, Director of Internal Audit Dorothy A. Quarltere, Vice President, Compliance Manager Stuart A. Smith, Vice President, Security Officer Lynne M. Wadsworth, Vice President, Asst. Director of Internal Audit Anthony A. Antonello, Senior Security Investigator Teresa Bower, Loan Review Team Leader COM M UNIT Y BA NK Business Banking Buffalo David McKinley, Vice President, Commercial Banking Canton Nicholas S. Russell, Senior Vice President of Commercial Banking Northern Region Clifton Springs Tina Bounds, Assistant Vice President, Mortgage Specialist DeWitt/Syracuse Luke Fagan, Vice President, Commercial Banking Team Leader William D. McIncrow, Vice President, Commercial Banking Officer Russell E. Sturtz, Assistant Vice President, Commercial Banking Officer Elmira Arthur J. Sable, Vice President, Commercial Banking Officer Erwin/Painted Post Michael G. Austin, Vice President, Small Business Banking Manager John D. Clark, Vice President, Commercial Banking Officer Richard R. Sisson, Vice President, Credit Underwriter Jill R. Staats, Small Business Banking, Senior Underwriter Geneva David Gooding, Vice President, Commercial Banking Officer Loren C. Herod, Vice President, Agricultural Banking Team Leader Charles Van Hooft, Vice President, Agricultural Banking Officer 18  Stephen H. Rich, Vice President, Commercial Banking Team Leader Johnson City Edward P. Michalek, Vice President, Commercial Banking Officer Lakewood Roger E. Dickinson, Vice President, Senior Commercial Banking Officer Lowville Kevin J. Kent, Vice President, Commercial Banking Officer Malone Lawrence P. Fleury, Assistant Vice President, Senior Business Development Officer North Creek Eugene M. Arsenault, Vice President, Commercial Banking Officer Olean Mark P. Saglimben, Vice President, Senior Commercial Banking Officer Scott P. Brechbuehl, Vice President, Commercial Banking Officer Gretchen Copella, Assistant Vice President, Commercial Banking Officer Eric M. Garvin, Assistant Vice President, Commercial Banking Officer Oneonta Jeffrey T. Lord, Vice President, Commercial Banking Team Leader John M. Connolly, Vice President, Commercial Banking Officer Andrew Rice, Assistant Vice President, Agricultural Banking Officer Robert Zehr, Vice President, Senior Indirect Market Manager Wellsville Douglas O. Frank, Vice President, Commercial Banking Officer James M. Knapp, Vice President, Business Development Officer FI R ST L IBE RTY BANK & T RUST Robert P. Matley, Executive Vice President, President Pennsylvania Banking Robert A. Cirko, Senior Vice President, Regional Retail Banking Manager Business Banking Hazelton Paul Baynum, Assistant Vice President, Commercial Banking Officer Olyphant Barry J. Westington, Vice President, Special Assets Officer Scranton Warren C. Rozelle, Senior Vice President, Commercial Banking Team Leader Matthew Dougherty, Senior Vice President, Commercial Banking Officer Mary Elizabeth D’Andrea, Senior Vice President, Commercial Banking Officer Samuel DeStefano, Vice President, Senior Indirect Market Manager Jonathan M. Luce, Assistant Vice President, Joseph S. Tomko, Senior Vice President, Commercial Banking Officer Commercial Banking Officer Allison M. Mosher, Assistant Vice President, Commercial Banking Officer Orchard Park Patrick M. Gorman, Vice President, Commercial Banking Officer Plattsburgh Paul Connelly, Vice President, Commercial Banking Officer Tracy Clark, Assistant Vice President, Commercial Banking Officer Potsdam Ronald J. Bacon, Vice President, Senior Commercial Banking Officer Matthew J. Rollins, Assistant Vice President, Commercial Banking Officer Saranac Lake Craig Stevens, Vice President, Commercial Banking Officer Watertown Duane M. Pelkey, Vice President, Senior Commercial Banking Officer Michael J. Brassard, Vice President, Loan Workout Officer Jeffrey T. Fallon Vice President, Commercial Banking Officer Tunkhannock Walter Sarafinko, Assistant Vice President, Commercial Banking Officer Wilkes-Barre Francis R. Doyle, Senior Vice President, Commercial Banking Team Leader David M. McHale, Senior Vice President, Commercial Banking Officer A. Edward Nork, Senior Vice President, Commercial Banking Officer Stacia L. Arnaud, Assistant Vice President, Commercial Banking Officer Neil D. King, Assistant Vice President, Commercial Banking Officer W E ALTH MA NAGE M ENT GRO UP Charles E. Kopp, Managing Director Trust and Investment Services Catherine B. Koebelin, Vice President, Chief Trust Officer Olean Charles J. Perrillo, Vice President, Trust Chief Investment Officer, Oneonta Herbert A. Simmerly, Vice President, Senior Trust Officer, Oneonta Vincent L. Mastrucci, Vice President, Trust Officer, Scranton PA Paul J. Snodgrass, Vice President, Trust Officer, Canton Priscilla R. Welch, Vice President, Senior Trust Officer, Oneonta Patricia E. Barie, Trust Officer, Olean Michael Byrne, Trust Officer, Geneva Charlotte S. Carlson, Trust Officer, Lakewood Lauren Carlson, Trust Officer, Oneonta Patricia A. Crolly, Trust Officer, Scranton PA Robert P. Jewell, Trust Officer, Elmira Thomas LaPage, Trust Officer, Canton Patricia A. Lowe, Trust Operations Officer Adam C. Niebanck, Trust Officer, Oneonta Amy B. Schlee, Trust Officer, Oneonta Nottingham Advisors, LLC 500 Essjay Road, Suite 220, Williamsville, NY Thomas S. Quealy, Chief Executive Officer Lawrence V, Whistler, President, Chief Investment Officer Karen A. Mohn, Chief Compliance Officer, Operations Manager Nicholas Verbanic, Vice President, Portfolio Manager Community Investment Services, Inc. Paul A. Restante, President Barbara Toczko-Maculloch, Sr. Vice President, Regional Sales Mgr. Audrey Pound, Operations Manager Financial Consultants Peter Albano, Wilkes-Barre PA Jonathan Bartholomew, Watertown Robert Bittner, Geneva Eric E. Brunet, Canton Lucas A. Burton, Olean Joseph M. Butler, Jr., Watertown Thomas Ciolek, Avon Daniel P. Drappo, Black River James G. Durso, Waterloo John F. Fabrizio, Skaneateles Timothy Forman, Tupper Lake Kevin C. Gildner, Wellsville Jason Grover, Canandaigua Justin P. Hooper, Plattsburgh Randall J. Hulick, Springville Kyle A. Leikam, Dunkirk Rick P. Little, Tunkhannock PA Andrew Lomanto, Plattsburgh/Malone David Long, Elmira Jude R. McDonough, Scranton PA Chad J. Murray, Jamestown Charles A. Nicosia, Oneonta David H. O’Neil, Jr., Boonville Joseph Topichak, Corning Michele Wilck, Newark/Palmyra 19 CBNA Insurance Agency Mark J. Moeller, President 117 Park Street, Tupper Lake, NY 173 Margaret Street, Plattsburgh, NY 6 Clinton Street, Heuvelton, NY 8242 Route 3, Harrisville, NY 217 West Main Street, Malone, NY BENEFIT PLAN S ERVI C ES Barry S. Kublin, President Benefit Plans Administrative Services, LLC 6 Rhoads Drive, Utica, NY Paul M. Neveu, Senior Vice President, Sales Robert A. Malczyk, Vice President, Sales Linda S. Pritchard, Vice President, Operations 3501 Masons Mill Road, Suite 505, Huntingdon Valley, PA Mary Anne Geary, Vice President Richard Schultz, Vice President Harbridge Consulting Group, LLC One Lincoln Center, Syracuse, NY Vincent F. Spina, President Steven P. Chase, Vice President Sarah E. Dam, Vice President Kenneth M. Prell, Vice President Sheila L. Yoensky, Vice President Kevin J. Wade, Vice President 335 Lexington Ave., 5th Floor, New York, NY Burton Sivin, Senior Vice President Sheryl Gabriel, Vice President George Gomez, Vice President William Nusblat, Vice President Jeffrey Schreiber, Vice President Hand Benefits & Trust 820 Gessner, Suite 1250, Houston, TX W. David Hand, Chief Executive Officer Stephen Hand, President James Goodwin, Vice President Kathy Harvey, Vice President BRANCH LOCAT ION S Community Bank Northern New York Market Adams Christopher M. Castle, Manager Alexandria Bay Matthew Honeywell, Manager Ausable Forks Valerie A. Daniels, Assistant Vice President, Manager Black River Christina S. Meagher, Assistant Vice President, Manager Boonville North Creek (101 Main Street and Headwaters Plaza) Debra Roberts, Assistant Vice President, Manager Brushton James H. McElwain, Branch Supervisor Canton David R. Peggs, Vice President, Manager Champlain Melissa M. Peryea, Assistant Vice President, Manager Chateaugay Barbara J. LaVoie, Manager Clayton Lori E. Fearnside, Manager Fort Covington Gayle E. Miner, Branch Supervisor Gouverneur Diane Easton, Vice President, Manager Harrisville Karen Pierce, Branch Supervisor Hermon Connie J. Green, Branch Manager Heuvelton Carol Peacock, Branch Supervisor Indian Lake Brenda K. Lanphear, Manager Lake Placid Katie R. Stephenson, Assistant Vice President, Manager Long Lake Viccann Novak, Manager Lowville (7605 State Street) Tina M. Paczkowski, Vice President, District Manager Mary L. Peters, Assistant Vice President, Retail Service Officer Joseph Monnat, Assistant Vice President, Retail Service Officer Lowville (7395 Turin Road) Stephen H. Allen, Manager Lyons Falls Nancy Fruin, Assistant Vice President, Manager Madrid Marsha L. Watson, Manager Malone (Elm Street) Byron Tuthill, Vice President, District Manager Malone (West Main Street) Stacey Brunell, Assistant Vice President, Lori A. DeMars, Assistant Vice President, Manager Norwood Victoria Strader, Vice President, Manager Ogdensburg (825 State Street) Robert L. Seymour, Vice President, District Manager Ogdensburg (320 Ford Street) Sandra C. Kendall, Vice President, Manager Old Forge Barbara B. Criss, Vice President, Manager Plattsburgh (Margaret Street) Mary Gibbs, Vice President, Manager Plattsburgh (Route 3) James E. Snook, Vice President, Manager Plattsburgh (468 Route 3) Kent G. Backus Vice President, Regional Retail Banking Manager Plattsburgh (In-store – Wal-Mart) Arlene Favreau, Branch Supervisor Potsdam (64-70 Market Street and May Road) Victoria G. Strader, Vice President, Branch Manager Helen M. Hollinger, Assistant Vice President, Retail Service Officer Pulaski Steven P. Gaffney, Vice President, Manager Saranac Lake (Broadway) Brenda Darrah, Assistant Vice President, Manager Saranac Lake (Lake Flower) Renee L. Darrah, Manager St. Regis Falls Cynthia M. Murphy, Assistant Vice President, Manager Star Lake Connie Green, Branch Manager Ticonderoga Maria E. Beuerlein, Assistant Vice President, Manager Tupper Lake (Hosely) John W. Salamy, Vice President, Manager Tupper Lake (Park Street) Gail Auclair, Vice President, Manager Clair Brown, Retail Service Officer Waddington Marsha Watson, Manager Watertown (1125 Arsenal Street) Elizabeth A. Brown, Assistant Vice President, Manager Manager Massena Joy Graves, Assistant Vice President, Manager Newcomb Viccann Novak, Manager Watertown (1218 Arsenal Street) Margaret Farone, Manager Watertown (216 Washington Street) Rita J. Walldroff, Vice President, Regional Retail Banking Mgr Catherine Ward, Vice President, Manager 20 West Carthage Naura L. Christman, Manager Whitehall Holly A. Rabideau, Manager Community Bank Southern New York Market Addison Robin K. Knapp, Assistant Vice President, Manager Alfred Beth L. Plaisted, Manager Allegany Stephanie L. Kolkowski, Assistant Vice President, Manager Avon Deborah K. Fitch, Branch Manager Angelica Diana L. Grastorf, Branch Supervisor Bath Joel P. Brazie, Assistant Vice President, Manager Belfast Lisa Perry, Branch Supervisor Bolivar Judy Gilliland, Manager Brocton Phyllis A. Crockett, Manager Canandaigua (County Road 10) Paul E. Lepore, Vice President, District Manager Deanna Nissen, Branch Supervisor Canandaigua (South Main Street) Christopher Bross, Manager Cassadaga Susan C. Sekuterski, Manager Cato Tiesha Combes, Manager Cicero Robert M. Liedka, Jr., Manager Clifton Springs (26 East Main Street and Clifton Plaza) Theresa P. Dorgan, Vice President, Manager Clymer Laurie L. Harvey, Manager Corning (West Market Street) Wendy B. Daines, Vice President, Manager Corning North Beth A. Robins, Manager Cuba Mary M. Quigley, Vice President, Manager Dansville Jody R. Tonkery, Vice President, District Manager Carolyn M. Scoppa, Vice President, Retail Service Officer Dunkirk (3909 Vineyard Drive) Jason DeChard, Manager Dunkirk (345 Central Avenue) Jean M. Coughlin, Assistant Vice President, Manager Elmira Denise E. Allen, Vice President, District Manager Robert J. Avvampato. Retail Service Officer Courtney Shaw, Retail Service Officer Vicki Weller, Retail Service Officer Erwin/Painted Post Laura Noonan, Branch Supervisor Falconer Joann W. Anderson, Assistant Vice President, Manager Fillmore Julie A. Hall, Manager Franklinville Sandra S. Wolfer, Manager Fulton Tina Stephens, Assistant Vice President, Manager Geneva Robert Sollenne, Vice President, Manager Gowanda Daniel L. Drozdiel, Vice President, District Manager Ralph Swanson, Vice President, Manager Nathan Pleakis, Retail Service Officer Hammondsport Kelly L. Bussmann, Assistant Vice President, Manager Hannibal Debra A. Davis, Assistant Vice President, District Manager Hornell Melissa M. Ponticello, Manager Horseheads-Consumer Square Cynthia A. Welliver, Assistant Vice President, Manager Houghton College Julie Hall, Manager Interlaken Denise Ector, Manager Ithaca Michael MacDonald, Manager Jamestown (1281 North Main Street) Kathleen S. Bemus, Assistant Vice President, Manager Jamestown (25 Main Street - Brooklyn Square) Glori A. Taylor, Manager Lakewood Lisa R. Allenson, Vice President, District Manager Livonia Ronda Howard, Manager Moravia Kathleen M. Longyear, Manager Mount Morris Stacey Lewis, Manager Naples Joilette M. Pendleton, Manager Newark Plaza Brenda K. Westcott, Manager Nichols Kathleen M. Bowen, Assistant Vice President, Manager North Collins Ellen M. Pavlovic, Assistant Vice President, Manager Olean (201 North Union Street) Jody L. Spears, Vice President, District Manager Theresa M. Raftis, Assistant Vice President, Retail Service Officer Olean (Delaware Park) Kelly Crandall, Manager Oswego Fred Aldrich IV, Vice President, Manager Ovid Jacqueline M. Robinson, Manager Owego Florence Rossi, Assistant Vice President, Manager Palmyra Cheryl A. Ford, Manager Penn Yan (151 Main Street) Thomas R. May, Vice President, Manager Dana L. Crans, Retail Service Officer Penn Yan (272 Lake Street) Teresa A. Vivier, Manager Phelps Susan J. Lanse, Manager Portville (1471 East State Road) Brenda Blackwell, Manager Portville (7 North Main Street) Christine P. Boser, Branch Supervisor Randolph Diane M. Lecceardone, Manager Ripley Patricia J. Knight, Manager Rushville Christine M. Copper, Branch Supervisor Salamanca Robin K. Bowser, Manager Seneca Falls David W. Sloan, Vice President, Regional Retail Banking Manager Christine Plate, Manager Sherman Shannon R. Stevens, Manager Silver Creek Mark J. Catalano, Assistant Vice President, District Manager 21 Skaneateles Desiree R. Murphy, Assistant Vice President, Manager Springville (Cascade Drive) Mary Ann Lutz, Manager Jason Mongillo, Retail Service Officer Springville (North Buffalo Street) Brooke Baker, Manager Kristen Woodarek, Retail Service Officer Waterloo Larry D. Ledgerwood, Vice President, Manager Watkins Glen Anthony Fraboni, Vice President, Manager Laurel M. Fox, Assistant Vice President, Retail Service Officer Wellsville (4196 Bolivar Road) Lori Dzielski, Manager Wellsville (113 Main Street) David E. Newton, Vice President, District Manager Virginia L. Elliott, Assistant Vice President, Manager Westfield Carl Swan, Manager Woodhull Lynn S. Vitale, Manager Yorkshire Joseph D. Fore, Assistant Vice President, Manager Community Bank Central New York Market Boiceville Roy S. Todd, Manager Cobleskill Arthur C. Lafleur, III, District Manager Cooperstown (Main Street) Janice E. Eichler, Manager Cooperstown Otsego (State Highway) Wende Ebberts, Manager Delhi Tina A. Seguare, Manager Downsville Jean M. Lacey, Manager Fleischmanns Marilee A. Asher, Manager Halfmoon Richard A. Griesche, District Manager Johnson City Michelle Carlsson, Manager Milford Rosemary Aborn, Manager Morris Michael Walling, District Manager Norwich (State Highway) Caryn M. Wake, Manager Norwich (Broad Street) Jason C. Yager, Manager Oneonta (Main Street) Susan M. DelCostello, Manager Nancy Miller, Gold Club Oneonta (Chestnut Street) Paula M. Morell, Manager Oneonta (Southside) Sean A. Hall, Manager Oneonta (FoxCare Center) Richard J. Follett, Assistant Vice President, District Manager Lesley A. Bohacek, Manager Otego Dorothy J. Kelley, Manager Schenevus Gerald V. Coombs, Jr., Manager Sidney Bridget Fisk, Assistant Vice President, District Manager Sharon D. Cutting, Manager Walton Donna A. Bundy, Manager First Liberty Bank & Trust Carbondale Bobbiann Davis, Manager Clarks Summit David C. Griffin, Vice President, Manager Daleville Susan M. Pitoniak, Manager Dickson City Noxen/Bowman’s Creek Colleen M. Bullock, Manager Olyphant Theresa A. Collins, Vice President, District Manager Pittston Nolan Ayres, Assistant Vice President, Manager Scranton (Keyser Avenue) John Peterson, Vice President, District Manager Scranton (Minooka - Davis Street) David H. Lencicki, Vice President, Manager Scranton (North Washington Avenue) Karen E. Sweeney, Manager Scranton (Wyoming Avenue) Patricia M. Calabro, Vice President, Manager Towanda Lori A. Smith, Manager Sue McClary, Business Development Officer Tunkhannock Karen Fuller, Vice President, District Manager Jennifer Chesner, Manager Brigitte S. Meskers, Retail Service Officer Trucksville/Back Mountain Susanne M. Mullin, Assistant Vice President, Manager Wilkes Barre (Franklin Street) David P. Dobbs, Vice President, District Manager Lisa Rochinski, Manager Gary J. Missal, Assistant Vice President, Manager Sandra A. Wheeler, Retail Service Officer Wyalusing Douglas M. Jackson, Manager Edwardsville Denise M. Johnson, Manager Hazleton (Airport Road) Paula Palance, Vice President, Manager Jermyn Lisa Browning, Assistant Vice President, Manager Jessup Mary Z. Bieszczad, Vice President, Manager Kingston (Wyoming Avenue) Susan M. Russick, Assistant Vice President, Manager Laceyville Kevin W. Huyck, Assistant Vice President, Manager Lawton Greg M. Culver, Manager Little Meadows Mary A. Sivers, Branch Manager Meshoppen Jennifer Ramey, Branch Manager Montrose Steven Stranburg, Vice President, Manager 22 SELEC TED FI N ANC IAL H IG H LI G HT S Income Statement (in millions) 2012 2006 Net interest income $ 230.4 $ 134.8 CAGR (6-year) 9.3% Non-interest income 99.0 51.7 11.4% Operating expenses 203.5 126.6 Provision for loan loss 9.1 6.6 8.2% 5.5% Net income $ 77.1 $ 38.4 12.3% Net interest margin 3.88% 3.91% Per Share Data (diluted) Earnings per share $ 1.93 $ 1.26 Cash dividends declared 1.06 0.78 Book value 22.78 15.37 7.4% 5.3% 6.8% Tangible book value $ 13.72 $ 7.17 11.4% Balance Sheet Data (end of period, in millions) Assets Loans, net Deposits $ 7,497 $ 4,498 3,866 2,702 5,628 3,168 Shareholders’ equity $ 903 $ 462 8.9% 6.2% 10.1% 11.8% 23 GLOSSARY Consumer direct lending Loan loss provision Direct lending to consumers through the bank’s branches, largely on an installment basis, for the purchase of automobiles and durable (long-lasting) goods for the home, and for educational and general purposes. Also includes loans secured by the equity in a borrower’s home. Consumer indirect lending Loans originated through applications taken on the premises of automobile, boat, and other dealers selling substantially priced goods, electronically submitted to the bank, and approved within a very short time period while the consumer remains on premises. Core deposits The total of checking, interest checking, savings and money market deposits. Generally considered a bank’s most stable and affordable source of funds. The charge against earnings to increase the allowance for loan losses (net of current period charge-offs) sufficient to absorb losses inherent in the company’s loan portfolios. Net interest income Banking revenues generated from standard lending and investment activities, equaling the difference between interest income on loans and investments and interest expense on deposits and borrowings. The primary source of earnings before expenses for most banks. Net interest margin A performance measure or ratio which is calculated by dividing net interest income by average interest-earning assets. The most basic indicator of the relative return on lending, investing, and depository activities before overhead and loan loss provision. Interest rate spread is a component of the net interest margin. Coverage ratio Non-interest income The ratio of loan loss allowance to nonperforming loans (loans for which payment is delinquent 90 days or more and loans for which interest is not being accrued) or nonperforming assets (additionally includes collateral acquired by a bank after a loan has defaulted) is considered an indicator of the strength of a financial institution’s allowance for loan losses. Diluted shares (or fully diluted) A calculation which includes those shares issued and outstanding or issuable upon the exercise of in-the-money stock options held by employees or Directors, offset by the number of shares which the company could repurchase on the open market with the cash received upon exercise. Shares held in treasury are excluded. Efficiency ratio A measure of a bank’s operating leverage or productivity, derived by dividing overhead expense by revenues (net interest income (FTE) plus non-interest income), excluding the effect of gains or losses on the sale of securities or the extinguishment of debt, amortization of intangibles, and acquisition-related expenses. The lower the ratio, the better the efficiency. Fully tax equivalent (FTE) Restatement of tax-exempt interest income as if it was fully taxable. Enables tax-exempt interest income to be compared to taxable interest income on a consistent basis. IPC deposits Deposits from individuals, partnerships and corporations (i.e., all consumer and commercial deposits). Excludes deposits from local governments/municipalities. Constitutes the major component of core deposits (see above). Revenues generated from fee-based depositor and borrowing services (including interchange and overdraft fees), the sale of financial services products, and gains or losses from the sale of securities and extinguishment of debt, if any. Nonperforming assets Represent loans delinquent as to interest or principal for a period of 90 days or more, loans for which interest is not being accrued (no payments expected), restructured loans, and real estate acquired through foreclosure. Tangible equity/assets Shareholders’ equity, net of goodwill and other intangible assets, divided by the assets of the company, net of goodwill and intangible assets. Troubled Asset Relief Program (TARP) A program of the United States government to purchase assets from, and provide capital to, financial institutions in order to strengthen the financial sector. It was the largest component of the government’s measures to address the crisis in the financial services industry over the past few years. The company chose not to participate in this program. Tier 1 capital Shareholders’ equity, adjusted for the unrealized gain or loss on securities held for sale and for certain assets, such as goodwill and other intangibles. The primary measure of a bank’s capital as defined by various bank regulatory agencies. 24 SHAREHOLDER INFORMATION Corporate Headquarters Community Bank System, Inc. 5790 Widewaters Parkway DeWitt, NY 13214-1883 Investor Information Macquarie Securities Group Investor and shareholder information John Moran / 212.231.0662 regarding Community Bank System, Inc., john.moran@macquarie.com including all filings with the Securities and Phone: 315.445.2282 or 800.724.2262 Exchange Commission, is available through Fax: 315.445.7347 www.communitybankna.com the company’s website: www.communitybankna.com Stock Listing Copies may also be obtained without charge Common stock of Community Bank System, upon written request to: Inc. is listed on the New York Stock Exchange (NYSE) under the symbol: CBU. Newspaper listing for common stock: CmntyBkSys. Annual Meeting Wednesday, May 8, 2013 1:00 P.M. EST Riveredge Resort 17 Holland Street Alexandria Bay, NY 13607 Ms. Josephine Anne E. Rurka Investor Relations Department Community Bank System, Inc. 5790 Widewaters Parkway DeWitt, NY 13214-1883 315.445.7300 josie.rurka@communitybankna.com Independent Auditors The Board of Directors appointed PricewaterhouseCoopers, LLP as auditor Transfer Agent and Registrant of Stock for the company for the year ended Shareholders requiring a change of December 31, 2012 Raymond James & Associates Anthony Polini / 212.856.4897 anthony.polini@raymondjames.com RBC Capital Markets Gerard Cassidy / 207.780.1554 gerard.cassidy@rbccm.com Sandler O’Neill & Partners LP Joseph Fenech / 212.466.7938 jfenech@sandleroneill.com Investor’s Choice Program CBU offers convenient, low-cost options for investors wishing to steadily buy shares. For information, contact: Ms. Donna J. Drengel Shareholder Relations Department Community Bank System, Inc. 5790 Widewaters Parkway DeWitt, NY 13214-1883 Phone: 315.445.7313 donna.drengel@communitybankna.com or name, address or ownership of stock, or information about shareholder records, lost or stolen certificates, and dividend checks, direct deposit and reinvestment should contact: American Stock Transfer & Trust Company Operations Center 6201 15th Avenue Brooklyn, NY 11219 800.937.5449 www.amstock.com Analyst Coverage The following analysts published research about Community Bank System in 2012: Boenning & Scattergood American Stock Transfer & Trust Co. Operations Center 6201 15th Avenue Brooklyn, NY 11219 800.937.5449 www.amstock.com Matthew Schultheis / 610.832.5290 mschultheis@boenninginc.com Guggenheim Partners David Darst / 615.208.1224 david.darst@guggenheimpartners.com Keefe, Bruyette & Woods Inc. Damon DelMonte / 860.722.5908 ddelmonte@kbw.com SAFE HARBOR S TAT E MENT The Community Bank System, Inc. Annual Report contains forward-looking statements, within the provisions of the Private Security Litigation Reform Act of 1995, that are based on current expectations, estimates, and projections about the industry, markets and economic environment in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company’s periodic reports filed with the Securities and Exchange Commission. COMMUNITY BANK SYSTEM, INC. 5790 Widewaters Parkway DeWitt, NY 13214-1883 800.724.2262 315.445.7347 fax communitybankna.com 

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