Community Bank System
Annual Report 2015

Plain-text annual report

R I G H T O N T R A C K 2 O15 A N N U A L R E P O R T 33 C B U : Q U I C K F A C T S 450 1 1.7 23 8 10 75 170 T A B L E O F C O N T E N T S 23 consecutive years of increased cash dividends Cumulative total shareholder returns of 450% (at 12/31/15) over the last 15 years33% of 2015 total revenue was noninterest incomeRanked 8th Best in Forbes.com® analysis of 100 largest U.S. banksYear-end 2015 market cap of $1.7 billionRated “Most Trustworthy Bank” for Northeast U.S. in MSR Group annual surveyOrganic loan growth of nearly $170 million in 2015Top two deposit market share in 75% of towns with Community Bank branchesPositioned to exceed the $10 billion asset threshold in the near future Executive Management 1 — Letter to Shareholders 2 — 2015 Forbes Comparison 7Financial Performance 8 — Company Profile 9 — Leadership 10 — Corporate Governance 11 — Operations Review 12 — Administration 20Performance Recognized 25 — Business Summary 26 — Investment Rationale 28 — Corporate / Shareholder Information 29COVER PHOTO COURTESY OF THE ADIRONDACK RAILWAY PRESERVATION SOCIETYWe’re fully prepared to meet the higher organizational expectations of a $10 billion institution. (Left to right) Scott Kingsley, Chief Financial Officer; Brian Donahue, Chief Banking Officer; Joe Getman, General Counsel; and, Mark Tryniski, President and Chief Executive Officer 1 2 2015 was a steady and strong performance with many organizational highlights.Nicholas A. DiCerbo, Chairman of the Board, and Mark E. Tryniski, President and Chief Executive Officer173.5 2015’s record annual operating results were driven by productive earning-asset growth, a continuation of excellent credit quality, meaningful growth in noninterest income and disciplined expense management. On the Right Track We had a busy and very productive finish to 2015, a year that can best be characterized as a steady and strong performance with many organizational highlights. Record annual operating results were driven by productive earning-asset growth, a continuation of excellent credit quality, meaningful growth to noninterest income and disciplined expense management. Add to that a highly complementary acquisition in our home market and strong third party assessments of our financial strength and customer service model and it’s easy to understand our enthusiasm for the future. We announced and then successfully completed the acquisition of Oneida Financial Corp., adding 12 branches, $699 million in deposits and improving our market share in the Syracuse and Utica-Rome metropolitan areas. Through Oneida we also added product and service offerings in benefit administration, wealth management and insurance which nicely complement our financial services offerings and added scale to our fee income profile. Most importantly, Oneida’s history of service to its customers and communities aligns perfectly with our culture here at Community Bank. Completing the transaction in December 2015 was an outstanding way to end one year and kick off the next. Our milestones in 2015 were many, and they reflect both the consistency of our execution and the future opportunity we believe is inherent in our business model as it exists today. Clearly, we’re on the right track for continued success.THE PATH TO SUCCESS“Even if you’re on the right track, you’ll get run over if you just sit there.” Will Rogers’ familiar quote rings true for the banking industry now more than ever. Today, we operate in an environment of technological advances, economic fragility and regulatory governance that was unimagined even just ten years ago. At Community Bank, we have invested significantly, and ahead of pace, to ensure we continue to meet the highest expectations of all our stakeholders: our shareholders, customers, employees and regulators alike.3SHAREHOLDER LETTERCBU’s Total Cumulative Return (at 12/31/15) for the last eight years was 173.5%, compared to a median value of 44.2% for the largest 100 U.S. banks 70 06 07 08 09 10 11 12 13 14 15 $15.37 $16.16 $16.69 $17.25 $18.23 $20.94 $22.78 $21.66 $24.24 $26.06 06 07 08 09 10 11 12 13 14 15 $0.78 $0.82 $0.86 $0.88 $0.94 $1.00 $1.06 $1.10 $1.16 $1.22 10-year CAGR = 5.5% 10-year CAGR = 5.1% To this end, many significant accomplishments of 2015 occurred “behind the scenes.” While our front line bankers continued to nurture customer relationships and expand our franchise, dozens of our employees from across the company continued the important work of enhancing our company’s infrastructure, on many fronts. Investments in technology prioritized customer data security and real-time access to critical customer information. Investments in products and services proactively addressed the evolving needs of our retail and commercial customers. Investments in our regulatory compliance functions continued at an elevated level of sophistication typically seen at larger banks, as we continued to make excellent progress at implementing Dodd-Frank Act stress testing and strengthening our risk management and compliance operations. Today we feel confident that we are ready for a future in which a larger Community Bank provides outstanding service to our customers – and superior returns to our shareholders – while operating within the significantly more rigorous expectations put upon banks of $10 billion or more in assets. We have invested a significant amount of time at the Board and the senior management levels addressing the specific challenges, alternatives and pathways for approaching the $10 billion threshold, a level at which significant additional compliance requirements become mandatory. We believe that we’ll be fully prepared to effectively hurdle the $10 billion asset threshold at the appropriate time. In the meantime, today we are thrilled to offer our community banking and financial services customers the sophisticated infrastructure of a large regional bank, with the exceptional service they’ve come to know as setting Community Bank System, Inc. apart from the competition.RECOGNITION OF SUCCESSWe are pleased to report that our performance and financial condition once again placed us among the best large U.S. banks, as evaluated by Forbes® Magazine in its seventh annual analysis of “America’s Best Banks 2016.” Community Bank was ranked eighth among the 100 largest publicly-traded banks and thrifts, based on a comparison of ten different metrics related to asset quality, capital adequacy, growth and profitability, and which included financial institutions ranging in size from $7 billion to $2.4 trillion. In the seven years that Forbes® has produced this analysis, Community Bank has never been ranked lower than 12th, and has been in the top 10 for five of the annual reviews. We believe that our record of placing near the top of the rankings for all seven years is a reflection of our consistently strong operating performance during this period. Likewise, in 2015 we raised our cash dividend for the 23rd consecutive year, maintaining our place among the select group of “dividend achievers” that populate the S&P High Yield Dividend Aristocrats® Index, an index designed to measure the performance of companies within the S&P Composite 1500® that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 years. Our job, as always, is to manage and grow our organization in a disciplined fashion that creates sustainable improvement in earnings and dividend capacity for the benefit of our shareholders. We are pleased to note that even among this elite group of investment peers, Community Bank System, Inc. outperformed the index as a whole on the basis of a one-year total return to shareholders of 9.5% at December 31, 2015, compared to the index average of -0.4%. In addition, we outperformed the index average for the three- and ten-year periods ended December 31, 2015 as well.4Dividend Growth Book Value per Share The Company’s book value per share has grown approximately 70% since the end of 2005. And perhaps most satisfying, our customers once again gave us top marks for customer satisfaction in 2015. The MSR Group, a research firm that specializes in customer experience within the retail banking sector, published survey results in September 2015 which identified top performing banks in eight categories related to superior customer experience. All banks talk about providing a consistent high quality customer experience, but the ability to follow through is another matter. We are gratified that the survey responses of Community Bank customers helped to propel us to the top of the “Trust” category for all Northeast Region banks. In addition, Community Bank was a Northeast Region silver award winner for MSR’s Net Advocacy Rating,® a proprietary metric that identifies customers who consider themselves “advocates” of their bank. It’s hard to imagine a better barometer of customer satisfaction than a willingness to advocate on behalf of your bank. We could not be more proud of our team. HIGHLY PRODUCTIVE RESULTS IN 2015Along with the significant operational milestones described above, our Company had a very productive year with revenue growth and improved operating earnings while at the same time continuing to invest in the infrastructure required to support a larger and growing institution. Total revenue for the year was $371.7 million, another record for the Company and an increase of 2.3% over $363.4 million in 2014. Operating earnings per share, which excludes the tax-effected impact of acquisition expenses and a litigation settlement charge, was $2.30 in 2015, an improvement of $0.04 per share above 2014’s operating earnings of $2.26 per share. And importantly, our bottom-line results for 2015 remained very solid with net income of $91.2 million or $2.19 in diluted earnings per share. In addition to strong top and bottom-line results, there were many other aspects of our 2015 financial performance that merit further discussion. Our year-end total loans of $4.8 billion were up $565 million or 13.3% from December 31, 2014 with growth across all portfolios. Total deposits were $6.9 billion on December 31, 2015, an increase of $938 million, with the growth coming primarily in core non-time accounts. Noninterest income of $123.3 million grew by $4.3 million, or 3.6%, in 2015 driven by 6.6% growth in employee benefit services and a 13.1% improvement in wealth management fees. As with prior periods, we continued to manage expenses in a disciplined fashion in 2015 as total operating expense grew by only 1.1% after excluding acquisition expense and a prior litigation settlement. Asset quality remains a core strength for Community Bank as our credit quality metrics continue to be favorable and stable, as well as reflective of disciplined risk management and underwriting standards. Full year net charge-offs were $6.4 million, or 0.15% of average loans, and consistent with net charge-offs in 2014. Nonperforming loans as a percentage of total loans at December 31, 2015 were 0.50%, compared to 0.56% on December 31, 2014, and the Bank’s total loan delinquency ratio of 1.16% at year-end was down 30 basis points from the end of 2014. Even after completion of the Oneida acquisition in December, our capital position remained very strong. The Company’s Tier 1 leverage ratio of 10.32% was up 36 basis points from the fourth quarter of 2014. Shareholders’ equity at December 31, 2015 was $1.1 billion, an increase of $152.7 million, or 15.5%, from 2014 year-end, due to strong earnings generation and capital retention over the last four quarters, as well as the issuance of 2.38 million shares of common stock, or $102.2 million, reflecting the equity portion of the Oneida transaction consideration. We believe that these results represent a very solid and productive year and leave the Company well positioned to pursue growth opportunities that are likely to create additional shareholder value. 150 YEARS…AND COUNTINGIn 2016 we’ll celebrate the 150th anniversary of our original bank charter reaching back to 1866. From our roots as St. Lawrence National Bank to our expansion into the North Country, the Southern Tier, Western and Central New York and Pennsylvania – and nationally with our financial services offerings – we’ve always remembered what got us here: our customers and the communities we serve. We have charted a path to growth based on superior service and home-town approachability, ensuring our customers “Bank Happy” at every encounter. We are immensely proud of our history of putting our company and our customers on the right track for success. The scale of our business has changed but our approach to satisfying our customers’ needs clearly remains the same. Undoubtedly, the future landscape for banking looks wholly different from the past 150 years. We are confident that our proven ability to adapt to changing economic and regulatory conditions – not to mention rapidly evolving customer preferences – positions us well to navigate the path ahead.510 We continue to make excellent progress on implementing Dodd-Frank Act stress testing and strengthening our risk management and compliance operations, to meet the more rigorous expectations put upon banks of $10 billion or more in assets. 6Mark E. Tryniski President and Chief Executive OfficerNicholas A. DiCerbo Chairman of the BoardAs is often the case, the New Year brings with it certain organizational changes and 2016 is no different. This New Year brought the retirement of James A. Wilson, our Lead Independent Director and a valued member of the Board of Directors since 2009. Our Board is the driving force behind the Company’s disciplined and proactive investments for the future, and Jim’s independent leadership through a period of unprecedented change has been instrumental in our success. It is with great appreciation that we recognize Jim Wilson for his dedicated service. We are also fortunate to have gained the service of two additional directors with deep knowledge of our industry and the Central New York market, as a result of the Oneida transaction. Michael R. Kallet, former Chairman and Chief Executive Officer of Oneida Financial Corp., and Eric E. Stickels, President, Chief Operating Officer and Secretary of Oneida Financial Corp., joined our Board upon deal closing in December 2015. We have a long and productive tradition of welcoming directors through our regional bank acquisitions, and we are thrilled to benefit from the experience of Mike and Rick. Their leadership at Oneida reflected a philosophy and culture that closely mirrored Community Bank’s. The beginning of 2016 finds Community Bank System very well positioned for the coming year and beyond. We’re prepared to build on our earnings momentum and the strong balance sheet growth we realized in 2015. Our record capital levels provide considerable flexibility to explore opportunities to strengthen or expand our retail service area. The substantial financial services businesses that we have developed both organically and through acquisition, have a strong foundation to support additional expansion. And our highly favorable and stable credit quality along with disciplined expense management remain important contributors to our ability to generate profitable growth.The completion of the Oneida Financial Corp. acquisition in December strengthened our competitive profile in our home market of Central New York and bumped our assets to more than $8.5 billion. It’s not a matter of if, but when Community Bank System reaches $10 billion in assets. At the appropriate time and in the appropriate manner we will hurdle the $10 billion threshold in a fashion that optimizes the economic outcome for our shareholders. As we celebrate our milestone 150th anniversary, it is a great honor to look ahead to a future of shared successes with our customers, shareholders and employees in 2016 and beyond. We thank you for your continued support of Community Bank System, Inc.7 Efficiency Ratio %Net Charge-offs / Total Loans %Allowance for Loan Losses / Nonperforming Loans %On January 7, 2016 Forbes.com® published its seventh annual ranking of “America’s Best Banks” for 2016. Once again, it was no surprise that Community Bank System was ranked near the top. The Forbes® analysis ranked CBU eighth best among America’s 100 largest banks and thrifts, based on a comparison of ten different metrics related to asset quality, capital adequacy and profitability. The Company has consistently ranked near the top of this industry analysis demonstrating an ongoing ability to deliver superior performance across these important industry financial metrics. The following charts display the financial metrics used in the 2016 analysis and compare CBU to the median values of the 100 largest financial institutions.Return on Average Tangible Equity %Performance That’s Consistently on TrackTier 1 Risk Based Capital Ratio %Net Interest Margin (FTE) %Leverage Ratio %Revenue Growth %Nonperforming Assets /Total Assets %Total Risk Based Capital Ratio % 0.4| 0.6| 12| 18| 12| 18| 3.8| 4.2| 200| 300| 8| 12| 60| 90| 5| 7.5| 1.0| 1.5| 8| 16| 24| 0.2| 6| 6| 3.4| 100| 4| 30| 2.5| 0.5| 0| 0| 0| 0| 3.0| 0| 0| 0| 0| 0|CBUTOP 100 BANKS2015 COMPARISON CHARTS CBU VS TOP 100 BANKS F I N A N C I A L P E R F O R M A N C E Income Statement In millions 2015 2012 2009 2006 Net interest income $ 248.4 $ 230.4 $ 165.5 $ 134.8 CAGR (9-year) 7.0% Noninterest income 123.3 99.0 83.5 51.7 10.1% Total revenue 371.7 329.4 Operating expenses 233.1 211.8 249.0 186.2 186.5 129.6 8.0% 6.7% Provision for loan loss 6.4 9.1 9.9 6.6 (0.3%) Net income $ 91.2 $ 77.1 $ 41.4 $ 38.4 10.2% Net interest margin 3.73% 3.88% 3.80% 3.91% N/A Per Share Data Diluted earnings per share $ 2.19 $ 1.93 $ 1.26 $ 1.26 Operating earnings per share1 Cash dividends declared 2.30 1.22 2.03 1.06 1.51 0.88 1.33 0.78 Book value 26.06 22.78 17.25 15.37 Tangible book value $ 15.90 $ 13.72 $ 8.09 $ 7.17 Balance Sheet Data End of period, In millions Assets Loans, net Deposits $ 8,553 $ 7,497 $ 5,403 $ 4,498 4,801 3,866 6,873 5,628 3,099 3,924 2,702 3,168 6.3% 6.3% 5.1% 6.0% 9.2% 7.4% 6.6% 9.0% Shareholders’ equity $ 1,141 $ 903 $ 566 $ 462 10.6% 1 Operating earnings per share excludes the tax-effected impact of any gains or losses on sales of investment securities and debt extinguishments, acquisition expenses, litigation settlements, and other special charges. 06 07 08 09 10 11 12 13 14 15 10-year CAGR = 6.3% 3,820 4,142 4,286 4,772 4,868 5,525 6,374 6,469 6,641 6,990 8 Selected Financial Highlights Average Interest-Earning Assets $ in millions C O M P A N Y P R O F I L E ( N Y S E : C B U ) 9 Our principal business focus is building additional value into our enterprise through selective and strategic acquisitions, disciplined lending, and a consistent approach to business regardless of economic conditions. Our goal is to generate average annual total shareholder return above 10% over time.Reflecting a history of consistent results, the Company has raised its cash dividend for 23 consecutive years, a significant milestone and evidence of our belief that payment of a meaningful and growing dividend is an important component of providing favorable long-term returns to our shareholders. Our disciplined approach to lending has provided an enviable risk profile for the Bank where our asset quality metrics have remained consistently and significantly better than industry and peer group averages. Community Bank’s disciplined approach to business has resulted in it being named one of the nation’s best large banks in each of the last seven years, in the annual Forbes.com® analysis of America’s 100 largest financial institutions.The Company operates more than 200 customer facilities across Upstate New York and Northeastern Pennsylvania through its banking subsidiary, Community Bank, N.A. With assets of approximately $8.6 billion, the DeWitt, N.Y. headquartered company is among the country’s 150 largest financial institutions. We have built a market-leading branch system serving predominantly non-urban markets where we have earned the 1st or 2nd leading deposit market share in 75% of the towns where we operate.Approximately 33% of our revenue comes from noninterest sources with over half coming from our benefits administration, wealth management and insurance businesses. For 2015, our financial services businesses generated just over $65 million in revenue, a strong foundation to build on.The Company’s Tier I leverage ratio, a primary measure of regulatory capital was 10.32% at the end of 2015, up 36 basis points from year-end 2014, primarily from strong net earnings retention. Executive Management CORPORATE GOVERNANCECommunity Bank, N.A. Regional Advisory BoardsAdirondack Paul M. Cantwell, Jr. William M. Dempsey Alexander C. EdwardsJoseph Vernon Lamb IIIJames R. Langley, Jr.Carl J. MadonnaBrian J. MonetteKim A. MurrayCentral Mary C. AlbrechtOlon T. ArcherTom HardingJoseph P. MirabitoBenjamin C. NesbittJames L. SewardGeoffrey A. SmithAlfred S. WhittetDavid F. Wilber IIIBrian R. WrightPennsylvania Edward A. CoachMichael J. ColemanJohn H. GrahamScott E. HenryEdward I. Johnson, Jr.Kathleen M. LambertThomas A. McCulloughWilliam K. Nasser, Jr.Russell G. NewellFrank J. NiemiecJames M. O’BrienGerard T. O’DonnellMark Tryniski President and Chief Executive OfficerWith CBU since 2003. Formerly served as Chief Financial Officer and Chief Operating Officer. Partner with Pricewaterhouse Coopers prior to joining CBU.Joe Getman Executive Vice President and General CounselWith CBU since 2008. Provided corporate counsel to CBU as a senior partner at Bond, Schoeneck & King, PLLC prior to joining CBU.Scott Kingsley Executive Vice President and Chief Financial OfficerWith CBU since 2004. Served as CFO of Carlisle Engineered Products prior to joining CBU.Brian Donahue Executive Vice President and Chief Banking OfficerWith CBU since 1992. Formerly served as Chief Credit Officer and as Senior Loan Officer for the Southern Region.10James A. WilsonThe Board of Directors extends its gratitude to former Lead Director James A. Wilson for his valued service to Community Bank System, Inc. A member of the Board since 2009, Mr. Wilson has provided important guidance to the company as Chair of the Audit/Compliance/Risk Management Committee, as well as a member of the Nominating/Corporate Governance Committee. Prior to joining the Board, he was a partner at the accounting firm of Parente Randolph, LLC in Wilkes-Barre, PA, as well as Director for the School of Accounting for the International Correspondence School in Scranton, PA. Board of Directors Nicholas A. DiCerbo Chairman of the Board; Of Counsel, DiCerbo Morgan, PLLC; Director since 1984James A. Gabriel Franklin & Gabriel, Owner; Trust and Financial Services Committee, Chair; Loan/ALCO Committee, Vice Chair; Strategic/Executive Committee; Director since 1984John Parente CP Media, LLC, CEO; Loan/ALCO Committee, Chair; Strategic/ Executive Committee; Audit/ Compliance/ Risk Management Committee; Director since 2010John F. Whipple Buffamante Whipple Buttafaro, P.C., CEO; Audit/ Compliance/ Risk Management Committee, Vice Chair; Nominating/ Corporate Governance Committee; Director since 2010Brian R. Ace Laceyville Hardware, Retired Owner; Nominating/ Corporate Governance, Chair;Trust and Financial Services Committee; Director since 2003James W. Gibson Retired, KPMG, LLP, Partner;Audit/ Compliance/ Risk Management Committee; Compensation Committee;Director since 2009Sally A. Steele Attorney at Law;Strategic/ Executive Committee, Chair; Audit/ Compliance/ Risk Management Committee;Trust and Financial Services Committee;Director since 2003Mark J. Bolus Bolus Motor Lines, Inc., President and CEO; Compensation Committee, Chair; Nominating/ Corporate Governance Committee; Strategic/ Executive Committee; Director since 2010Michael R. Kallet Retired Chairman and CEO of Oneida Financial Corp. Trust and Financial Services Committee Director since 2015Eric E. Stickels Retired President, COO and Secretary of Oneida Financial Corp.; Trust and Financial Services Committee; Director since 2015Neil E. Fesette Fesette Realty, LLC and Fesette Property Management, Owner, President and CEO; Compensation Committee; Nominating/ Corporate Governance Committee; Strategic/ Executive Committee; Director since 2010Edward S. Mucenski Pinto, Mucenski, Hooper, Van House & Company, P.C., Partner and Managing Director; Audit/ Compliance/ Risk Management Committee, Chair; Compensation Committee; Director since 2010Mark E. Tryniski Community Bank System, Inc., President and CEO; Director since 2006Note: All bank board members participate in the Loan/ ALCO Committee11Total Average Annual Shareholder Returns Through December 31, 2015, Including Reinvestment of Dividends Source: Bloomberg Our objective, year in and year out, is to create superior returns for our investors utilizing our unique operating model. It is no secret that we operate in slow growth markets where many larger competitors have exited, apparently deciding that they are unable to profitably compete in these smaller towns and villages. However we continue to create long-term double-digit returns for investors by functioning as a well-run, disciplined company with a relatively low-risk profile within these areas. We have focused on assembling a strong retail banking franchise capable of attracting a leading market share position in each of these smaller, stable regions. We offer comprehensive retail and small business products, as well as responsive, decentralized decision-making, both reflective of our detailed knowledge of the local markets and of our customers. Focusing on these stable lower-growth markets has been a core strength which has resulted in relatively consistent credit quality and dependable earnings performance. We augment the limited organic growth opportunities with high-value acquisitions that strengthen our competitive position in existing markets, or enable us to push out the boundaries of our service area. We also have been an active acquirer of fee-based financial services businesses which diversify our revenue stream and reduce dependence on interest income. In 2015 we were able to complete an acquisition that accomplished all of these objectives. Our acquisition of Oneida Financial Corp. extended and strengthened our Central New York service area by expanding our market presence in the Syracuse and Utica-Rome metropolitan areas. This transaction also added to our product and service offerings in insurance, benefits administration, and wealth management. Oneida is an excellent example of the type of high-value acquisition opportunity we continue to pursue, transactions that provide a strong platform for potential growth, and which make sense for our shareholders. Our objective is not to grow just for the sake of getting bigger, our goal is to manage and grow this organization in a disciplined fashion that creates sustainable improvement in earnings and dividend capacity which benefits our shareholders. If a potential transaction makes sense for our shareholders, then we’re interested. Once we determine that an acquisition makes sense, then our team executes the transaction in a focused and disciplined fashion to create growing and sustainable value for our shareholders. Our history of long-term value creation has demonstrated our ability to do just that.Community Bank System has increased its cash dividend for 23 consecutive years, and is one of only eight banks in the select group of “dividend achievers” which have increased cash dividends for 20 years or more. RIGHT ON TRACKVALUE CREATION 1 YEAR 5 YEARS 10 YEARS 15 YEARS CBU 8.3% 11.4% 10.0% 12.2%S&P 600 Commercial Bank 6.4% 14.0% 0.1% 4.1%KBW Regional Bank 5.8% 10.3% 2.6% 7.3%S&P 500 1.4% 12.6% 7.3% 5.0%DJIA 0.2% 11.3% 7.3% 5.8% 122313 Our goal is to generate average annual total shareholder return above 10% over time.Financial Services Acquisitions 2015 OneGroup – Insurance and Benefits (Oneida Financial Corp) 2014 Lifetime Benefit Solutions 2011 CAI Benefits, Inc. 2008 Alliance Benefit Group MidAtlantic 2007 CBNA Insurance Agency, Inc. (TLNB Financial) Hand Benefits & Trust, Inc. Bank Acquisitions (since 2006) 2015 Oneida Financial Corp. WHOLE BANK, CENTRAL UPSTATE NY 2013 Bank of America 8 BRANCHES, NORTHEAST PA 2012 HSBC/First Niagara Financial Group, Inc. 19 BRANCHES, UPSTATE NY 2011 Wilber Corporation WHOLE BANK, CENTRAL UPSTATE NY 2008 Citizens Financial Group, Inc. 18 BRANCHES, NORTHERN NY 2007 TLNB Financial Corp. WHOLE BANK, NORTHERN NY 2006 ES&L Bancorp, Inc. WHOLE BANK, UPSTATE NY ONB Corporation WHOLE BANK, UPSTATE NY 14 With our operations located in slower growth markets such as Upstate New York and Northeastern Pennsylvania, and a goal of generating 10% average annual total shareholder return, relying solely on organic growth wouldn’t be realistic. We have a record of building additional value into our enterprise through selective and strategic acquisitions, which complement a disciplined and consistent approach to business regardless of economic conditions.We have significantly enhanced and grown our banking franchise by making 18 successful acquisitions since 1995. We have been particularly active since 2006, adding a net of more than 80 retail locations through eight branch or whole-bank acquisitions. These transactions provided density to our existing footprint, as well as entry into 58 new markets. The “plug and play” flexibility of our model allows us to efficiently allocate resources and serve clients in historically lower-growth areas, a strategy that remains highly effective for us. Along with identifying strategic opportunities to build scale and market share in our banking franchise, we have also pursued opportunities to diversify revenue by investing in fee-based financial services businesses that complement our banking business. In 1996, we acquired Benefit Plans Administrators (BPAS) and since then have made eight additional financial services businesses acquisitions. Through these transactions we have added an investment advisory firm and an insurance agency, while expanding our benefit plan administrative, consulting and actuarial services. Importantly, our Oneida Financial acquisition included insurance, benefits administration and wealth management products and services which are expected to add over $20 million in revenue in 2016. In total our noninterest revenue sources account for approximately one third of the Company’s revenue, with more than half coming from our benefits administration, wealth management, and insurance businesses. In 2015, the revenues from these businesses totaled more than $65 million, up 66% in just five years.The expansion of our financial services businesses, both organically and through acquisitions, has significantly expanded our capabilities. BPAS has grown into a national provider of administrative, actuarial and consulting services to a diverse array of clients spanning the United States and Puerto Rico. Our wealth management and insurance capabilities have grown to include broker-dealer and investment advisory services, asset management services to individuals, corporate pension and profit sharing plans, trust services and insurance products and services. Along with expanding our service capabilities, the strategy of developing strong financial services options has provided a strong revenue source largely unaffected by the variability of interest rate movements. RIGHT ON TRACKSTRATEGIC INVESTMENT 15 We build additional value through selective and strategic acquisitions.1 1 Includes deferred tax liabilities (of approximately $39.7 million at 12/31/15) generated from tax deductible goodwill. 16With strong balance sheet growth, earnings momentum and stable credit quality through 2015, Community Bank remains solidly positioned for 2016 and beyond. Total loans at year-end were up $565 million from the end of the 2014 with approximately $400 million of that related to the Oneida acquisition and the remainder from organic growth in the second, third and fourth quarters. Funding growth was comparable in 2015 with total deposits of $6.9 billion at year-end, up $938 million from the end of 2014 and driven by approximately $700 million from the Oneida transaction and the remainder from solid core deposit growth.Our capital levels at the end of 2015 continued to be very strong despite completion of the Oneida Financial transaction in December. Our Tier 1 leverage ratio was 10.32% and tangible equity to net tangible assets ended December at 8.59%, reflecting strong earnings retention during the year. We finished the year in an excess capital position providing the flexibility to continue to evaluate growth opportunities that are consistent with our strategic goals. We increased our dividend again in 2015, as we have for each of the past 23 years. Consistent and substantial earnings growth has driven the increased dividend capacity which, despite 23 years of increased payouts, still reflects only 56% of net earnings. The success of our value creation model relies on having a superior capital foundation, and we’re confident in our ability to maintain and grow internal capital generation.The Company’s very strong financial position is representative of the considerable value that has been gradually and conservatively built over the years through disciplined investment and operational focus. This approach continues today and will continue tomorrow as we evaluate the appropriate time and the appropriate manner to hurdle the $10 billion threshold in a fashion that optimizes the economic outcome for our shareholders. RIGHT ON TRACKFINANCIAL STRENGTHOur continued strong capital position is primarily a result of strong earnings generation and retention.10-year CAGR =7.3%Total Loans In billions06 $2.707 $2.8 08 $3.109 $3.110 $3.011 $3.5 12 $3.913 $4.114 $4.215 $4.82015 Year-end Capital Tier 1 Leverage Ratio 10.32% Tangible Equity/Net Tangible Asset 8.59%17 We delivered strong balance sheet growth, productive operating leverage, and excellent asset quality.Exceptional Asset Quality At or for the twelve months ended December 31, 2015 2 3 The Company’s efficiency ratio has been below 60% consistently since 2010. 57.91 ACBN = All Commercial Banks, National 2 NPLs = Nonperforming loans 3 FDIC Statistics - Net charge-off to loans CBU ACBN 1 ACBN ACBN ACBN > $1B $1B-$10B > $10BLoan loss allowance/NPLs 190% 87% 84% 118% 81%NPLs /loans outstanding 0.50% 1.54% 1.59% 1.06% 1.66% Net charge-offs/average loans 0.15% 0.43% 0.45% 0.23% 0.48% Provision to net charge-offs 95% 99% 99% 137% 96% Earnings coverage of net charge-offs (x) 14.28 7.41 7.22 11.43 6.94Our business approach seeks a balance between growth and operating efficiency, and our success at achieving this balance can be seen in our improved operating leverage. In 2015, our operating revenues grew 2.3% while operating expenses grew by only 1.1%. Even more gratifying is how efficiently we’ve grown over the past five years, both organically and through acquisitions, with revenue growing at a compound annual growth rate of 6.6% and expenses increasing by 5.4%. Revenue per share grew at an annual rate of nearly 2.2% over the last five years, while operating expenses per share grew at a 1.1% annual rate. This “per share” measure of value creation accounts for the incremental capital raised over this time and reflects the true economic growth provided to shareholders. It’s particularly meaningful in that this has been accomplished over a period of time during which the Company has been making infrastructure investments in operations, capital planning, Dodd-Frank Act stress testing, and strengthening risk management and compliance to be fully prepared to meet the higher organizational expectations of a $10 billion institution.Another strong indication of the effectiveness of our business approach has been our consistently strong credit quality. 2015 was no exception, as our asset quality metrics remained superior compared to industry standards. Our consistent record of solid credit quality is attributable to strong underwriting, a stable economy in our footprint and solid customer relationships. Our net loan charge-off ratio, non-performing loan ratio and loan delinquency ratio all compared favorably to peer and industry averages at year-end, as well as through prior years reaching back through the industry credit crisis period that began in 2008. Our process is neither mysterious nor complex. We extend fairly-priced, straightforward loans to credit-worthy borrowers seeking financing for everyday needs, from car loans to mortgages to business lines of credit. Combined with responsive local decision-making, customer service and support, and authority at the branch level we have an approach which matches the needs of our predominately small-town customer base.RIGHT ON TRACKEFFECTIVE MANAGEMENT1819 Our business approach seeks a balance between growth and operating efficiency.EXECUTIVEMark E. Tryniski, President and Chief Executive OfficerScott A. Kingsley, Executive Vice President, Chief Financial OfficerBrian D. Donahue, Executive Vice President, Chief Banking OfficerGeorge J. (Joe) Getman, Executive Vice President, General CounselRETAIL & BUSINESS BANKINGJoseph Serbun, Senior Vice President, Chief Credit OfficerHal Wentworth, Senior Vice President, Retail Banking and MarketingRichard Heidrick, Senior Vice President, Consumer BankingGeorge Burke, Senior Vice President, Director of Mortgage BankingJoseph Sutaris, Senior Vice President, Regional Banking ExecutiveRobert Cirko, Senior Vice President, Regional Retail Banking ManagerScott Boser, Retail Lending ManagerJudith Meyer, Branch Services AdministratorCynthia Lefko, Cash Management Product and Sales ManagerDeborah Baker, Collections ManagerCREDIT ADMINISTRATIONStephen Hardy, Senior Vice President, Chief Credit AdministratorNancy Mastrucci, Senior Credit ManagerMark Guenthner, Special Assets ManagerDenise Rhoads, Commercial Appraisal ManagerFINANCE & TREASURY MANAGEMENTJoseph Lemchak, Senior Vice President, Chief Investment OfficerDeresa Durkee, Vice President, Corporate ControllerRobert Frost, Vice President of Finance, Director of Capital Planning and Analysis Sean Howard, Senior Treasury Officer Randy Pray, Corporate Purchasing Manager Brian Fancher, Benefits Accounting ManagerLaura Mattice, General Accounting ManagerDennelle Michalski, Financial Controls Manager Robert Pierce, Financial Reporting ManagerADMINISTRATIVE SERVICESBernadette Barber, Senior Vice President, Chief Human Resources OfficerDanielle Cima, Associate General Counsel, Corporate SecretaryMichael Abdo, Associate General CounselBrett Fisk, Director of FacilitiesDonna Drengel, Board Secretary and Shareholder RelationsINFORMATION TECHNOLOGY & OPERATIONSJ. Michael Wilson, Senior Vice President, Chief Technology OfficerSusan Fox, Senior Vice President, Chief Information OfficerAaron Friot, Director of Information TechnologyRobin Dumas, Electronic Banking ManagerBarbara Snyder, Loan Operations ManagerChristina Sullivan, Director of Business Information SystemsPaula Demo, Deposit Operations ManagerRISK MANAGEMENTPaul Ward, Senior Vice President, Chief Risk OfficerMark Houghtaling, Director of Loan ReviewDaniel O’Connell, Director of Internal AuditDorothy Quarltere, Chief Compliance Officer Timothy Miller, Director of Information SecurityCOMMUNITY BANKCOMMERCIAL BANKING OFFICERS WESTERN REGION James Rahill, Senior Commercial Bank Officer David Alm, Senior Commercial Banking Officer Mark Saglimben, Senior Commercial Banking Officer David McKinley, Commercial Banking Officer Scott Brechbuehl, Commercial Banking Officer Gretchen Copella, Commercial Banking Officer Patrick Gorman, Commercial Banking Officer Michael Boza, Agricultural Banking OfficerNORTHERN REGION Nicholas Russell, Senior Vice President, Commercial Banking Ronald Bacon, Senior Commercial Banking Officer Kevin Kent, Commercial Banking Officer Paul Connelly, Commercial Banking Officer Craig Stevens, Commercial Banking Officer Jeffrey Fallon, Commercial Banking Officer Amy Downey, Commercial Banking Officer Patricia Duffy, Agricultural Banking Officer Duane Pelkey, Commercial Banking Officer Aaron Kimmich, Agricultural Banking OfficerSYRACUSE/ONEIDA REGION Luke Fagan, Commercial Banking Team Leader Russell Brewer, Commercial Banking Team Leader William McIncrow, Commercial Banking Officer Russell Sturtz, Commercial Banking Officer Joseph Pedrotti, Commercial Banking Officer William Baldwin, Commercial Banking Officer Steven Potter, Commercial Banking Officer Douglas Bartell, Commercial Banking Officer Thomas Lewin, Commercial Banking Officer Trevor Bacon, Commercial Banking Associate SOUTHERN REGION Stephen Rich, Commercial Banking Team Leader Loren Herod, Agricultural Banking Team Leader Arthur Sable, Commercial Banking Officer J. David Clark, Commercial Banking Officer D. James Vedora, Commercial Banking Officer Mark Miller, Commercial Banking Officer Charles Van Hooft, Agricultural Banking Officer Rebecca Snyder, Agricultural Banking OfficerCENTRAL REGION Jeffrey Lord, Commercial Banking Team Leader Edward Michalek, Commercial Banking Officer John Connolly, Commercial Banking Officer Jonathan Luce, Commercial Banking Officer Allison Mosher, Commercial Banking OfficerSMALL BUSINESS UNDERWRITING Michael Austin, Small Business Loan Manager Richard Sisson, Underwriter Beth Robbins, UnderwriterPENNSYLVANIA REGION Robert Matley, Regional Vice President, Commercial Banking Warren Rozelle, Commercial Banking Team Leader Richard Kazmerick, Commercial Banking Team Leader Paul Baynum, Commercial Banking Officer Matthew Dougherty, Commercial Banking Officer Mary Elizabeth D’Andrea, Commercial Banking Officer Joseph Tomko, Commercial Banking Officer Neil King, Commercial Banking Officer Walter Sarafinko, Commercial Banking Officer David McHale, Commercial Banking Officer A. Edward Nork, Commercial Banking Officer Stacia Arnaud, Commercial Banking Officer John Pekarovsky, Commercial Banking Officer20ADMINISTRATIONWEALTH MANAGEMENT AND INSURANCE GROUPPaul Restante, Managing DirectorBarbara Toczko-Maculloch, Senior Vice President, Pennsylvania Market Director Theresa Kalil-Lennon, Senior Vice President, Regional Sales Manager, Central/EastDavid Coon, Senior Vice President, Regional Sales Manager, Western NYDaniel Drappo, Senior Financial Consultant, Regional Sales Coordinator, St. LawrenceStephen McFadden, Financial Consultant, Regional Sales Coordinator, AdirondackLaurel Pellettiere, Special Projects and Compliance ManagerTRUST AND INVESTMENT SERVICESCatherine Koebelin, Senior Vice President, Chief Trust Officer, OleanCharles Perrillo, Senior Vice President, Chief Trust Investment Officer, OneontaAmy Allen, Senior Trust Officer, OneontaPatricia Barie, Senior Trust Officer, OleanJennifer Critti-Lebeau, Trust Officer, OneontaPatricia Crolly, Trust Officer, Scranton Shannon Hyzer, Trust Officer, OneontaRobert Jewell, Senior Trust Officer, ElmiraJohn Jones, Trust Officer, OneontaLinda Meyer Lambert, Trust Officer, OleanThomas LaPage, Trust Officer, CantonPatricia Lowe, Trust Operations Officer, OneontaVincent Mastrucci, Corporate Trust Officer, Scranton Adam Niebanck, Trust Investment Officer, OneontaChristine Petras, Trust Investment Officer, Oneonta Herbert Simmerly, Jr., Vice President and Senior Trust Officer, OneontaPaul Snodgrass, Trust Investment Officer, CantonBrett Zielasko, Trust Officer, OneidaNOTTINGHAM ADVISORS, LLC100 Corporate Parkway, Suite 338 Amherst, NYThomas Quealy, Chief Executive OfficerLawrence Whistler, President, Chief Investment OfficerKaren Mohn, Chief Compliance Officer, Client Services ManagerNicholas Verbanic, Vice President, Portfolio ManagerONE GROUP706 North Clinton Street, Syracuse, NYPierre Morrisseau, Chief Executive OfficerJohn Catanzarita, Chief Operating OfficerAlison Dunn, SVP, HR and Employee BenefitsChris Mason, SVP, Commercial LinesRon Heath, Chief Sales and Marketing OfficerCraig Bailey, VP, Personal LinesMark Moeller, President and CEO, CBNA Insurance AgencyCOMMUNITY INVESTMENT SERVICES, INC. / ONEIDA WEALTH MANAGEMENTPaul Restante, PresidentChasity Jaynes, Vice PresidentGarry Payne, Carta GroupJeremy Caza, Carta GroupFinancial ConsultantsPeter Albano, Wilkes-BarreCharles Baracco, Syracuse Donald Bower III, ElmiraEric Brunet, OgdensburgMichael Bufalini, WatertownJoseph Butler, Jr., WatertownThomas Ciolek, Olean/AvonShawn Derrick, WellsvilleDaniel Drappo, WatertownJames Durso, WaterlooRobert Eckermann, CazenoviaTimothy Forman, Lake PlacidKevin Gildner, WellsvilleJoseph Hatfield, OneidaJustin Hooper, PlattsburghRandall Hulick, SpringvilleKathy Kaffenberger, ChittenangoKyle Leikam, DunkirkRick Little, JermynAndrew Lomanto, Plattsburgh/MaloneAndrew Mangano, FultonJude McDonough, Scranton PAStephen McFadden, PlattsburghJames Mersfelder, SyracuseChad Murray, Falconer Charles Nicosia, OneontaDavid O’Neil, Jr., BoonvilleBrent Patry, Oneonta/NorwichRobert Stanley, MinookaJoseph Topichak, CorningMichele Wilck, Newark/PalmyraBradley Williams, AvonBENEFIT PLAN SERVICESBarry Kublin, PresidentBPAS6 Rhoads Drive, Utica, NYPaul M. Neveu, President, BPAS, LLCRobert A. Malczyk, Vice President, Director of SalesLinda S. Pritchard, Senior Vice President, Recordkeeping Services3501 Masons Mill Road, Suite 505, Huntingdon Valley, PAMary Anne Geary, Senior Vice President, DC Plan ServicesRichard Schultz, Senior Vice President, Fiduciary ServicesBPAS ACTUARIAL AND PENSION SERVICESOne Lincoln Center, Syracuse, NYVincent F. Spina, PresidentSteven P. Chase, Senior Vice PresidentSarah E. Dam, Senior Vice President 335 Lexington Ave., 5th Floor, New York, NYSheryl Gabriel, Senior Vice President HAND BENEFITS & TRUST820 Gessner, Suite 1250, Houston, TXW. David Hand, Chief Executive OfficerStephen Hand, PresidentJames Goodwin, Vice PresidentBPAS TRUST COMPANY PUERTO RICO644 Fernandez Juncos Ave, Suite 301, San Juan, PRAlfredo Matheu, BPAS President, Puerto Rico21COMMUNITY BANK NORTHERN NEW YORK MARKETAdams Christopher M. Castle, ManagerAlexandria Bay Matthew Honeywell, Manager Ausable Forks Valerie Daniels, ManagerBlack River Christina S. Meagher, ManagerBoonville (101 Main Street and Headwaters Plaza) Debra Roberts, ManagerCanton David Peggs, Manager Champlain Melissa M. Peryea, ManagerChateaugay Candice Pelkey, Branch SupervisorClayton Lori Fearnside, ManagerFort Covington Gayle Miner, Branch SupervisorGouverneur Diane Easton, ManagerHarrisville Karen Pierce, Branch SupervisorHermon Connie Green, ManagerHeuvelton Richard Tacchino, Branch SupervisorIndian Lake Brenda Lanphear, ManagerLake Placid Katie Stephenson, ManagerLong Lake Viccann Novak, ManagerLowville (State Street) Tina Paczkowski, District Manager Lowville (Turin Road) Stephen Allen, ManagerLyons Falls Nancy Fruin, ManagerMadrid Marsha Watson, ManagerMalone (Elm Street) Byron Tuthill, District ManagerMalone (West Main Street) Stacey Brunell, ManagerMassena Sue Perkins, ManagerNorth Creek Lori DeMars, ManagerNorwood Emily Losey, ManagerOgdensburg (State Street) Robert Seymour, District ManagerOgdensburg (Ford Street) Denise Barse, ManagerOld Forge Barbara Criss, ManagerPlattsburgh (Margaret Street) Kathryn Reynolds, ManagerPlattsburgh (Route 3) Kent Backus, Regional Retail Banking Manager James Snook, ManagerPlattsburgh (In-store – Wal-Mart) Arlene Favreau, Branch SupervisorPotsdam (Market Street and May Road) Victoria Strader, Manager Saranac Lake (Broadway and Lake Flower) Brenda Darrah, ManagerSt. Regis Falls Sherri Fleury, Branch SupervisorStar Lake Connie Green, ManagerTiconderoga Maria Beuerlein, ManagerTupper Lake John Salamy, Manager Waddington Emily Losey, Manager Watertown (Arsenal Street) Elizabeth Brown, ManagerWatertown (216 Washington Street) Rita J. Walldroff, Regional Retail Banking Manager Catherine Ward, ManagerWest Carthage Naura L. Christman, ManagerWhitehall Holly A. Rabideau, ManagerCOMMUNITY BANK SOUTHERN NEW YORK MARKETAddison Robin Knapp, ManagerAlfred Beth Plaisted, ManagerAllegany Stephanie Kolkowski, ManagerAvon Deborah Fitch, Manager Angelica Diana Grastorf, Branch SupervisorBath Joel Brazie, ManagerBelfast Brandy Burdick, Branch SupervisorBolivar Judy Gilliland, ManagerCanandaigua (County Road 10) Paul Lepore, District Manager Canandaigua (South Main Street) Christopher Bross, ManagerCassadaga Susan Sekuterski, ManagerCato Tiesha Combes, ManagerClifton Springs (East Main Street and Clifton Plaza) Theresa Dorgan, ManagerClymer Laurie Harvey, ManagerCorning (West Market Street) Wendy Daines, ManagerCorning North Robert Avvampato, ManagerCuba Shavonne Henderson, ManagerDansville Jody Tonkery, District Manager Dunkirk (Vineyard Drive) Jason DeChard, ManagerDunkirk (Central Avenue) Jean Coughlin, ManagerElmira Denise Allen, District Manager 22BRANCH LOCATIONSErwin/Painted Post Todd Selander, Branch SupervisorFalconer Joann Anderson, ManagerFillmore Julie Hall, District ManagerFranklinville Sandra Wolfer, ManagerGeneseo Lisa Kime, ManagerGeneva (Canandaigua Road) Tina Jackson, ManagerGeneva (Seneca Street) John Latanyshyn, ManagerGowanda Ralph Swanson, Manager Hammondsport Kelly Bussmann, ManagerHornell Melissa Ponticello, ManagerHorseheads-Consumer Square Glenn Parsons, ManagerHoughton College Julie Hall, District ManagerInterlaken Denise Ector, ManagerIthaca Michael MacDonald, ManagerJamestown (North Main Street) Kathleen Bemus, ManagerJamestown (Main Street - Brooklyn Square) Glori Taylor, ManagerLakewood Lisa Allenson, District ManagerLivonia Ronda Howard, ManagerMoravia Michael Pizzola, ManagerMount Morris Susan Neelin, ManagerNaples Joilette Pendleton, ManagerNewark (Church Street) Phyllis A. Adriaansen, ManagerNewark Plaza Ann Young, ManagerNichols Kathleen Bowen, ManagerNorth Collins Robin Hohman, Manager Olean (North Union Street) Eric M. Garvin, Regional Retail Banking Manager Jody Spears, District Manager Olean (Delaware Park) Kelly Crandall, ManagerOrchard Park Kristen Woodarek, ManagerOvid Jacqueline Robinson, ManagerOwego Florence Rossi, ManagerPalmyra Cheryl Ford, ManagerPenn Yan (Main Street) Thomas May, Manager Penn Yan (Lake Street) Teresa A. Vivier, ManagerPhelps Amy Shaffer, ManagerPortville (East State Road) Brenda Blackwell, ManagerPortville (North Main Street) Katrina Savitcheff, Branch SupervisorRandolph Diane Lecceardone, ManagerRipley Patricia Knight, ManagerRushville Christine Copper, ManagerSalamanca Robin Bowser, ManagerSeneca Falls David Sloan, Regional Retail Banking Manager Christine Plate, ManagerSherman Shannon Stevens, ManagerSilver Creek Mark Catalano, District ManagerSpringville (Cascade Drive) Mary Ann Lutz, Manager Springville (North Buffalo Street) Brooke Baker, Manager Waterloo Alexis Carlson-Spina, ManagerWatkins Glen Anthony Fraboni, Manager Wellsville (Bolivar Road) Lori Dzielski, ManagerWellsville (Main Street) Virginia Elliott, ManagerWestfield Carl Swan, ManagerWoodhull Ashley Quick, ManagerYorkshire Joseph Fore, Manager 23COMMUNITY BANK CENTRAL NEW YORK/ONEIDA REGIONBoiceville Brad Bernard, ManagerCamden Michelle Szkolnik, Manager Canastota Lori Torrey, ManagerCazenovia Robin Gallup, ManagerChittenango Branch Roberta Button, ManagerCicero Denise Cavallo, ManagerCobleskill Joseph Sutaris, Regional Banking ExecutiveCooperstown (Main Street and Otsego, State Highway) Naomi Grigoli, ManagerDelhi Tina Seguare, ManagerDewitt Robert Liedka, ManagerDownsville Jean M. Lacey, ManagerFleischmanns Marilee Asher, ManagerFulton Tina Stephens, ManagerHamilton Janet Briggs, ManagerHannibal Debra Davis, District ManagerJohnson City Michelle Carlsson, ManagerMilford Rosemary Aborn, ManagerMorris Michael Walling, District ManagerNorwich (State Highway) Caryn Wake, ManagerNorwich (Broad Street) Michael Walling, District ManagerOneida Convenience Cathy Mumford, Manager Oneida Main Angel Rose, Regional Retail Banking Manager Cindy Lindauer, ManagerOneonta (Main Street) Michael Walling, District Manager Nancy Miller, Gold Club ManagerOneonta (Chestnut Street) Paula Morell, ManagerOneonta (Southside) Tahitian Teft, ManagerOneonta (FoxCare Center) Lesley Bohacek, ManagerOswego Fred Aldrich IV, ManagerOtego Beth Braun, ManagerPulaski Steven P. Gaffney, ManagerRome Griffiss Park Dean Shlotzhauer, ManagerRome Turin Rd. Wendy Berg, ManagerSchenevus Gerald V. Coombs, Jr., ManagerSidney Bridget Fisk, District Manager Sharon Cutting, ManagerSkaneateles Desiree R. Murphy, ManagerVernon Angel Rose, Regional Retail Banking ManagerWalton Donna A. Bundy, ManagerWestmoreland Amanda Tedford, ManagerCOMMUNITY BANK PENNSYLVANIA MARKETCarbondale Bobbiann Davis, ManagerClarks Summit David Griffin, ManagerDaleville Susan Pitoniak, ManagerDickson City Lisa Rochinski, ManagerEdwardsville Denise Johnson, ManagerFreeland Daniel Boote, ManagerHazleton (Airport Road) Paula Palance, ManagerHazleton (North Church Street) Lori Roth, ManagerHazleton (West Broad Street) Emmanuel Marte, ManagerJermyn John Peterson, Manager Jessup Mary Bieszczad, ManagerKingston (James Street) Karen Shuster, ManagerLaceyville Greg Culver, ManagerLansford John Greybosh, ManagerLawton Doug Jackson, ManagerLehighton Dana Cannariato, ManagerLittle Meadows Mary Sivers, ManagerMeshoppen Jennifer Ramey, ManagerMontrose Steven Stranburg, ManagerNoxen/Bowman’s Creek Colleen Bullock, ManagerOlyphant Theresa Collins, District ManagerPittston Gary Missal, ManagerScranton (Keyser Avenue) Lisa Browning, ManagerScranton (Minooka - Davis Street) David Lencicki, ManagerScranton (North Washington Avenue) Suzanne Kennedy, ManagerScranton (Wyoming Avenue) Michelle Cook, ManagerTowanda Lori Smith, Manager Tunkhannock Jennifer Chesner, Manager Trucksville/Back Mountain Susanne M. Mullin, ManagerWilkes Barre (Franklin Street) David Dobbs, District Manager Susan Russick, Manager Wilkes Barre (South Main Street) Sandra Wheeler, ManagerWyalusingKaren Fuller, District Manager24BRANCH LOCATIONS25Once again, the performance and financial condition of Community Bank System, Inc. was ranked among the best large banks in the 2016 analysis compiled and published by Forbes.com®. Community Bank was ranked eighth among the 100 largest publicly-traded banks and thrifts, based on a comparison of ten different metrics related to asset quality, capital adequacy, growth and profitability, and which included financial institutions ranging in size from $7 billion to $2.4 trillion. In the seven years that Forbes has been producing this analysis, Community Bank has never been ranked lower than 12th, reflecting its consistent strong performance over this period.Survey results published in September 2015 by MSR Group, a research firm that specializes in customer experience within the retail banking sector, identified Community Bank as the most trusted bank in the Northeast Region of the U.S. as judged by our customers. Also, using MSR’s Net Advocacy Rating®, a proprietary metric that identifies customers who consider themselves “advocates” of their bank, Community Bank was the silver award winner for the Northeast Region. There is simply no better barometer of customer satisfaction than a willingness to advocate on behalf of your bank. It’s one thing to say you give great customer service, it’s quite another to be able to prove it.Community Bank’s roots reach all the way back to 1866, the year when predecessor bank, St. Lawrence National Bank, was chartered. Community Bank System, Inc. (“Company”) was incorporated on April 15, 1983, and listed on the New York Stock Exchange with the ticker symbol CBU. The Company’s philosophy has always centered on serving the financial needs of customers in rural and smaller communities, first in Upstate New York and then expanding into Northeastern Pennsylvania. The Company has been an active acquirer of smaller financial institutions in and around its retail banking footprint, and remains so today. The Bank’s operating philosophy is based on local decision making at each branch location coupled with providing a comprehensive offering of retail and small business products which enable the Bank to compete effectively. PERFORMANCE : RECOGNIZED America’s Best Banks 2016Most Trusted Bank – Northeast RegionA Century and a Half of ServiceD I V E R S I F I E D B U S I N E S S AT A G L A N C E $306.1M 2015 Revenue 82% of Total Revenue 5.8% 5-Year CAGR MARKET-LEADING BRANCH SYSTEM 194 202 158 117 42 $6.9 B 12/31/15 Branch Locations ATMs Towns 1st/2nd Market Share Counties (NY/PA) Total Deposits Banking Service Area n COUNTIES WITH RETAIL BANKING LOCATIONS Loan Portfolio Composition At 12/31/15 Total Loans = $4.8 Billion Consumer Mortgage 37% Business Lending 31% 8% Home Equity 24% Consumer Direct/Indirect Total Revenue Composition At 12/31/15 2015 Total Revenue = $371.7 Million Banking Services 15% Wealth Management and Insurance 6% Benefit Plan Services 12% 67% Net Interest Income 26 $20.2M 2015 Revenue 6% of Total Revenue 15.6% 5-Year CAGR Full Suite of Financial Services Provided Under One Roof n Full Service Brokerage and Insurance Firm n Registered Investment Advisory Firm n Personal and Institutional Trust Services n Property and Casualty Insurance Noninterest Income1 In millions 06 07 08 09 10 11 12 13 14 15 0| 25| 50| 75| 100| 125| 9-Year CAGR = 10.1% 1 Excluding securities gains/losses and debt extinguishment charges BANKING SERVICES FINANCIAL SERVICES BPAS $45.4 M 2015 Revenue 12% of Total Revenue 8.9% 5-Year CAGR BPAS is a national provider of retirement plan administration and related services, with ten offices across the nation and 260 retirement plan professionals. The company serves more than 4,000 retirement plans and 400,000 participants through partnerships with financial advisors, and currently hold more than $19 billion of assets under custody. BPAS services include: n Plan Administration & Recordkeeping Services n Actuarial and Pension Services n TPA Services n Fiduciary Services n Healthcare Consulting Services n VEBA & HRA/HSA Services n AutoRollovers & MyPlanLoan Services n Hand Benefits & Trust (a BPAS Company) n BPAS Trust Company of Puerto Rico National Financial Services Reach n STATES WITH AUM/AUA 27 PUERTO RICO I N V E S T M E N T R AT I O N A L E Relentless focus on creating shareholder value > Through superior performance > Through growing dividends Consistent execution over the past 20+ years Effective and proven business model, built for tomorrow Diversification driving noninterest income expansion Disciplined approach to growth > Through an against-the-grain branch-centric philosophy > Through a record of successful and accretive acquisitions Meaningful dividend and yield INVESTMENT PROFILE Listing: New York Stock Exchange Ticker Symbol: CBU Market Cap: Dividend: $1.66 billion At 3/15/16 $1.24 Annualized for most recent quarter Dividend Yield: 3.3% Based on closing price of $38.02 on 3/15/16 Dividend Payout Ratio: 56% Shares Outstanding: 43,774,860 Av. Trading Volume: ~250,000 3-month average 2/2/16 Stock Ownership 12/31/15 Institutional – Active Managed 31% Retail 37% 32% Institutional – Passive or Index Managed $10 Billion Asset Threshold Community Bank System, Inc. continues to make progress implementing DFAST systems, strengthening risk management and compliance operations in preparation for exceeding the $10 billion asset threshold. The Company has not identified a specified time frame for reaching this regulatory size threshold, but remains committed to exceeding the $10 billion threshold at the appropriate time and in the appropriate manner to optimize the economic outcome for our shareholders. 28 S H A R E H O L D E R I N F O R M AT I O N CO RPOR ATE HE ADQ UA RT ER S INVESTOR INFORMATION Community Bank System, Inc. Investor and shareholder information 5790 Widewaters Parkway DeWitt, NY 13214-1883 regarding Community Bank System, Inc., including all filings with the Securities Phone: 315.445.2282 or 800.724.2262 and Exchange Commission, is available Fax: 315.445.7347 www.communitybankna.com through the company’s website: www.communitybankna.com Keefe, Bruyette & Woods Inc. Collyn Gilbert / 973.549.4092 collyn.gilbert@kbw.com Piper Jaffray Companies Matthew Breese / 617.654-0728 matthew.m.breese@pjc.com STOCK LISTING Copies may also be obtained without Raymond James Common stock of Community Bank System, charge 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 18, 2016 1:00 p.m. EST Ms. Josephine Anne E. Rurka Investor Relations Department Community Bank System, Inc. 5790 Widewaters Parkway DeWitt, NY 13214-1883 315.445.7300 The Greater Oneida Kallet Civic Center josie.rurka@communitybankna.com 159 Main Street Oneida, New York 13421 TRANSFER AGENT AND REGISTRANT OF STOCK Shareholders requiring a change of 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 INDEPENDENT AUDITORS The Board of Directors appointed PricewaterhouseCoopers, LLP as auditor for the company for the year ended December 31, 2015 ANALYST COVERAGE The following analysts published research about Community Bank System in 2015: American Capital Partners Anthony Polini / 908.625.1931 apolini@acpweb.com Boenning & Scattergood Matthew Schultheis / 610.832.5290 mschultheis@boenninginc.com Guggenheim Partners David Darst / 615.208.1224 david.darst@guggenheimpartners.com Hovde Group LLC Joseph Fenech / 646.281.4946 jfenech@hovdegroup.com William Wallace / 703.749.1485 william.wallace@raymondjames.com RBC Capital Markets Jake Civiello / 617.725.2152 jake.civiello@rbccm.com Sandler O’Neill Alexander Twerdahl / 212.466.7916 atwerdahl@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 American Stock Transfer & Trust Co. Operations Center 6201 15th Avenue Brooklyn, NY 11219 800.937.5449 www.amstock.com Safe Harbor Statement 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. 29 COMMUNITY BANK SYSTEM, INC.5790 Widewaters ParkwayDeWitt, NY 13214-1883800.724.2262315.445.7347 faxcommunitybankna.com

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