Community Bank System
Annual Report 2017

Plain-text annual report

A N N U A L R E P O R T 2017Disciplined GrowthConsistent Performance6 Ranked sixth best in Forbes® Magazine analysis of America’s 100 largest publicly-traded banks for 2018 15-year cumulative total shareholder return of 480% at December 31, 2017 ’s y n a p m o C e h t f o % 9 3 s a w e m o c n i t s e r e t n n o N i e u n e v e r l a t o t 8 1 5 $ f o e u n e v e r l a t o T n i g n i t l u s e r , n o i l l i m % 0 1 f o R G A C r a e y - 0 1 a 2017 FACTS i s n c e 2 0 1 1 b r a n c h a c q u s i t i o n i b a n k o r s g n fi c a n t i i B a n c s h a r e s , o u r fi f t h w h o e l The cash dividend TA B L E O F C O N T E N T S Investment Overview Letter to Shareholders Operations Review Corporate Leadership Executive Management Administration was increased for the 25th consecutive year Branch Locations / Management Financial Services Business Summary Selected Financial Data Corporate / Shareholder Information A c q u i r e d M e r c h a n t s 1 2 8 18 20 21 24 27 28 29 48039255185 INVESTMENT CONSIDERATIONS: CBU STOCK OWNERSHIP At 12/31/17 The 15-year cumulative total return to shareholders of 480% (on 12/31/17), the eighth highest among the 100 largest publicly-traded US banks Cash dividend payment raised every year for the past 25 years, providing a meaningful dividend and yield Focus on revenue diversification, which has driven noninterest income to nearly 40% of revenue Successful and effective operating strategy Strong fundamentals with excellent asset quality on a consistent basis NYSE-listed company with significant liquidity Institutional — 70% Retail — 30% INSTITUTIONAL OWNERSHIP SUMMARY 50.7 MILLION SHARES OUTSTANDING 35.7 MILLION SHARES HELD BY INSTITUTIONS 70% OF SHARES OUTSTANDING 215 INSTITUTIONAL HOLDERS 310 PORTFOLIO POSITIONS 1 To Our Shareholders, Customers and Employees: 2017 ranks among the most transformative years in Community Bank System’s history. Record profits and meaningful expansion — both in size and geography — were the headlines to a remarkably productive year across virtually every aspect of our franchise. Operating earnings per share grew over 13 percent from 2016. We raised our dividend for the 25th consecutive year. We closed and swiftly integrated two significant acquisitions, including our largest-ever whole-bank deal, gaining entry to the attractive New England market and expanding our balance sheet by more than 20 percent. In tandem, and as anticipated, we crossed the $10 billion asset threshold, joining the ranks of the “big banks” from a regulatory standpoint, and assuming the significantly more complex requirements related to compliance, risk management and general regulatory oversight that comes with our new classification. We completed our first “dry run” of Dodd-Frank Act Stress Testing, or “DFAST,” in a smooth and satisfactory manner, exhibiting our team’s solid execution toward implementing and building out DFAST systems and reporting capabilities over the past three years. We’ve long anticipated and prepared for this eventuality, and we were fully prepared to meet the higher organizational expectations of a $10 billion institution. Our record operating results and financial performance once again placed us among the best large U.S. banks, as evaluated by Forbes® Magazine in its ninth annual analysis of “America’s Best Banks.” In its January 2018 list, Forbes® ranked Community Bank sixth 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 asset size from just under $8.8 billion to $2.6 trillion. At $10.7 billion in assets, we are decidedly “small” amongst this cohort. Yet, we’ve ranked 12th or higher in every year Forbes® has produced this analysis, with top 10 rankings for seven of the annual reviews. We believe our record of regularly placing near the top of these rankings reflects our consistently strong operating performance over the long term. In parallel, our performance has yielded top-tier shareholder returns. Over the past ten years, an investment in Community Bank System provided a 288 percent cumulative total return to shareholders, seventh highest among the top 100 banks and meaningfully higher than the 112 percent median for this group. A DI VERSIFIED STRATEGY Our history of double-digit growth exceeds the more modest growth characteristics of our geographic footprint. We attribute our success in achieving this outcome to consistent execution of a multi-layered strategy. We focus on disciplined capital deployment across a spectrum of organic growth, M&A and dividend opportunities. Maintaining a low-risk profile, a diverse revenue mix, above-average profitability, and a successful acquisition model are essential, and each year pulls upon these “levers” differently. GAAP earnings of $3.03 per share, compared to $2.32 for 2016 Operating earnings of $2.64 per share, a 13.3% increase over 2016 Record net income of $150.7 million Total revenue exceeds $518 million Continuation of excellent asset quality metrics Cash dividend raised for the 25th consecutive year to an annualized $1.36 Acquired and integrated Merchants Bancshares, Inc. Completed acquisition and integration of Northeast Retirement Services, Inc. Core non-time deposits increased $1.3 billion to 90.8% of total deposits Total cost of deposits ended 2017 at 0.10% 2 PERFORMANCE HIGHLIGHTS $1.5 $1.0 $0.5 $30.00 $20.00 $10.00 10-year CAGR = 13.1% 10-year CAGR = 6.8% Perhaps more than any year in recent history, 2017 delivered tangible and compelling outcomes from this well-articulated strategy. 2017 saw the deployment of capital to two highly accretive acquisitions, the expansion of our non-banking businesses, a continuation of our outstanding credit quality, disciplined protection of deposit funding costs despite multiple rate increases, conservative expense management and modest organic growth. We are immensely pleased with these results. EX PANSION AND EXECUTION Acquisition growth was the most significant driver of 2017 performance. The May 2017 addition of Merchants Bancshares marked our largest-ever bank acquisition among our history of 22 transactions since 1989, adding assets of $2.0 billion, total deposits of $1.5 billion, 31 banking offices, and one of the strongest loan books in the country. Through Merchants, we gained the third largest deposit market share in Vermont, with a growing presence in Western Massachusetts, and an exceptionally strong and complementary culture. The integration has proceeded smoothly with cost synergies running ahead of plan. We were equally pleased with the February 2017 acquisition of Northeast Retirement Services, Inc. (“NRS”), a leading provider of plan accounting, transfer agency, fund administration, and trust and retirement plans services to institutional clients. Investing in non-banking businesses is an important part of our strategy as these franchises tend to have very high return characteristics and are generally unconstrained by our branch footprint, allowing for stronger organic growth opportunities. Boston-based NRS, our 10th financial services acquisition, fit within this strategy perfectly. The combination of NRS with Benefit Plans Administrative Services, Inc. (“BPAS”), our existing benefits business, created a platform with over $90 million of expected annual revenue, along with more than $75 billion of trust assets under management in 3,800 retirement plans with more than 400,000 clients across the United States and Puerto Rico. As part of BPAS, NRS continued to grow both its top and bottom line performance at a double-digit pace, exceeding our initial expectations. These transactions were immediately and are expected to be significantly accretive to both GAAP and cash earnings, supplementing modest organic growth and providing substantial support to our capital accumulation and dividend capacity. OUSTANDING RESULTS Community Bank produced GAAP-basis earnings per share totaling $3.03 for 2017, up more than 30 percent compared to $2.32 per share in 2016. We strive to provide a clear picture of our Company’s core business activities by customarily presenting results on an operating basis, which excludes the impact of acquisition-related expenses and other non-operating items. 3 0808090910101111121213131414151517171616SHAREHOLDERS’ EQUITY In billions at 12/31BOOK VALUE PER SHARE At 12/31Acquisition expenses amounted to $26.0 million in 2017, while a $38.0 million one-time tax benefit resulted from the revaluation of our net deferred tax liability position following the late December 2017-enacted Tax Cuts and Jobs Act, which meaningfully lowers the corporate federal tax rate beginning in 2018. Excluding these items, we produced operating earnings per share totaling $2.64 in 2017, marking our eighth consecutive record annual performance. Earnings momentum was exceptional, with year-over-year growth in operating earnings per share exceeding 13 percent, our highest rate in seven years. The addition of Merchants resulted in total loan balances rising to $6.3 billion at year-end, 26 percent higher than 2016. Economic momentum fueled organic lending activity during the year, driving record commercial originations and positioning 2018 with a record pipeline. However, we also experienced a high level of unexpected payoff activity, which muted the impact of exceptional commercial origination growth, driving total legacy commercial balances down three percent from 2016. Residential mortgages and home equity instruments grew just under two percent, organically, while our consumer indirect portfolio declined by about three percent in 2017 as we continued to balance growth with our objective of improving returns on capital deployed in this portfolio. $3.00 $2.00 $1.00 $1.50 $1.00 $0.50 10-year CAGR = 7.9% 10-year CAGR = 4.9% Core deposits grew $1.3 billion from 2016, also reflective of the Merchants transaction and continued success in our core deposit gathering. Notably, our cost of interest-bearing deposits was virtually unchanged in 2017, despite four federal funds rate target increases since December 2016. We do expect to experience modest rate pressure competitively in the market in 2018; however, the nature of our geographic markets has historically allowed us to lag industry deposit price increases. Our success has been aided by our near total lack of external debt - a rarity in our peer group. We will continue to be very judicious in optimizing our funding costs, and we expect the strength of our funding base will be highly additive to operating performance if rates continue to rise. Net interest margin measured 3.69 percent for the year, compared to 3.71 percent for 2016, as proactive and disciplined management of funding costs in 2017 continued to help offset the modest decline in our average earning asset yields compared to the prior year. Overall revenue expansion was significant in 2017. Noninterest income grew 30 percent from 2016 and was meaningfully impacted by the two acquisitions. Our non-banking businesses — employee benefits administration, wealth management and insurance — posted an overall 44 percent increase in revenues, with a significant portion of the growth coming from NRS activities. Banking fee income expanded by 11 percent, also reflecting organic and acquisition growth. Total non-margin revenues grew to constitute over 39 percent of total revenues, up from 36 percent in 2016 and well above the 25 percent median for the top 100 banks by assets. Robust noninterest income continues to provide not just diversification but multiple points of opportunity for further growth. 4 0808090910101111121213131414151517171616EARNINGS PER SHARE DilutedDIVIDEND GROWTH DeclaredClosing Price $53.75 AT 12/31/17 Market Cap $2.72 billion AT 12/31/17 Price/Earnings (TTM) 17.7 Price/Tangible Book Value 3.2 Dividend $1.36 ANNUALIZED FOR MOST RECENT QUARTER Dividend Yield 2.53% BASED ON CLOSING PRICE OF $53.75 ON 12/31/17 Dividend Payout Ratio 44% Shares Outstanding 50.7 million $3.0 $2.0 $1.0 Average Trading Volume ~242,000 3-MONTH AVERAGE 12/31/17 5-year CAGR = 19.2% Our operating performance also reflected improvements in core expenses. Likewise, our efficiency ratio improved from 59.5 percent to 58.3 percent, meeting our objective of operating with an efficiency ratio consistently below 60 percent. We continue to believe our efficient management of expenses is an important core competency. The full year of 2017 was a continuation of the favorable overall asset quality results we’ve experienced for several years. Our year-end December 2017 reserve for loan losses represented more than four years of annualized net charge-offs, and full-year charge-offs were again manageable at 18 basis points of average loans. Nonperforming loans, comprised of both legacy and acquired loans, ended 2017 at $27.4 million, or 0.44 percent of total loans, four basis points lower than the ratio reported at the end of 2016. Outstanding 2017 results accelerated our trend of producing positive long-term returns for our shareholders. We moved from generating $1.42 per share on an operating basis in 2007 to $2.64 per share in 2017, growing 86 percent, or 9.5 percent per year. Over the same period, our dividend grew by 61 percent, or 6.8 percent per year, and we provided a 288 percent 10-year cumulative total return to shareholders. LEA D ERSHIP STRENGTH AND CHANGES Central to our success in achieving these outcomes is the depth of talent, experience and commitment of our senior management team and Board of Directors. Among our senior leadership team, our pool of talent is as broad as it is deep. Our lean and collaborative culture naturally allows this team to learn from, challenge and inform business decisions across the franchise. Their exceptional competence is an invaluable asset, and one that permits outstanding succession planning opportunities. Likewise, our Board is comprised of visionary and dedicated Directors who have been steady advocates for our model and strategy across major economic and industry changes, in some cases for decades. 2017 brought a number of notable changes to the group. Per our Board’s policy, Nicholas A. DiCerbo, James A. Gabriel and Edward S. Mucenski retired in 2017 after reaching the mandatory retirement age of 70 during the year. 5 1314151716INVESTMENT PROFILEMARKET CAPIn billions at 12/31TOTAL REVENUE1 In millions $9.0 $6.0 $3.0 10-year CAGR = 7.8% 10-year CAGR = 10.0% $9.0 $6.0 $3.0 10-year CAGR = 10.1% 10-year CAGR = 8.4% $210 $140 $70 $600 $400 $200 $6.3 $4.2 $2.1 $150 $100 $50 10-year CAGR = 12.4% 10-year CAGR = 13.4% 1 Excluding securities gains/losses and debt extinguishment charges 6 Performance Profile080808080808090909090909101010101010111111111111121212121212131313131313141414141414151515151515171717171717161616161616NONINTEREST INCOME1 In millionsTOTAL DEPOSITS In billions at 12/31AVERAGE INTEREST-EARNING ASSETS In billions at 12/31NET INCOME In millionsTOTAL LOANS In billions at 12/31Nick Dicerbo and Jim Gabriel each joined our Board in 1984. Both attorneys, their active and engaged leadership spanned many significant roles. Each served as Chairman of the Board — Jim from 1999 to 2006 and Nick from 2011 to 2016 — periods of vast and deep change in the industry. Jim most recently chaired the Trust and Financial Services Committee, served as Vice Chair on the Risk Committee, and served as a member of the Strategic/Executive Committee. Nick most recently chaired the Strategic/Executive Committee while also serving on the Trust and Financial Services Committee. Ed Mucenski, a Director since 2010, most recently served as Chair of the Audit / Compliance Committee, as well as on the Compensation Committee and the Stress Testing Subcommittee. As a Certified Public Accountant, Ed’s financial expertise brought tremendous insight to our Board. With deep gratitude we thank our retired Directors. In 2017 we also welcomed two new Directors from Merchants, continuing our long history of benefiting from our acquired institutions’ leaders’ expertise and insights. Jeffrey L. Davis and Raymond C. Pecor, III joined the Board to support our ongoing efforts in our new markets. We are grateful for the committed work of our leadership and Board teams, who remain ever-mindful of our obligations to manage with prudence and discipline, serve our customers with distinction, and deliver exceptional returns to shareholders. LOOKING AHEAD For several years we’ve communicated our strategy and efforts to position our company for the future. With characteristic discipline and consistent execution, our 2,800 team members completed transformational acquisitions and operational initiatives, and are today committed to achieving efficient and profitable growth as a “bigger bank” that operates a true community bank business model. The future is here. Of course, as the saying goes, “The more things change, the more they stay the same.” We are a community bank at heart and in history. This identity frames every lending decision and customer interaction, every Board discussion and management meeting, every community activity and employee experience at Community Bank. We know our customers and our communities, and we are pleased that the landscape today is favorable toward growth for us all. As always, we look forward to creating incremental value from these relationships, driving meaningful capital generation and deploying it for the long-term benefit of our shareholders. We are grateful for your support of Community Bank System, Inc. Sally A. Steele Chairman of the Board Mark E. Tryniski President and Chief Executive Officer 7 COMMUNITY BANK LOCATIONS At 12/31 240 160 80 08 09 10 11 12 13 14 15 16 17 The Company’s market-leading branch system serves predominantly non-metropolitan markets across Upstate New York, Northeastern Pennsylvania, Vermont, and Western Massachusetts. The Lake Champlain Bridge, constructed in 2011, connects New York State and Vermont, a state that Community Bank System expanded operations into during 2017. 8 Expanded Geographic Reach 9 Our operating philosophy has always been to serve the financial needs of customers in smaller towns and cities within areas where we could earn a leading deposit market share. This focus, combined with deep knowledge of our customers and their banking needs, a comprehensive menu of retail and business products and responsive local decision-making has enabled our team to compete effectively in our markets. We are confident this approach will work equally well in other markets with similar characteristics. Our 2017 acquisition of Merchants Bancshares (“Merchants”) extended our banking footprint into 12 Vermont counties and one additional county in Western Massachusetts, adding to an existing footprint that covered 35 counties in Upstate New York, and six counties in Northeastern Pennsylvania. Importantly, the markets we now serve in Vermont and Western Massachusetts are primarily smaller markets with similar characteristics to the areas where we already had a presence. The Merchants transaction did more than just offer geographic expansion; it delivered an immediate elevated market presence with its 11 percent deposit share, the third highest for Vermont. Along with a statewide presence, we gained 30 banking offices, approximately $2.1 billion of assets, and $1.5 billion of deposits. The Merchants transaction is an example of our strategy of contiguous expansion of our franchise, our preferred method to grow and strengthen our service footprint. We have no interest in jumping across multiple states to add a banking franchise that would have little relevance to our existing service area. With the successful integration of Merchants we are well positioned to evaluate other potential New England partners with a similar philosophy and market demographics, along with expansion opportunities in Upstate New York, Pennsylvania and Ohio. Our investment in a variety of financial services business units has had an even greater impact on the geographical reach of our businesses since they are essentially capable of offering services anywhere within the United States. We have made seven separate financial services acquisitions since 2007 which strengthened and expanded our benefits administration and insurance business units and added retirement plan administration, along with expanding the geographic reach for these activities.We will continue to identify quality merger candidates that have the potential to grow our earnings and dividend capacity at sustainable levels, as well as to expand the service areas of our various business units. ACQUISITION CHARACTERISTICS Manageable-sized acquisitions Organizations that are a cultural fit Largely in-market Accretive to earnings and low risk Vermont has the highest density of covered bridges in the United States, with more than 100 in total. TOTAL ASSETS In billions at 12/31 $12.0 $8.0 $4.0 08 09 10 11 12 13 14 15 16 17 10-year CAGR = 13.7% 10 Growing Beyond $10 Billion Acquisitions have been and remain an important part of our Company’s long-term strategic growth initiative. Since 2011 we have completed five whole bank or branch acquisitions, in addition to acquiring four high-value financial services businesses. Each of these transactions were manageable in size, accretive to earnings and importantly, low risk. Through our record of successful transactions, we have developed a reputation as an effective acquirer and our culture has made us a preferred merger partner. In May 2017 we successfully completed another whole bank transaction by adding Merchants Bancshares, Inc., expanding our retail banking footprint across Lake Champlain into New England. At $2 billion in assets, Merchants was approximately 25 percent of our asset size at the time we announced this deal and the largest transaction completed by Community Bank. Along with the usual complexity of integrating another institution into our franchise, we faced the added challenge of cresting $10 billion in assets. Banks that exceed this asset threshold are subject to significantly more complex requirements related to compliance, risk management and general regulatory oversight, through what is referred to as Dodd-Frank Act Stress Testing, or “DFAST.” Knowing that this day would come, we had previously established a plan which would provide for a mid-2017 DFAST reporting capability, regardless of whether we’d actually reached the threshold by that time. When our October 2016 agreement to acquire Merchants Bancshares, Inc. made exceeding the $10 billion asset mark a certainty, we were well prepared. Along with completing our build-out of DFAST in 2017, we improved our risk management processes and systems and implemented improved customer channel technology. Simply put, 2017 was a highly transformative year for Community Bank System, which reflected the significant efforts of the Company’s 2,800 team members. 5 Since 2011 we have completed five whole bank or branch acquisitions, in addition to acquiring four high-value financial services businesses. In addition to the Merchants transaction, we completed the acquisition of Northeast Retirement Services, Inc. as well as three small insurance agency acquisitions in 2017. Despite employing a meaningful amount of capital to complete these transactions during the year, our capital levels at year end continued to be very strong. Our Tier 1 leverage ratio was 10.00 percent and tangible equity to net tangible assets ended 2017 at 8.61 percent. While our new classification as a “large bank” has changed our regulatory status, it has not altered our operating strategy. We remain focused on growing our earnings and dividends in a disciplined and sustainable fashion for the benefit of our shareholders. We will continue to pursue growth opportunities that support these ends, but we won’t pursue growth for its own sake. We believe that the Merchants acquisition demonstrates that we can comfortably handle sizeable transactions, and we plan to continue identifying high-value targets and engaging in dialogue about potential merger opportunities. 11 An important element of the Company’s long-term business strategy has been and remains investment in financial services businesses, which either complement the Bank’s service offerings or can function independently of the Bank’s activities. Over the past 10 years, we have made seven financial services acquisitions which bolstered and expanded our existing benefits administration, wealth management and insurance businesses. We have focused on identifying and acquiring businesses with very high return characteristics and then working to realize consistent organic growth. These businesses have consistently performed very well and the same is certainly true during 2017, when they generated $129 million in revenue through acquired and organic growth activities. Operating both inside and outside of our bank branch service footprint, these business units are responsible for a large part of the growth in our noninterest income which has significantly reduced dependence on the Bank’s net interest margin. 129 Our financial services businesses generated more than $129 million in revenue in 2017, a 44% increase from the prior year. During 2017, we completed the acquisition of another high-value financial services business adding Northeast Retirement Services (“NRS”), a leading provider of plan accounting, transfer agency, fund administration, trust and retirement plan services. With the addition of NRS in February 2017, Benefit Plans Administrative Services, Inc. (“BPAS”), increased in size to over $90 million in annual revenue, over $75 billion in trust assets under management and 3,800 retirement and other employee benefit plan administration clients throughout the United States and Puerto Rico. BPAS was originally acquired in 1996 and through acquisitions and organic expansion has evolved to a business that provides benefits administration and consulting services, including defined contribution plan benefit administration, actuarial services, health care and benefit plan consulting, collective investment fund administration, and VEBA/HRA administration. The $80.8 million in revenues generated by BPAS in 2017 increased by $34.2 million from 2016, largely as a result of the addition of NRS. Through the Bank and its wealth management subsidiaries (collectively, the Community Bank Wealth Management Group), the Company provides retirement planning, higher educational planning, risk management, personal financial planning, and broker-dealer and investment advisory services. OneGroup NY, Inc. (“OneGroup”) is a full-service insurance agency offering personal and commercial property and casualty insurance, employee benefits, and other risk management products and services which added three smaller insurance agencies during 2017 to expand its product offerings and geographic profile. Our wealth management and insurance businesses performed well in 2017, growing revenues by more than 12 percent to $48.2 million. 12 Leveraging Non-Banking OpportunitiesFINANCIAL SERVICES REVENUE In millions $120 $80 $40 08 09 10 11 12 13 14 15 16 17 10-year CAGR = 16.5% FINANCIAL SERVICES REVENUE DIVERSITY 2017 Revenue = $129.1 Million Employee Benefit Service Revenues — 63% Wealth Management and Insurance Revenues — 37% Our multi-state footprint is rich with lakes and rivers, providing ample opportunity for kayaking, canoeing, fishing and the like. 13 Vermont and New York lead the U.S. in maple syrup production. Together, they produced nearly 4.3 million gallons during the 2017 season, making up 64 percent of all maple syrup production for the entire country. 14 NONPERFORMING LOANS / TOTAL LOANS At 12/31 0.90% 0.60% 0.30% 08 09 10 11 12 13 14 15 16 17 NET CHARGE-OFFS / AVERAGE LOANS At 12/31 08 09 10 11 12 13 14 15 16 17 EFFICIENCY RATIO1 0.30% 0.20% 0.10% 70.0% 60.0% 50.0% 40.0% 08 09 10 11 12 13 14 15 16 17 1 Efficiency ratio provides a ratio of operating expenses to operating income. It excludes intangible amortization, acquisition expenses, and litigation settlement from expenses and gains and losses on investment securities and early retirement of long-term borrowings from income while adding a fully-taxable equivalent adjustment. Superior Operating Performance Our business strategy was designed to produce consistent performance that builds value for our shareholders, regardless of economic conditions. We utilize a conservative and well-articulated strategy that pursues growth through organic and acquired opportunities. Acquisitions are structured to be accretive to earnings and low risk. We continue to invest in businesses that generate substantial noninterest revenues, reducing our dependence on net interest margin. We have focused our banking franchise in non-metropolitan areas of Upstate New York, Northeastern Pennsylvania, Vermont and Western Massachusetts with stable annual growth rates of two to five percent and limited economic cyclicality. We have a disciplined and consistent culture, a deep knowledge of our markets and an emphasis on profitable customer relationships across all business lines. As a result of this approach, we have assembled a low-risk balance sheet with exceptional asset quality, which consistently yields high-quality results, as it did again during 2017. Operating earnings per share increased by more than 13 percent in 2017 to $2.64, another record level for the company. These results reflect both acquired and organic growth, as well as a continued focus on expense management. We completed two significant acquisitions during the year, adding Northeast Retirement Services, Inc. in February, and Merchants Bancshares (“Merchants”) in May. Our benefit plans administration, wealth management and insurance businesses all delivered double- digit increases to revenue and profit, along with improved profit margins. Banking fee income also realized double-digit growth reflecting the addition of the Merchants franchise. 2.64 Operating earnings per share increased by more than 13 percent in 2017 to $2.64, another record level for the company. These results reflect both acquired and organic growth. We have earned a reputation as a well-run institution with consistently strong credit metrics, as illustrated by net charge-off and delinquency rates that compare favorably to industry and peer averages. This trend continued through 2017 with net charge-offs of just 0.18 percent of total loans and year end nonperforming loans of 0.44 percent of total loans. With a history of more than 20 whole bank or financial service business acquisitions since 1989, we have developed a core competency in merger integration that has served our shareholders well. Acquisitions remain an important and effective method for growing our earnings and dividends in a sustainable fashion. With the late December enactment of the Tax Cuts and Jobs Act, which reduced the corporate federal tax rate from 35 percent to 21 percent, the Company should accrete capital at a more rapid pace in 2018 than in prior years. While this change will provide more capital for potential opportunities, it won’t impact the discipline and strategic thinking we apply to our merger and acquisition process. We will continue to seek opportunities which are high-value, both qualitatively and economically, and, importantly, a fit with our growing geographic service area. 15 Forbes.com® 2018 Ranking of the Best Banks Community Bank System, Inc. (“CBU”) once again ranked near the top in the annual Forbes.com® ranking of America’s Best Banks. This is the ninth year that Forbes® has produced this analysis and the seventh time that CBU has been ranked among the top 10 of America’s 100 largest banks and thrifts. The analysis includes a comparison of ten different metrics related to growth, asset quality, capital adequacy and profitability. The following charts display the financial metrics used in the 2018 analysis and compare CBU’s to the median values of the 100 largest financial institutions. 2 0 1 7 C O M P A R I S O N C H A R T S CBU CBU VS TOP 100 BANKS TOP 100 BANKS RETURN ON AVERAGE TANGIBLE COMMON EQUITY 21.0% 14.0% 7.0% RETURN ON AVERAGE ASSETS NET INTEREST MARGIN (FTE) EFFICIENCY RATIO NET CHARGE-OFFS/ AVERAGE LOANS 1.5% 1.0% 0.5% 4.5% 3.0% 1.5% 60% 40% 20% 0.30% 0.20% 0.10% NONPERFORMING ASSETS / TOTAL ASSETS RISK-BASED CAPITAL RATIO RESERVES/ NONPERFORMING ASSETS COMMON EQUITY TIER 1 CAPITAL RATIO OPERATING REVENUE GROWTH (LTM) 0.75% 18.0% 0.50% 12.0% 0.25% 6.0% 150% 100% 50% 15.0% 21.0% 10.0% 14.0% 5.0% 7.0% Note: Forbes® analysis ranked banks based on September 30, 2017 regulatory data. The graphs shown here compare CBU’s full year 2017 metrics against those of the top 100 banks. 16 Consistently Superior Returns The Company’s principal operating focus is building additional value into the enterprise through selective and strategic acquisitions, disciplined lending, revenue diversification and a consistent approach to business regardless of economic conditions. The Company’s performance goal is to generate a more than 10 percent average annual total shareholder return over time. Our total cumulative return to shareholders over the past 10 years was 287.6 percent, as of December 31, 2017. 25 We have raised our cash dividend for 25 consecutive years, evidence of our belief that payment of a meaningful and growing dividend is an important component of providing favorable long-term returns to shareholders. Our 2017 financial performance was determined to be among the best for large U.S. banks by Forbes® Magazine, in its annual analysis of “America’s Best Banks.” Community Bank was ranked sixth among the 100 largest publicly-traded banks and thrifts, based on a comparison of ten different performance and financial strength metrics. We have ranked among the top 10 for seven of the nine years that Forbes® has published the analysis, and we’ve never been lower than twelfth. TOTAL SHAREHOLDER RETURNS (ANNUALIZED) Through December 31, 2017, or most recent available, including reinvestment of dividends. CBU S&P 600 Commercial Bank KBW Regional Bank S&P 500 DJIA Source: Bloomberg 2 YEARS 5 YEARS 10 YEARS 15 YEARS 19.0% 18.9% 19.0% 16.8% 22.1% 17.9% 18.7% 17.7% 15.8% 16.4% 14.5% 12.4% 6.0% 6.3% 8.5% 9.3% 5.1% 6.0% 9.9% 10.2% 17 Board of Directors 18 Note: All bank board members participate in the Risk Committee Jeffrey L. Davis President of J.L. Davis, Inc.COMMITTEES Governance; Audit/ComplianceDirector since 2017Raymond C. Pecor, III President, Lake Champlain Transportation Company COMMITTEES Compensation; Trust and Financial ServicesDirector since 2017John Parente CP Media, LLC, CEOCOMMITTEES Risk Committee, Vice Chair;Strategic/Executive, Chair;Audit/ComplianceDirector since 2010John F. Whipple Buffamante Whipple Buttafaro, P.C., CEOCOMMITTEES Audit/Compliance, Chair;Governance; Stress Testing SubcommitteeDirector since 2010Brian R. Ace Retired Owner of Laceyville HardwareCOMMITTEES Governance, Chair;Trust and Financial ServicesDirector since 2003Sally A. Steele Chairman of the BoardAttorney at LawDirector since 2003Mark J. Bolus Bolus Motor Lines, Inc., President and CEOCOMMITTEES Compensation, Vice Chair; Risk, Chair; Strategic/ExecutiveDirector since 2010Michael R. Kallet Retired Chairman and CEO of Oneida Financial Corp.COMMITTEES Trust and Financial Services, Chair; Stress Testing SubcommitteeDirector since 2015Eric E. Stickels Retired President, COO and Secretary of Oneida Financial CorpCOMMITTEES Stress Testing Subcommittee, Chair;Trust and Financial Services; Strategic/ExecutiveDirector since 2015Neil E. Fesette Fesette Realty, LLC and Fesette Property Management, Owner, President and CEOCOMMITTEES Compensation, Chair;Governance; Strategic/ExecutiveDirector since 2010Mark E. Tryniski Community Bank System, Inc., President and CEODirector since 200619 TRIBUTE James A. Gabriel, Nicholas A. DiCerbo and Edward S. Mucenski At the close of 2017, three directors who have made important contributions to Community Bank System’s growth and transition to a regional community bank with more than $10 billion in assets retired from the company’s Board. The Board of Directors sincerely appreciates the service and valuable counsel provided by Nicholas A. DiCerbo, James A. Gabriel and Edward S. Mucenski during their tenures as Directors. For more than 30 years, our Company benefited from the experience, talent and vision of Mr. DiCerbo and Mr. Gabriel. Both attorneys, they joined the Board in 1984, provided exceptional leadership as Chairmen of the Board and have been instrumental in shaping Community Bank System into the financial services company that it is today.Mr. DiCerbo served as Chairman of the Board from 2011 until 2016. Most recently, he served as Chair of the Strategic/Executive Committee and a member of the Trust and Financial Services Committee and the Risk Committee. He served as long-time senior partner of the law firm of Dicerbo & Palumbo in Olean, New York.Mr. Gabriel led the Board as Chairman from 1999 until 2006. Most recently, he served as Chair of the Trust and Financial Services Committee, Vice Chair of the Risk Committee and a member of the Strategic/Executive Committee. Mr. Gabriel is an Owner of Franklin & Gabriel in Ovid, New York.Mr. Mucenski joined Community Bank System’s Board in 2010 and most recently served as Chair of the Audit/Compliance Committee, as well as on the Compensation Committee and the Stress Testing Subcommittee. A Certified Public Accountant, he is a Partner and Managing Director of Pinto, Mucenski, Hooper, Van House & Company, P.C., which has multiple offices in Northern New York.The Board of Directors and entire Community Bank System team would like to extend deep thanks and appreciation to Mr. DiCerbo, Mr. Gabriel and Mr. Mucenski for their years of service and commitment to this Company.20 Executive ManagementCOMMUNITY 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. SmithDavid F. Wilber IIIBrian R. WrightPENNSYLVANIA Edward CoachColleen DoyleJohn GrahamScott HenryGerard O’DonnellWilliam RuarkLissa Bryan-SmithJames Shoemaker Scott Kingsley Executive Vice President, Chief Financial OfficerJoined CBU in 2004. Prior to joining the Company, he served as CFO of Carlisle Engineered Products.Joe Getman Executive Vice President, General CounselPrior to joining the Company in 2008, he provided corporate counsel to CBU as a senior partner at Bond, Schoeneck & King, PLLC.Mark Tryniski President and Chief Executive OfficerJoined CBU in 2003 and has previously served as Chief Financial Officer and Chief Operating Officer. Prior to joining the company he was a partner with Pricewaterhouse Coopers.Brian Donahue Executive Vice President, Chief Banking OfficerJoined the Company in 1992. During his more than 25 years of service to the Company, he has served as Chief Credit Officer and Senior Loan Officer for the Bank’s Southern Region.A D M I N I S T R A T I O N Pellentesque vitae lectus purus. Donec scelerisque tincidunt ipsum rutrum. Integer nec dolor, ut elit feugiat leo. Donec sit amet lobortis augue dictum sollicitudin sed eu vitae massa. Erie Canal, New York 21 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 MarketingScott Boser, Senior Vice President, Director of Consumer and Mortgage Lending Geoffrey Hesslink, Regional President New EnglandBarbara Maculloch, Regional President Northeast PennsylvaniaKent Backus, Regional Retail Banking Manager, Northern NYAnita Bourgeois, Retail and Municipal Banking Manager, New EnglandRobert Cirko, Regional Retail Banking Manager, PennsylvaniaEric M. Garvin, Regional Retail Banking Manager, Western NYPaul Lepore, Regional Retail Banking Manager, Central NYDavid Sloan, Regional Retail Banking Manager, Western NYRita J. Walldroff, Regional Retail Banking Manager, Northern NYLynne Wadsworth, Branch Services AdministratorCynthia Lefko, Cash Management Product and Sales ManagerDeborah Baker, Collections ManagerCREDIT ADMINISTRATIONStephen Hardy, Senior Vice President, Chief Credit AdministratorJohn Keshavan, Special Assets ManagerDenise Rhoads, Commercial Appraisal ManagerAmanda Snook, Regional Credit ManagerMark Warner, Regional Credit ManagerFINANCE & TREASURY MANAGEMENTJoseph Lemchak, Senior Vice President, Chief Investment OfficerJoseph Sutaris, Senior Vice President, Accounting and FinanceDeresa Durkee, Corporate ControllerRobert Frost, Vice President of Finance, Director of Capital Planning and AnalysisSean Howard, Senior Treasury OfficerRandy Pray, Corporate Purchasing ManagerBrian Fancher, Assistant Corporate ControllerLaura Mattice, Accounting Operations and Regulatory Reporting ManagerRobert Pierce, Subsidiary Accounting and Financial Reporting ManagerNicole Lannie, Employee Benefits Accounting Manager Carlena Wallace, Financial Controls ManagerADMINISTRATIVE SERVICESBernadette Barber, Senior Vice President, Chief Human Resources OfficerMichael Abdo, Associate General CounselDanielle Cima, Associate General Counsel, Corporate SecretaryBrett Fisk, Director of FacilitiesINFORMATION TECHNOLOGY & OPERATIONSAaron Friot, Senior Vice President, Chief Technology OfficerSusan Fox, Senior Vice President, Chief Information OfficerRobin 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 ReviewDennelle Michalski, Director of Risk ManagementTimothy Miller, Director of Information SecurityDaniel O’Connell, Director of Internal AuditDorothy Quarltere, Chief Compliance OfficerLarry Witter, Bank Secrecy OfficerRichard (Chris) Simone, Corporate Security OfficerA D M I N I S T R A T I O N 22 Mount Mansfield, Vermont COMMUNITY BANKCOMMERCIAL BANKING OFFICERS WESTERN REGIONJames Rahill, Commercial Banking Team LeaderDavid Alm, Senior Commercial Banking OfficerMark Saglimben, Senior Commercial Banking OfficerMichael Boza, Agricultural Banking OfficerScott Brechbuehl, Commercial Banking OfficerGretchen Copella, Commercial Banking OfficerRichard Ferrari, Commercial Banking OfficerPatrick Gorman, Commercial Banking OfficerChristopher Humphrey, Commercial Banking OfficerDavid McKinley, Commercial Banking OfficerNORTHERN REGIONNicholas Russell, Senior Vice President, Commercial BankingRonald Bacon, Senior Commercial Banking OfficerPaul Connelly, Commercial Banking OfficerPatricia Duffy, Agricultural Banking OfficerAaron Kimmich, Agricultural Banking OfficerDuane Pelkey, Commercial Banking OfficerMichael Pierce, Commercial Banking OfficerCraig Stevens, Commercial Banking OfficerSYRACUSE/ONEIDA REGIONLuke Fagan, Commercial Banking Group ManagerRussell Brewer, Commercial Banking Team LeaderTrevor Bacon, Commercial Banking OfficerWilliam Baldwin, Commercial Banking OfficerThomas Lewin, Commercial Banking OfficerSteven Potter, Commercial Banking OfficerDean Shlotzhauer, Commercial Banking OfficerRussell Sturtz, Commercial Banking OfficerSOUTHERN REGIONStephen Rich, Commercial Banking Group ManagerLoren Herod, Agricultural Banking Team LeaderMark Miller, Commercial Banking OfficerArthur Sable, Commercial Banking OfficerRebecca Snyder, Agricultural Banking OfficerCharles Van Hooft, Agricultural Banking OfficerD. James Vedora, Commercial Banking OfficerCENTRAL REGIONJeffrey Lord, Commercial Banking Group ManagerJohn Connolly, Commercial Banking OfficerEdward Michalek, Commercial Banking OfficerCody Miller, Commercial Banking OfficerAllison Mosher, Commercial Banking OfficerCAPITAL REGIONJeffrey Levy, Commercial Banking Team LeaderEric Magnano, Commercial Banking OfficerSMALL BUSINESS UNDERWRITINGMichael Austin, Small Business Loan ManagerBeth Robbins, Senior UnderwriterRichard Sisson, UnderwriterPENNSYLVANIA REGIONRichard Kazmerick, Commercial Banking Team LeaderWarren Rozelle, Commercial Banking Team LeaderPaul Baynum, Commercial Banking OfficerMary Elizabeth D’Andrea, Commercial Banking OfficerMatthew Dougherty, Commercial Banking OfficerNeil King, Commercial Banking OfficerDavid McHale, Commercial Banking OfficerA. Edward Nork, Commercial Banking OfficerJohn Pekarovsky, Commercial Banking OfficerCJ Rinaldi, Commercial Banking OfficerWalter Sarafinko, Commercial Banking OfficerNEW ENGLAND REGIONBruce Bernier, Commercial Banking Team LeaderMichael Breen, Commercial Banking Team LeaderDouglas Babbitt, Commercial Banking OfficerSarah Bauer, Commercial Banking OfficerMichael Buckmaster, Commercial Banking OfficerDiane Dunkerley, Commercial Banking OfficerBenjamin George, Commercial Banking OfficerBart Greenfield, Commercial Banking OfficerKeith Nesbitt, Commercial Banking OfficerRichard Nold, Commercial Banking OfficerKatherine Rendall, Commercial Banking OfficerJameson Roberts, Commercial Banking OfficerJoyce Werzer, Commercial Banking OfficerSaranac Lake, New York 23 WEALTH MANAGEMENT GROUPPaul Restante, Managing DirectorTheresa Kalil-Lennon, Senior Vice President, Sales ManagerDavid Coon, Senior Vice President, Regional Sales Manager, Western NYDaniel Drappo, Senior Financial Consultant, Regional Sales Coordinator, Northern NYStephen McFadden, Financial Consultant, Regional Sales Coordinator, Northern NYAngela Webster, Personal Investment Officer, Sarasota, FloridaTRUST SERVICESCatherine Koebelin, Senior Vice President, Chief Trust Officer, OleanCharles Perrillo, Senior Vice President, Chief Trust Investment Officer, South BurlingtonAmy Allen, Senior Trust Officer, OneontaPatricia Barie, Senior Trust Officer, OleanYvonne Benson, Trust Operations Officer, OleanDavid Bosworth, Trust Investment Officer, South BurlingtonHolly Burbo, Trust Operations Officer, South BurlingtonJennifer Critti-Lebeau, Trust Officer, OneontaPatricia Crolly, Trust Officer, ScrantonKaren Dovey, Trust Officer, ElmiraJulia Goff, Trust Officer, OneontaSean Houghton, Trust Officer, South BurlingtonShannon Hyzer, Trust Officer, OneontaJohn Jones, Trust Investment Officer, OneontaDavid LaForest, Senior Trust Officer, Manchester CenterThomas LaPage, Trust Officer, PotsdamPatricia Lowe, Trust Operations Officer, OneontaRuth Lund, Trust Officer, OleanVincent Mastrucci, Corporate Trust Officer, ScrantonLinda Meyer Lambert, Trust Officer, OleanKatherine Mosenthal, Trust Officer, Manchester CenterAdam Niebanck, Trust Investment Officer, OneontaChristine Petras, Trust Investment Officer, OneontaPaul Snodgrass, Trust Investment Officer, PotsdamMatthew Vlasak, Trust Investment Officer, OneontaPaul Wood, Trust Officer, OneontaBrett Zielasko, Trust Officer, OneidaNOTTINGHAM ADVISORS, LLC100 Corporate Parkway, Suite 338, Amherst, NYThomas Quealy, Chief Executive OfficerLawrence Whistler, President, Chief Investment OfficerKaren Mohn, Chief Compliance OfficerNicholas Verbanic, Vice President, Portfolio ManagerCOMMUNITY INVESTMENT SERVICES, INC.Chasity Jaynes, Operations ManagerLaurel Pellettiere, Compliance ManagerGarry Payne, Carta GroupJeremy Caza, Carta GroupFINANCIAL CONSULTANTSPeter Albano, Wilkes-BarreCharles Baracco, SyracuseEric Brunet, OgdensburgJoseph Butler, Jr., WatertownThomas Ciolek, Olean/AvonLloyd Cristman, RomeDaniel Drappo, WatertownRobert Eckermann, CazenoviaTimothy Forman, Lake PlacidZachary Groet, AvonJoseph Hatfield, OneidaJustin Hooper, PlattsburghRandall Hulick, SpringvilleMichael Kent, SyracuseRick Little, JermynAndrew Mangano, FultonJude McDonough, Scranton Stephen McFadden, PlattsburghJames Mersfelder, SyracuseChad Murray, FalconerCharles Nicosia, OneontaJames Nielsen, ElmiraDavid O’Neil, Jr., BoonvilleBrent Patry, Oneonta/NorwichRobert Stanley, MinookaMichael Tisdell, SyracuseJoseph Topichak, CorningMichele Wilck, Newark/PalmyraINSURANCEONE GROUP706 North Clinton Street, Syracuse, NYPierre Morrisseau, Chief Executive OfficerChris Mason, PresidentAlison Dunn, Senior Vice President, HR and Employee BenefitsBENEFIT PLAN SERVICESBPAS6 Rhoads Drive, Utica, NYBarry Kublin, Chief Executive OfficerPaul M. Neveu, President, BPAS, LLCLinda 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 SERVICES706 North Clinton Street, 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 OF PUERTO RICO644 Fernandez Juncos Ave, Suite 301, San Juan, PRAlfredo Matheu, PresidentNORTHEAST RETIREMENT SERVICES, INC. (NRS)12 Gill St., Suite 2600, Woburn, MATom Forese, PresidentChris Hulse, Chief Operating OfficerKen Grant, Chief Corporate Development OfficerB R A N C H L O C A T I O N S 24 Thousand Islands, New York COMMUNITY BANK NORTHERN NEW YORK MARKETADAMS Christopher M. Castle, ManagerALEXANDRIA BAY Bethany Todd, Manager AUSABLE FORKS Valerie Daniels, ManagerBLACK RIVER Margaret Farone, ManagerBOONVILLE (101 MAIN STREET AND HEADWATERS PLAZA) Debra Roberts, ManagerCANTON Marsha Watson, Manager CHAMPLAIN Melissa M. Peryea, ManagerCHATEAUGAY Sherry Langdon, ManagerCLAYTON Lori Fearnside, ManagerFORT COVINGTON Zeta Kuretz, Senior CSRGOUVERNEUR Diane Easton, ManagerHARRISVILLE Karen Pierce, Branch SupervisorHERMON Connie Green, ManagerHEUVELTON Susan Patton, Senior CSRINDIAN 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 Susan Krist, ManagerMADRID Michelle Hollister, ManagerMALONE (ELM STREET) Darcy King, District ManagerMALONE (WEST MAIN STREET) Stacey Brunell, ManagerMASSENA Sue Perkins, ManagerNORTH CREEK Lori DeMars, ManagerNORWOOD Emily Losey, ManagerOGDENSBURG (FORD STREET) Denise Barse, ManagerOGDENSBURG (STATE STREET) Matthew Honeywell, ManagerOLD FORGE Barbara Criss, ManagerPLATTSBURGH (MARGARET STREET) Kathryn Reynolds, ManagerPLATTSBURGH (ROUTE 3) James Snook, ManagerPLATTSBURGH (WAL-MART) Arlene Favreau, Branch SupervisorPOTSDAM (MARKET STREET AND MAY ROAD) Victoria Strader, District Manager SARANAC LAKE (BROADWAY AND LAKE FLOWER) Brenda Darrah, District ManagerST. REGIS FALLS Sherri Fleury, ManagerSTAR LAKE Connie Green, ManagerTICONDEROGA Maria Beuerlein, ManagerTUPPER LAKE John Salamy, Manager WADDINGTON Emily Losey, Manager WATERTOWN (ARSENAL STREET) Elizabeth Brown, ManagerWATERTOWN (216 WASHINGTON STREET) 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, ManagerANGELICA Diana Grastorf, Branch SupervisorAVON Deborah Boisvert, Manager BATH Joel Brazie, District ManagerBELFAST Brandy Burdick, Branch SupervisorBOLIVAR Judy Gilliland, ManagerCANANDAIGUA (COUNTY ROAD 10) Ashley Braun, Branch SupervisorCANANDAIGUA (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 Angela Long, ManagerCUBA Shavonne Henderson, ManagerDANSVILLE Jody Tonkery, District Manager Melissa Ponticello, ManagerDUNKIRK (CENTRAL AVENUE) Jean Coughlin, ManagerDUNKIRK (VINEYARD DRIVE) Jason DeChard, ManagerELMIRA Denise Allen, District Manager ERWIN/PAINTED POST Todd Selander, Branch SupervisorFALCONER Joann Anderson, ManagerFILLMORE Julie Hall, District ManagerFRANKLINVILLE Sandra Wolfer, ManagerGENESEO Lisa Kime, ManagerGENEVA (CANANDAIGUA ROAD) Sharon Garofanello, ManagerGENEVA (SENECA STREET) John Latanyshyn, ManagerGOWANDA Ralph Swanson, Manager HAMMONDSPORT Kelly Bussmann, ManagerHORNELL Sandra Aiken, ManagerHORSEHEADS (CONSUMER SQUARE) Glenn Parsons, ManagerHOUGHTON COLLEGE Julie Hall, District ManagerB R A N C H L O C A T I O N S Watkins Glen, New York 25 INTERLAKEN Denise Ector, ManagerITHACA Michael MacDonald, ManagerJAMESTOWN (BROOKLYN SQUARE) Glori Taylor, ManagerJAMESTOWN (NORTH MAIN STREET) Kathleen Bemus, ManagerLAKEWOOD Lisa Allenson, District ManagerLIVONIA Ronda Howard, ManagerMORAVIA Michael Pizzola, ManagerMOUNT MORRIS Susan Neelin, ManagerNAPLES Joilette Pendleton, District ManagerNEWARK (CHURCH STREET) Phyllis A. Adriaansen, ManagerNEWARK PLAZA David Tyler, ManagerNICHOLS Kathleen Bowen, ManagerNORTH COLLINS Robin Hohman, Manager OLEAN (DELAWARE PARK) Kelly Crandall, ManagerOLEAN (NORTH UNION STREET) Jody Spears, District Manager ORCHARD PARK Kristen Woodarek, ManagerOVID Jacqueline Robinson, ManagerOWEGO Elizabeth Morse, ManagerPALMYRA Ann Young, ManagerPENN YAN (LAKE STREET) Kelly Smith, ManagerPENN YAN (MAIN STREET) Thomas May, Manager PHELPS Mary Niles, ManagerPORTVILLE (EAST STATE ROAD) Brenda Blackwell, ManagerPORTVILLE (NORTH MAIN STREET) Katrina Savitcheff, ManagerRANDOLPH Diane Lecceardone, ManagerRIPLEY Shara Post, Branch SupervisorRUSHVILLE Christine Copper, ManagerSALAMANCA Robin Bowser, ManagerSENECA FALLS 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 Micki Stewart, ManagerYORKSHIRE Joseph Fore, ManagerCOMMUNITY BANK CENTRAL NEW YORK MARKETBOICEVILLE Brad Bernard, ManagerCAMDEN Michelle Szkolnik, Manager CANASTOTA Lori Torrey, ManagerCAZENOVIA Barbara Houghton, ManagerCHITTENANGO Roberta Button, ManagerCICERO Denise Cavallo, ManagerCOBLESKILL Christy Roberts, ManagerCOOPERSTOWN (MAIN STREET AND OTSEGO) Naomi Duncan, ManagerDELHI Tina Seguare, ManagerDEWITT Robert Liedka, ManagerDOWNSVILLE Carol Sutherland, ManagerFLEISCHMANNS Ana Benjamin, ManagerFULTON Tina Stephens, ManagerHAMILTON Janet Briggs, District ManagerHANNIBAL Debra Davis, District ManagerJOHNSON CITY Michelle Carlsson, ManagerMILFORD Victoria Ellis, Branch SupervisorMORRIS Emily Boss, ManagerNORWICH (BROAD STREET) Leigh Ann Odell, ManagerNORWICH (STATE HIGHWAY) Caryn Wake, ManagerONEIDA (182 MAIN STREET) Cindy Lindauer, ManagerONEIDA (585 MAIN STREET) Jackie Mowers, ManagerONEONTA (MAIN STREET) Michael Walling, District Manager Nancy Miller, Gold Club ManagerONEONTA (CHESTNUT STREET) Paula Morell, ManagerONEONTA (SOUTHSIDE) Kevin Moore, ManagerONEONTA (FOXCARE CENTER) Lesley Bohacek, ManagerOSWEGO Fred Aldrich IV, ManagerOTEGO Beth Koncelik, Branch SupervisorPULASKI Steven P. Gaffney, ManagerROME (GRIFFISS PARK AND TURIN ROAD) Wendy Berg, ManagerSCHENEVUS Gerald V. Coombs, Jr., ManagerSIDNEY Bridget Fisk, District Manager Sharon Cutting, ManagerSKANEATELES Elizabeth Silliman, ManagerVERNON Willis Corney, ManagerWALTON Donna A. Bundy, ManagerWESTMORELAND Carly Perham, Manager B R A N C H L O C A T I O N S 26 Bushkill Falls, Pennsylvania COMMUNITY 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 (SOUTH CHURCH STREET) Emmanuel Marte, ManagerCarol Duran, Branch SupervisorJERMYN John Peterson, ManagerJESSUP Mary Bieszczad, ManagerKINGSTON Karen Shuster, ManagerLACEYVILLE Greg Culver, ManagerLANSFORD John Greybosh, ManagerLAWTON Doug Jackson, ManagerLEHIGHTON Dana Cannariato, ManagerLITTLE MEADOWS Doug Jackson, 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) David Lencicki, ManagerSCRANTON (NORTH WASHINGTON AVENUE) Suzanne Kennedy, ManagerSCRANTON (WYOMING AVENUE) Michelle Cook, ManagerTOWANDA Lori Smith, Manager TUNKHANNOCK Brigitte Meskers, Manager TRUCKSVILLE/BACK MOUNTAIN Susanne M. Mullin, ManagerWILKES BARRE (NORTH FRANKLIN STREET) David Dobbs, District Manager Susan Russick, Manager WILKES BARRE (SOUTH MAIN STREET) Sandra Wheeler, ManagerWYALUSING Karen Fuller, District ManagerCOMMUNITY BANK NEW ENGLAND MARKETBARRE Matthew Villemaire, ManagerBENNINGTON Bette Smith, ManagerBRADFORD Colleen Page, ManagerBRATTLEBORO Ryan Jennings, Branch SupervisorBRISTOL Denise Johnson, ManagerBURLINGTON (COLLEGE STREET) Erin Pond, ManagerBURLINGTON (NORTH AVENUE) Darcy Allard, ManagerENOSBURG Jodi Tallman, ManagerESSEX JUNCTION Geoffrey Germann, ManagerFAIR HAVEN Jill Miller, ManagerHARDWICK Patricia Lemay, ManagerHINESBURG Peter Crapo, ManagerJERICHO Kelly Kimball, ManagerJOHNSON Jodi Tallman, ManagerMANCHESTER George Araskiewicz, District ManagerNORTHFIELD Matthew Villemaire, ManagerRUTLAND (GREEN MOUNTAIN PLAZA AND WOODSTOCK AVENUE) Michelle LaMoria, ManagerSOUTH BURLINGTON (KENNEDY DRIVE) Jonathan Roddy, ManagerErika Baldasaro, District ManagerSOUTH BURLINGTON (SHELBURNE ROAD) Maryann Russell, ManagerSOUTH BURLINGTON (WILLISTON ROAD) Christine Auriemma, ManagerSOUTH HERO Barry Fauteux, ManagerSPRINGFIELD, VT Kenneth Davis, ManagerSPRINGFIELD, MA Jackalyn Guenette, ManagerST. ALBANS Barry Fauteux, ManagerST. JOHNSBURY Martha Davis, ManagerTHETFORD George Araskiewicz, District ManagerVERGENNES Stepheni Newton, ManagerWATERBURY Donald Bedard, ManagerWHITE RIVER JUNCTION George Araskiewicz, District ManagerWILMINGTON Kaci Howes, ManagerWINOOSKI Darcy Allard, ManagerFINANCIAL SERVICES BUSINESS SUMMARY EMPLOYEE BENEFIT SERVICES $80.8M 2017 R E V E N U E WEALTH MANAGEMENT AND INSURANCE SERVICES $48.2M 2 017 R E V E N U E BPAS, Inc. is a national provider with 10 offices located in New York, New Jersey, Pennsylvania, Massachusetts, Texas and Puerto Rico. SERVICES Collective Investment Fund Administration INVESTMENT ADVISORY and ASSET MANAGEMENT SERVICES Community Bank Wealth Management Group individuals, corporations, corporate pension and profit sharing plans, and foundations Community Investment Services, Inc. Defined Contribution Plan Benefit Administration The Carta Group, Inc. Actuarial Services Health Care and Benefit Plan Consulting Nottingham Advisors, Inc. Personal Trust Services INSURANCE personal and commercial property insurance and other risk management products and services OneGroup NY, Inc. VEBA/HRA Administration Transfer Agency CUSTOMER PROFILE Supports 3,800 retirement plans 400,000 + participants $75 billion in trust assets FINANCIAL SERVICES ACQUISITIONS 2017 Northeast Retirement Services Retirement plan administration 2015 OneGroup 2014 Lifetime Benefit Solutions 2011 CAI Benefits, Inc. 2008 Alliance Benefit Group MidAtlantic Insurance and benefits (Oneida Financial Corp.) Benefits administration Benefits administration Benefits administration 2007 CBNA Insurance Agency, Inc. Insurance (TLNB Financial) 2007 Hand Benefits & Trust, Inc. 2003 BPAS-APS (Harbridge Consulting) Benefits administration Benefits administration 27 $600 $450 $300 $150 $200 $150 $100 $50 TOTAL REVENUE1 In millions SELECTED FINANCIAL HIGHLIGHTS Income Statement In millions 2017 2007 Net interest income $ 315.7 $ 136.0 CAGR (10-year) 8.8% Noninterest income Total revenue Operating expenses1 202.4 518.1 258.5 63.3 12.3% 199.3 10.0% 141.7 6.2% Net income $ 150.7 $ 42.9 13.4% Net interest margin 3.69% 3.64% N/A Per Share Data (diluted) Diluted earnings per share $ 3.03 $ 1.42 Operating earnings per share2 Cash dividends declared 2.64 1.32 1.40 0.82 Book value 32.26 16.16 Tangible book value $ 16.94 $ 7.51 Balance Sheet Data End of period, In millions Assets Loans, net Deposits $ 10,746 $ 4,697 6,209 2,821 8,444 3,228 10.1% 7.9% 6.6% 4.9% 7.2% 8.5% 8.6% 8.2% 08 09 10 11 12 13 14 15 16 17 Net Interest Income Noninterest Income 10-year CAGR = 10.0% 1 Excluding securities gains/losses and debt extinguishment charges NONINTEREST INCOME In millions Shareholders’ equity $ 1,635 $ 479 13.1% 1 Excluding acquisition expense 2 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. COMMUNITY BANK FRANCHISE OVERVIEW Total Branch Locations Total ATMs Total Counties Served New York Pennsylvania Vermont Massachusetts Counties with Top Three Deposit Share 225 242 35 6 12 1 25 Average Deposits per Branch $36.7 million 08 09 10 11 12 13 14 15 16 17 Banking Services Financial Services 10-year CAGR = 12.3% 28 CORPORATE AND SHAREHOLDER INFORMATION CO RPOR ATE HE ADQ UA RT ER S Community Bank System, Inc. 5790 Widewaters Parkway DeWitt, NY 13214-1883 Phone: 315.445.2282 or 800.724.2262 Fax: 315.445.7347 communitybankna.com STOCK LISTING Common stock of Community Bank System, Inc. is listed on the New York Stock Exchange (NYSE) under the symbol: CBU. Newspaper listing for common stock: CmntyBkSys. ANNUAL MEETING Wednesday, May 16, 2018 1:00 p.m. EST Main Street Landing Performing Arts Center 60 Lake Street Burlington, VT 05401 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: AST Operations Center 6201 15th Avenue Brooklyn, NY 11219 astfinancial.com General questions: 877.253.6847 INVESTOR INFORMATION Investor and shareholder information regarding Community Bank System, Inc., including all filings with the Securities and Exchange Commission, is available through the company’s website: communitybankna.com Copies may also be obtained without charge upon written request to: 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 for the company for the year ended December 31, 2017. ANALYST COVERAGE The following analysts published research about Community Bank System in 2017: American Capital Partners Anthony Polini / 908.625.1931 apolini@acpweb.com Boenning & Scattergood Matthew Schultheis / 610.832.5290 mschultheis@boenninginc.com D.A. Davidson & Co. Russell E. T. Gunther / 212.223.5403 rgunther@dadco.com Hovde Group LLC Joseph A. Fenech / 646.281.4946 jfenech@hovdegroup.com Keefe, Bruyette & Woods Inc. Collyn B. Gilbert / 973.549.4092 collyn.gilbert@kbw.com Piper Jaffray Companies Matthew M. Breese / 617.654.0728 matthew.m.breese@pjc.com Raymond James Financial Inc. William J. Wallace IV / 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: AST Operations Center 6201 15th Avenue Brooklyn, NY 11219 astfinancial.com General questions: 877.253.6847 S A F E H A R B O R S T A T E M E N T 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 Parkway DeWitt, NY 13214-1883 800.724.2262 315.445.7347 fax communitybankna.com 

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