Market Overview

Community Bank System Reports Record First Quarter 2018 Results

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Community Bank System, Inc. (NYSE:CBU) reported record first quarter
2018 net income of $40.1 million, or $0.78 per fully diluted share,
compared with $26.3 million, or $0.57 per share reported for the first
quarter of 2017. First quarter 2017's results included $1.7 million, or
$0.03 per share of acquisition expenses. Excluding acquisition expenses
and the one-time tax benefit from the revaluation of net deferred tax
liabilities related to the Tax Cuts and Jobs Act enacted in December
2017, the linked fourth quarter of 2017's earnings per share were $0.67
per share.

First Quarter 2018 Performance Highlights:

First quarter EPS of $0.78, up 37% over the first quarter of 2017.
Noninterest
income was up 30% over the first quarter of 2017, representing 40% of
operating revenues.
Deposit funding costs of 0.10%. Beta remains at
zero.
Return on assets of 1.52%.
Return on tangible equity of
19%.

"We're very pleased with this quarter's results and the continuation of
our earnings acceleration, due principally to the strategic deployment
of capital last year with the NRS and Merchants Bancshares
transactions," said President and Chief Executive Officer Mark E.
Tryniski. "In addition, our fee-based businesses continue to grow both
revenue and margin, contributing significantly to earnings and cash
flow. EPS growth of 30% over last year, excluding acquisition expenses,
was also supported by a lower effective tax rate that contributed
approximately one-fifth of that improvement. We are very well positioned
for the remainder of the year."

Total revenues for the first quarter of 2018 were $142.1 million, an
increase of $30.5 million, or 27.4%, over the prior year quarter, and
included the results from both the Merchants and NRS transactions
completed in the first half of last year. Higher revenues were generated
as a result of a 21.5% increase in average earning assets and continued
growth in noninterest income, as well as a six basis-point increase in
the net interest margin from the prior year quarter. A combination of
acquired and organic growth resulted in an $8.6 million, or 30.3%
increase in wealth management, insurance, and employee benefit services
revenues compared to the prior year quarter. Deposit service fees
increased 30.4% year-over-year, primarily the result of the addition of
Merchants, as well as increased debit card-related revenues. Other
banking services were up marginally, year-over-year. The quarterly
provision for loan losses of $3.7 million was $1.9 million higher than
the first quarter of 2017, reflective of higher quarterly net charge-off
levels, including an incremental $1.1 million partial charge-off related
to a single commercial relationship that incurred a $3.1 million charge
in the fourth quarter of 2017. Non-performing asset and delinquent loan
ratios were up slightly in comparison to the end of the first quarter of
2017, and included the impact of the previously mentioned commercial
relationship which also adds over $4.1 million to non-performing assets.
Total operating expenses for the first quarter of 2018 were $86.3
million. This compares to $71.9 million (excluding acquisition expenses)
in the first quarter of 2017. Included in the first quarter 2018 results
are the operating expenses from Merchants and NRS, as well as an
additional $2.0 million of intangible amortization, primarily a result
of those two transactions.

First quarter 2018 net interest income was $84.6 million, an increase of
$17.3 million, or 25.8%, compared to the first quarter of 2017, and
included the impact of the Merchants acquisition. In comparison to first
quarter 2017, funding costs increased two basis points, and earning
asset yields increased seven basis points, resulting in a six
basis-point improvement in the net interest margin. The increase in the
earning asset yield was driven by an incremental $1.6 million in
non-impaired purchased loan accretion, as well as $0.8 million of
accretion on a purchased impaired relationship. On a year-over-year
basis, average loan balances grew $1.3 billion, or 26.3%, principally
related to the Merchants transaction, while average loan yields
increased 22 basis points, including the incremental purchased loan
accretion. Investment interest income was $1.4 million higher than the
first quarter of 2017, as average investment securities balances
(including cash equivalents) increased by $358.7 million, due to the
portfolio acquired from Merchants, while the yield on investments
declined 30 basis points. Interest expense was $1.1 million higher than
the previous year's first quarter, driven by a $275.5 million increase
in average borrowings (primarily customer repurchase agreements) and a
$1.32 billion increase in average deposit balances, principally related
to the Merchants transaction, and a net two basis point increase in the
overall cost of funds.

Wealth management and insurance services revenues increased to $14.1
million, an increase of $2.8 million, or 24.9%, compared to the first
quarter of 2017, driven by both acquired and organic growth. Employee
benefit services revenues of $23.0 million, increased $5.8 million from
the first quarter of 2017 and were primarily attributable to the NRS
acquisition.

Excluding acquisition expenses, first quarter 2018 operating expenses of
$86.3 million, which included a full quarter of operating activities
from both Merchants and NRS, increased $14.5 million over the first
quarter of 2017. Salaries and employee benefits increased $9.0 million,
or 20.9%, and included the personnel added from the two transactions, as
well as annual merit and performance-based increases. All other
operating expenses increased 19.1% year-over-year, and reflected the
occupancy, equipment and other operating costs of both Merchants and
NRS, including significantly higher intangible asset amortization,
compared to the first quarter of 2017.

The effective tax rate for the first quarter of 2018 was 23.0%, down
from 27.4% in the first quarter of last year benefitting earnings by
$0.04 per share, and reflected the lower federal tax rate that resulted
from the Tax Cut and Jobs Act passed in the fourth quarter of 2017.
During the first quarter of 2017, the Company adopted new accounting
guidance for share-based transactions. That guidance requires that all
excess tax benefits and tax deficiencies associated with share-based
compensation be recognized as income tax expense or benefit in the
income statement. Previously, tax effects resulting from changes in the
Company's share price subsequent to the grant date of equity instruments
were recorded through shareholders' equity at the time of vesting or
exercise. The adoption of the amended accounting guidance resulted in a
$2.2 million reduction of income tax expense in the first quarter of
2017, or $0.04 of diluted earnings per common share, and a $0.3 million
reduction of income tax expense in the second, third and fourth quarters
of 2017, or less than $0.01 per share each quarter. In the first quarter
of 2018, the new guidance resulted in a $0.7 million reduction of income
tax expense, or $0.01 per share.

The Company also provides supplemental reporting of its results on a
"net adjusted" or "tangible" basis, from which it excludes the after-tax
effect of amortization of core deposit and other intangible assets (and
the related goodwill, core deposit intangible and other intangible asset
balances, net of applicable deferred tax amounts), accretion on
non-impaired purchased loans, expenses associated with acquisitions, and
the one-time benefit from the revaluation of net deferred tax
liabilities. The amounts for such items are presented in the tables that
accompany this release. Although "adjusted net income" as defined by the
Company is a non-GAAP measure, the Company's management believes this
information helps investors understand the effect of acquisition
activity in its reported results. Adjusted net earnings per share were
$0.82 in the first quarter of 2018, compared to $0.63 in the first
quarter of 2017, or a 30.2% increase.

Financial Position

Average earning assets of $9.38 billion for the first quarter of 2018
were up modestly from the fourth quarter of 2017. Average deposit
balances were down slightly from fourth quarter levels, but ending
deposits were seasonally up $326.7 million, or 3.9%. Average borrowings
(including customer repurchase agreements) in the first quarter of 2018
of $453.1 million, were also consistent with fourth quarter 2017 levels.

Ending loans at March 31, 2018 declined $29.7 million from year-end
2017, principally attributable to lower residential real estate
balances, consistent with expectations. Investment securities totaled
$3.03 billion at March 31, 2018, down slightly from the end of the
fourth quarter, and up from the end of the first quarter of 2017 due to
investments added from Merchants, and partially offset by limited
reinvestment of securities cash flows over the last several quarters.

Shareholders' equity of $1.63 billion at first quarter-end was $335.4
million, or 25.9%, higher than the prior year period, a result of strong
earnings generation and capital retention over the last four quarters,
as well as incremental shares issued in conjunction with the Merchants
acquisition. The Company's net tangible equity to net tangible assets
ratio was 8.42% at March 31, 2018, down from 8.91% a year earlier,
primarily a result of the Merchants acquisitions completed in the second
quarter of 2017. The Company's Tier 1 leverage ratio was 10.19% at the
end of the first quarter, down marginally from 10.35% a year earlier due
mostly to the impact of the Merchants transaction.

As previously announced in December 2017, the Company's Board of
Directors approved a stock repurchase program authorizing the repurchase
of up to 2.5 million shares of the Company's common stock during a
twelve-month period starting January 1, 2018. Such repurchases may be
made at the discretion of the Company's senior management based on
market conditions and other relevant factors and will be acquired
through open market or privately negotiated transactions as permitted
under Rule 10b-18 of the Securities Exchange Act of 1934 and other
applicable legal requirements. There were no shares repurchased in the
first quarter of 2018.

Asset Quality

Despite the previously mentioned partial charge-off of $4.2 million on a
specific acquired commercial relationship in the fourth quarter of 2017
and the first quarter of 2018, the Company's asset quality metrics
continue to illustrate the long-term effectiveness of the Company's
disciplined risk management and underwriting standards. Total net
charge-offs were $3.2 million for the first quarter, compared to $2.0
million for the first quarter of 2017 and $5.8 million for the fourth
quarter of 2017. Net charge-offs as an annualized percentage of average
loans measured 0.21% in the first quarter of 2018, compared to 0.16% in
the prior year's first quarter and 0.37% in the fourth quarter of 2017.
Nonperforming loans as a percentage of total loans at March 31, 2018
were 0.48%, compared to 0.44% at December 31, 2017 and 0.46% at March
31, 2017. The total loan delinquency ratio of 1.01% at the end of the
first quarter was nine basis points lower than the level at December 31,
2017, and seven basis points higher than last year's first quarter-end.
The first quarter provision for loan losses of $3.7 million was $1.9
million higher than the first quarter of 2017, and $1.7 million lower
than the fourth quarter of 2017. The allowance for loan losses to
nonperforming loans was 162% at March 31, 2018, compared with 173% and
206% at the end of the fourth quarter of 2017 and first quarter of 2017,
respectively.

Dividend Increase

During the first quarter of 2018 the Company declared a quarterly cash
dividend of $0.34 per share on its common stock, compared to a $0.32
dividend declared in the first quarter of 2017, or 6.3% higher, which
represents an annualized yield of 2.5% based upon the $54.61 closing
price of the Company's stock on April 23, 2018. The two cent increase
declared in the third quarter of 2017 marked the 25th
consecutive year of dividend increases for the Company. "The
acceleration of our earnings and cash flow results will provide further
strength to capital accumulation and dividend capacity into the future,"
said Mark E. Tryniski, President and Chief Executive Officer.

Merchants Bancshares, Inc.

The Company completed the acquisition of Merchants Bancshares, Inc.
("Merchants"), parent company of Merchants Bank headquartered in South
Burlington, Vermont, on May 12, 2017, for $345.2 million in Company
stock and cash. The transaction extended the Company's footprint into
the Vermont and Western Massachusetts markets. The transaction added 31
branch locations in Vermont and one office in Western Massachusetts in
addition to approximately $2.0 billion of assets and $1.5 billion in
deposits.

Northeast Retirement Services, Inc.

The Company acquired Northeast Retirement Services, Inc. ("NRS"), a
leading provider of plan accounting, transfer agency, fund
administration, trust and retirement plan services for $148.6 million in
Company stock and cash on February 3, 2017.

Conference Call Scheduled

Company management will conduct an investor call at 11:00 a.m. (ET)
tomorrow, April 25, 2018, to discuss first quarter 2018 results. The
conference call can be accessed at 866-548-2692 (719-325-2430 if outside
United States and Canada) using the conference ID code 7507810.
Investors may also listen live via the Internet at: http://www.webcaster4.com/Webcast/Page/995/25249.

This earnings release, including supporting financial tables, is
available within the press releases section of the Company's investor
relations website at: http://ir.communitybanksystem.com.
An archived webcast of the earnings call will be available on this site
for one full year.

Community Bank System, Inc. operates more than 230 customer facilities
across Upstate New York, Northeastern Pennsylvania, Vermont, and Western
Massachusetts through its banking subsidiary, Community Bank, N.A. With
assets of over $10.7 billion, the DeWitt, N.Y. headquartered company is
among the country's 150 largest financial institutions. In addition to a
full range of retail, business, and municipal banking services, the
Company offers comprehensive financial planning, insurance and wealth
management services through its' Community Bank Wealth Management Group
and OneGroup NY, Inc. operating subsidiaries. The Company's Benefit
Plans Administrative Services, Inc. subsidiary (which includes the
recently acquired NRS) is a leading provider of employee benefits
administration, trust services, fund administration and actuarial
consulting services to customers on a national scale. Community Bank
System, Inc. is listed on the New York Stock Exchange and the Company's
stock trades under the symbol CBU. For more information about Community
Bank visit www.communitybankna.com
or http://ir.communitybanksystem.com.

This press release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995.
The
following factors, among others, could cause the actual results of CBU's
operations to differ materially from CBU's expectations: the successful
integration of operations of its acquisitions; competition; changes in
economic conditions, interest rates and financial markets; changes in
legislation or regulatory requirements; and the timing for receiving
regulatory approvals and completing pending transactions.
These
statements are based on the current beliefs and expectations of CBU's
management and CBU does not assume any duty to update forward-looking
statements.

             

Summary of Financial Data

(Dollars in thousands, except per share data)

                 
2018   2017
        1st Qtr   4th Qtr   3rd Qtr   2nd Qtr   1st Qtr
Earnings                        
Loan income $69,441 $69,716 $69,498 $62,351 $52,384
Investment income 18,963 19,872 18,989 19,071 17,574
Total interest income 88,404 89,588 88,487 81,422
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