Community Bank System : Second Quarter 2023 Earnings Press Release Supplemental

COMMUNITY BANK SYSTEM, INC. REPORTS SECOND QUARTER 2023 RESULTS

SYRACUSE, N.Y. - July 31, 2023

Community Bank System, Inc. (the "Company") (NYSE: CBU) reported second quarter 2023 net income of $48.3 million, or $0.89 per

fully-diluted share and operating net income, a non-GAAP measure, of $49.1 million, or $0.91 per fully-diluted share.

"We are pleased with the performance of our Company in the second quarter," commented Mark E. Tryniski, President and CEO. "Earnings per share of $0.89 for the quarter were $0.16 higher than the second quarter of 2022 and $0.78 higher than the linked first quarter of 2023. Operating earnings per share of $0.91 for the quarter were $0.06 higher than the prior year's second quarter and $0.05 higher than the first quarter of 2023. Operating revenues across all lines of business remained strong in the quarter, with noninterest revenues contributing 37.6% of the revenue. Total banking segment revenues were up $6.6 million, or 5.5%, over the prior year's second quarter, while financial services business revenues were up $1.4 million, or 3.1%, over the same period. Net interest margin was stable and the Company's cycle-to-date deposit beta remained low at just 10%. The Company's employee benefit services, insurance services and wealth management services businesses contributed $48.3 million in revenues in the second quarter, which represents 73.2% of total noninterest revenues of $66.0 million and 27.5% of total revenues of $175.3 million. Asset quality remained strong as annualized net charge-offs were only three basis points in the quarter. Total operating expenses, which excludes acquisition-related expenses, were up $6.0 million, or 5.6%, from the second quarter of 2022, but were $2.0 million, or 1.7%, lower than the linked first quarter. Total loans outstanding were up $188.4 million, or 2.1%, during the quarter, marking the eighth consecutive quarter of loan growth. Although higher interest rates, decreasing money supply and more acute competition from banks and non-depository institutions are expected to continue to be a challenge over the next few quarters, we believe the Company is well positioned to continue to outperform the banking industry as a whole. The Company's deposits are well diversified across customer segments and approximately 72% of total deposits were in checking and savings accounts at the end of the second quarter. We believe the Company's strong core deposit base, in combination with its strong liquidity profile, capital, asset quality and diversified revenue profile provide a solid foundation for future opportunities and growth."

Second Quarter 2023 Performance Highlights

2.89% for the second quarter of 2022

Second Quarter 2023 Business Segment Highlights

Results of Operations

The Company reported second quarter 2023 net income of $48.3 million, or $0.89 per fully-diluted share. This compares to $39.8 million of net income, or $0.73 per fully-diluted share for the second quarter of 2022. The $0.16 increase in earnings per share was reflective of increases in net interest income and noninterest revenues and decreases in the provision for credit losses and fully-diluted shares outstanding, partially offset by increases in operating expenses and income taxes. Comparatively, the Company recorded $0.11 in fully-diluted earnings per share for the linked first quarter of 2023, which was negatively impacted by $0.75 per share of realized losses on investment security sales made as part of a strategic balance sheet repositioning.

Net Interest Income and Net Interest Margin

The Company's eighth consecutive quarter of loan growth and a rising rate environment supported year-over-year growth in net interest income and net interest margin expansion that more than offset higher funding costs.

• Net interest income in the second quarter of 2023 was $109.3 million, up $6.1 million, or 6.0%, compared to the second quarter of 2022, but was down $1.7 million, or 1.6%, from the first quarter of 2023.
• Second quarter tax-equivalent net interest margin, a non-GAAP measure, of 3.18% increased by 29 basis points from the second quarter of 2022 primarily as a result of higher yields on interest-earning assets, partially offset by higher rates paid on interest- bearing liabilities.
• The yield on interest-earning assets increased 85 basis points to 3.82% in the second quarter of 2023 from the prior year's second quarter primarily as a result of higher loan yields due to market-related increases in interest rates on new loans, a significant increase in variable and adjustable rate loan yields driven by rising market interest rates, including the prime rate, and a high level of new loan originations.
• The cost of interest-bearing liabilities increased 81 basis points to 0.94% in the second quarter of 2023 from the second quarter of 2022 driven by higher deposit and borrowing rates.
• On a linked quarter basis, tax-equivalent net interest margin, a non-GAAP measure, decreased by two basis points as the cost of funds increased 23 basis points, including a 32 basis point increase in the cost of interest-bearing liabilities, while the yield on interest-earning assets increased 19 basis points.

Noninterest Revenues

The Company's banking and financial services (employee benefit services, insurance services and wealth management services) noninterest revenue streams reduce dependence on net interest income, continue to be strong, diverse and provide a solid foundation for future opportunities and growth.

• Banking noninterest revenues increased $0.4 million, or 2.6%, from $17.3 million in the second quarter of 2022 to $17.7 million in the second quarter of 2023.
• Employee benefit services revenues for the second quarter of 2023 were $28.6 million, down $0.4 million, or 1.2%, in comparison to the second quarter of 2022 driven primarily by a decline in asset-based fees reflecting the impact of lower financial market valuations.
• Insurance services revenues for the second quarter of 2023 were $11.9 million, which represents a $2.1 million, or 21.3%, increase versus the prior year's second quarter, reflective primarily of a strong premium market and organic growth.
• Wealth management services revenues for the second quarter of 2023 were $7.9 million, down from $8.1 million in the second quarter of 2022, primarily driven by more challenging investment market conditions.

Noninterest Expenses and Income Taxes

The Company continues to maintain a focus on expense management. For the remaining two quarters of 2023, management anticipates that total operating expenses, excluding any future acquisition activities, will remain generally in line with first and second quarter levels.

• The Company recorded $113.0 million in total operating expenses in the second quarter of 2023, compared to $110.4 million of total operating expenses in the prior year's second quarter, mainly driven by higher salaries and employee benefits, data processing and communications expenses, business development and marketing and other expenses, partially offset by lower acquisition expenses.
• The $2.6 million, or 4.0%, increase in salaries and benefits expense was primarily driven by merit and market-related increases in employee wages and acquisition-related and other additions to staffing.
• The $0.7 million, or 5.0%, increase in data processing and communications expenses is reflective of the Company's continued investment in customer-facing and back-office digital technologies.
• Business development and marketing expenses increased $1.0 million, or 26.3%, due to the Company's investment in digital marketing automation technologies and higher levels of targeted advertisements intended to generate deposits.
• Other expenses were up $2.1 million, or 36.5%, due to increases in insurance and travel-related expenses along with incremental expenses associated with operating an expanded franchise subsequent to the Elmira acquisition in May of 2022.
• The effective tax rate for the second quarter of 2023 was 21.4%, down slightly from 21.6% in the second quarter of 2022.

Financial Position and Liquidity

The Company's financial position and liquidity profile remains strong.

• The Company's total assets were $15.11 billion at June 30, 2023, representing a $379.8 million, or 2.5%, decrease from one year prior and a $147.9 million, or 1.0%, decrease from the end of the first quarter of 2023. The decrease in the Company's total assets during the prior twelve-month period was primarily driven by the sales and maturities of certain available-for-sale investment securities, partially offset by organic loan growth.
• At June 30, 2023, the Company's readily available sources of liquidity totaled $4.27 billion, including cash and cash equivalents balances, net of float, of $120.4 million, investment securities unpledged as collateral totaling $1.08 billion, unused borrowing capacity at the Federal Home Loan Bank of New York of $1.65 billion and $1.42 billion of funding availability at the Federal Reserve Bank's discount window.
• The available sources of immediately available liquidity represent over 200% of the Company's estimated uninsured deposits, net of collateralized and intercompany deposits.
• Estimated insured deposits, net of collateralized and intercompany deposits, represent greater than 80% of second quarter ending total deposits.

Deposits and Funding

The Company maintains a solid core deposit base with low funding costs.

• Ending deposits at June 30, 2023 of $12.87 billion were $238.9 million, or 1.8%, lower than the first quarter of 2023 and $486.0 million, or 3.6%, lower than one year prior.
• Ending borrowings of $484.8 million at June 30, 2023 increased $104.5 million, or 27.5%, from March 31, 2023 and increased $172.3 million, or 55.1%, from a year prior due, in part, to the funding of strong loan growth.
• The Company's average cost of funds was up 58 basis points, from 0.09% in the second quarter of 2022 to 0.67% in the second quarter of 2023, while the average cost of total deposits remained relatively low at 0.59% for the quarter.
• Through the end of the second quarter, the Company's cycle-to-date deposit beta was 10% and the cycle-to-date total funding beta was 12%. The target Federal Funds rate has increased 500 basis points since December 31, 2021, while the Company's total deposit costs and total funding costs increased 51 basis points and 58 basis points, respectively, over the same period.
• The Company's deposit base is well diversified across customer segments, comprised of approximately 63% consumer, 26% business and 11% municipal at the end of the current quarter, and broadly dispersed with an average deposit account balance of under $20,000.
• 72% of the Company's total deposits were in checking and savings accounts at the end of the second quarter and the Company does not currently utilize brokered or wholesale deposits. 10% of the Company's total deposits were in time deposit accounts at the end of the second quarter, up two percentage points from the end of the prior year's second quarter and the end of the first quarter of 2023 primarily due to the movement of individual's deposits from non-time to time accounts.

Loans and Credit Quality

The Company's in-footprint based loan portfolio is growing and diversified with a core focus on credit quality.

• Ending loans at June 30, 2023 of $9.17 billion were $188.4 million, or 2.1%, higher than March 31, 2023 and $1.03 billion, or 12.6%, higher than one year prior with the year-over-year growth driven by increases in all loan categories due to net organic growth.
• At June 30, 2023, the Company's allowance for credit losses totaled $63.3 million, or 0.69% of total loans outstanding compared to $63.2 million, or 0.70% of total loans outstanding, at the end of the first quarter of 2023 and $55.5 million, or 0.68% of total loans outstanding, at June 30, 2022.
• Reflective of an increase in loans outstanding and a stable economic forecast, the Company recorded a $0.8 million provision for credit losses during the second quarter of 2023. While certain macroeconomic concerns are emerging related to non-owner occupied commercial real estate, the Company's exposure to this portfolio remains relatively low at 180% of total bank-level capital.
• The Company recorded net charge-offs of $0.7 million, or an annualized 0.03% of average loans, in the second quarter of 2023 compared to net charge-offs of $0.4 million, or an annualized 0.02% of average loans, in the second quarter of 2022 and net charge-offs of $1.5 million, or an annualized 0.07% of average loans, in the first quarter of 2023.
• Total delinquent loans, which includes nonperforming loans and loans 30 or more days delinquent, to total loans outstanding was 0.83% at the end of the second quarter of 2023. This compares to 0.75% at the end of the second quarter of 2022 and 0.73% at the end of the first quarter of 2023.
• At June 30, 2023, nonperforming (90 or more days past due and non-accruing) loans decreased to $33.3 million, or 0.36%, of total loans outstanding compared to $33.8 million, or 0.38%, of total loans outstanding at the end of the first quarter of 2023 and $37.1 million, or 0.46%, of total loans outstanding one year earlier.
• Loans 30 to 89 days delinquent (categorized by the Company as delinquent but performing), which tend to exhibit seasonal characteristics, were 0.47% of total loans outstanding at June 30, 2023, up from 0.35% at the end of the first quarter of 2023 and 0.29% one year earlier.

Shareholders' Equity and Regulatory Capital

The Company's capital planning and management activities, coupled with its historically strong earnings performance, diversified streams of revenue and prudent dividend practices, have allowed it to build and maintain a strong capital position. At June 30, 2023, all of the Company's and the Bank's regulatory capital ratios significantly exceeded well-capitalized standards.

• Shareholders' equity of $1.62 billion at June 30, 2023 was $44.3 million, or 2.7%, lower than one year ago despite strong earnings retention primarily because of a $76.1 million decline in accumulated other comprehensive income related to the Company's investment securities portfolio due to higher market interest rates. Shareholders' equity was down $16.6 million, or 1.0%, from March 31, 2023, primarily driven by a $33.3 million decrease in accumulated other comprehensive income related to the Company's investment securities portfolio.
• The Company's tier 1 leverage ratio was 9.35% at June 30, 2023, which substantially exceeds the regulatory well-capitalized standard of 5.0%.
• The Company's shareholders' equity to assets ratio (GAAP) was 10.71% at June 30, 2023, down slightly from 10.73% at June 30, 2022, but consistent with 10.71% at March 31, 2023.
• The Company's net tangible equity to net tangible assets ratio (non-GAAP) was 5.34% at June 30, 2023, down slightly from 5.40% a year earlier and 5.41% at the end of the first quarter of 2023. The decrease in the net tangible equity to net tangible assets ratio (non-GAAP) from one year prior was primarily driven by a $28.5 million, or 3.6%, decrease in tangible equity due to the aforementioned decline in accumulated other comprehensive income related to the Company's investment securities portfolio, partially offset by a $363.9 million, or 2.5%, decrease in tangible assets due primarily to the aforementioned sales and maturities of certain available-for-sale investment securities.

Dividend Increase and Stock Repurchase Program

The payment of a meaningful and growing dividend is an important component of our commitment to provide consistent and favorable long term returns to our shareholders, and it reflects the continued strength of our current operating results and capital position, and our confidence in the future performance of the Company. The $0.01 increase in the quarterly dividend declared in the third quarter of 2023 marked the 31st consecutive year of dividend increases for the Company.

• During the second quarter of 2023, the Company declared a quarterly cash dividend of $0.44 per share on its common stock, up 2.3% from the $0.43 dividend declared in the second quarter of 2022.
• On July 19, 2023, the Company announced an additional one cent, or 2.3%, increase in the quarterly dividend to $0.45 per share on its common stock, payable on October 10, 2023 to shareholders of record as of September 15, 2023, representing an annualized yield of 3.4% based upon the $52.59 closing price of the Company's stock on July 28, 2023. This increase marked the 31st consecutive year of dividend increases for the Company.
• As previously announced, in December 2022 the Company's Board of Directors (the "Board") approved a stock repurchase program authorizing the repurchase of up to 2.70 million shares of the Company's common stock during a twelve-month period starting January 1, 2023. 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 regulatory and legal requirements. There were 400,000 shares repurchased pursuant to the 2023 stock repurchase program in the first six months of 2023, including 200,000 shares in the second quarter of 2023.

Non-GAAP Measures

The Company also provides supplemental reporting of its results on an "operating," "adjusted" and "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-purchased credit deteriorated ("PCD") loans, expenses associated with acquisitions, acquisition-related provision for credit losses, acquisition-related contingent consideration adjustments, gain on debt extinguishment, loss on sales of investment securities and unrealized loss on equity securities. In addition, the Company provides supplemental reporting for "adjusted pre-tax,pre-provision net revenues," which subtracts the provision for credit losses, acquisition expenses, acquisition-related contingent consideration adjustments, gain on debt extinguishment, loss on sales of investment securities and unrealized loss on equity securities from income before income taxes. Although these items are non-GAAP measures, the Company's management believes this information helps investors and analysts measure underlying core performance and provides better comparability to other organizations that have not engaged in acquisitions. The Company also provides supplemental reporting of its net interest margin on a "fully tax-equivalent" basis, which includes an adjustment to net interest income that represents taxes that would have been paid had nontaxable investment securities and loans been taxable. Although fully tax-equivalent net interest margin is a non-GAAP measure, the Company's management believes this information helps enhance comparability of the performance of assets that have different tax liabilities. The amounts for such items are presented in the tables that accompany this release. Diluted adjusted net earnings per share, a non-GAAP measure, were $0.95 in the second quarter of 2023, compared to $0.89 in the second quarter of 2022 and $0.90 in the first quarter of 2023. Adjusted pre-tax,pre-provision net revenue per share, a non-GAAP measure, was $1.17 in the second quarter of 2023, compared to $1.13 in the second quarter of 2022 and $1.16 in the first quarter of 2023.