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Community Bank System Reports Strong Second Quarter Results

The second quarter 2012 effective income tax rate, of 29.6%, was 2.2% above the effective tax rate for the prior year quarter, the result of a higher proportion of income being generated from fully taxable sources.

Financial Position

Average earning assets for the second quarter were $6.3 billion, an increase of $647.8 million compared to second quarter 2011, and up $421.6 million over the first quarter of 2012. Ending loans increased $100.9 million on a linked basis reflecting strong organic growth primarily from consumer mortgage and installment products. Average investment securities, including cash equivalents increased $589.7 million from second quarter 2011, reflective of the Company’s acquired liquidity pre-investment initiative, which began late in the first quarter. Average deposits increased $231.9 million, or 5.0%, compared to the second quarter of 2011, with core accounts growing by $357 million and time deposits declining $125 million. Quarter-end borrowings were $1.26 billion, and included $430 million of overnight funds which were extinguished upon the completion of the HSBC branch acquisition.

Quarter-end shareholders’ equity of $885.1 million was $155.0 million, or 21.2%, higher than June 30, 2011, and up $44.4 million from the end of the first quarter of 2012. The increase was driven by the January 2012 issuance of 2.1 million additional shares in support of the Company’s acquisition of 19 branch-banking centers in Upstate New York, appreciation in the available-for-sale investment portfolio, and continued solid growth in retained earnings due to record net income generation. The continued strengthening of the Company’s capital position was evidenced by the 165 basis-point increase in the net tangible equity to net tangible assets ratio from the end of the second quarter of 2011 in comparison to June 30, 2012, as well the 39 basis-point increase in the same ratio from March 31, 2012.

Asset Quality

The Company’s asset quality metrics continue to be markedly better than comparative peer and industry averages and illustrate the long-term effectiveness of the Company’s disciplined risk management and underwriting standards.

3 of 5

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