Welcome to the Community Bank System Second Quarter Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provisions of the Private Securities 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 Annual Report and Form 10-K filed with the Securities and Exchange Commission. Today’s call presenters are Mark Tryniski, President and Chief Executive Officer; and Scott Kingsley, Executive Vice President and Chief Financial Officer. Gentlemen, you may begin.

Thank you, George. Good morning, everyone. Thank you for joining our second quarter conference call. It was a very busy and also very productive quarter for us, starting with record quarterly loan growth and ending with the closing of the HSBC branch acquisition this past Friday. Operating performance was good. The margin held up, non-interest income grew, we managed expenses, and the asset quality remained strong. Present demand was the real bright point of the quarter, with loans growing $100 million in the second quarter or 12% annualized. Business lending, mortgage lending, and consumer installment all saw growth. Our pipelines remain strong and we are hopeful for solid Q3 performance as well. This past Friday, we closed on the first leg of the branch acquisition previously announced in January, consisting of 16 branches from HSBC. We’ve assumed approximately $700 million of deposits and $100 million of loans at a blended deposit premium of 3.2%. The conversion went very well and all 16 branches began operating as a Community Bank this past Monday. The remaining three branches of First Niagara that we will be acquiring, representing approximately $140 million of deposits and $72 million of loans, will be closing on September 7. Looking forward, we expect our operating strength to continue. The branch acquisition will be additive to earnings. Our capital levels are very strong and asset quality is sound. I expect our principle challenge in the near term will be to maintain margins in a difficult interest rate environment, but that is our job and a challenge we will engage with vigor. Scott?

Thank you, Mark, and good morning, everyone. As Mark mentioned, our second quarter earnings of $0.53 a share were $0.05 a share better than the first quarter of this year, and included a full quarter impact of the liquidity pre-investment strategy we initiated late in the first quarter, as well as the additive impact of $100 million of loan growth this quarter. Those increases in earning assets, combined with continued stable and favorable asset quality results and disciplined management of our cost of funds, generated the improved results. It is important to again remind everyone that our decision to early invest a portion of our expected acquired liquidity resulted in achieving a meaningful portion of our expected transaction accretion prior to its actual closing. Also as a remainder, we did raise the necessary capital to support the branch acquisition in late January of this year, which did negatively impact EPS for the first half of the year. We felt strongly that it was important to eliminate any potential market uncertainty relative to our ability to timely capitalize the deal. We believe the successful execution of the common stock offering in January validated that decision, despite the $0.01 per month EPS dilution that it would entail. I’ll first discuss some balance sheet items. Average earning assets of $6.31 billion for the quarter were up $422 million from the first quarter of 2012, and included an increase in investment securities, including cash equivalents of $363 million and an increase in average loans of $58 million. Ending loans were $101 million higher than the end of the first quarter and included increases in consumer mortgage, consumer installment and business banking products. The modest net increase in our business lending portfolio in the second quarter was a positive result given the continuation of contractual…

[Operator Instructions] Our first question is from David Darst.

So Scott, I was looking at expenses, should we add about $2 million going into the third quarter for the acquisition?

David, I think that is a pretty fair estimate. I think what we’ve been looking at is $8 million to $9 million of annualized expense associated with the branch operations and the technology associated with the incremental add.

Okay. And then, it sounds like you fully kind of walked through what you think will happen to the balance sheet and you’re looking for $365 million of additional earning assets.

Right, and David, as you appreciate, you won’t see the average effect of that in the third quarter because of the timing of the transactions. But if I was to just lay that on top of, that’s incremental earning assets to what we’ve reported in the second quarter, that’s a fair number to use.

Okay. And is a portion of that, so a portion of that is going to be the $100 million of loans, $107 million loans. And then does that mean you have purchased an additional couple hundred million of Treasuries or you will be, that would fall under this blended rate or the $600 million at 2.3%?

David, at this point, no, in other words for modeling purposes, it’s fair to assume that there’s $180 million of loans, which as you know on purchase accounting, will be marked-to-market. So use a yield of roughly 4%, and the other $180 million we’ve assumed stays in cash equivalents at least for the balance of 2012.

Okay, so is it fair to say that you maybe drew you cash balances down to a level that you would not have taken them down to during the quarter?

Since we were a net borrower for the quarter, David, I’d have to say that’s a true statement. But at the same point in time, I think we’ve, from a modeling standpoint, we’ve always said $100 million of liquidity is plenty for us. And given our access to short term borrowing sources, we could even go lower. In other words, if we surprised ourselves on the upside on loan growth in any specific quarter and ended up being a short-term net borrower, we’d be okay with that.

Okay. But at least, I guess the average balances were much lower for your cash?

Yes, they were practically zero, David. And to say this straight, when you have zero cash equivalents in a quarter, you get a very efficient margin outcome, there’s no debate there.

Okay. And so what portion of the compression do you attribute to kind of that dynamic versus kind of what’s happening with the new -- with the adjustments occurring from the acquisition?

David, probably all of it. So in other words, we would expect that, to see that reduction in 10 to 12 to 14 basis points in the margin, it’s because we’d be carrying roughly an average of $200 million of cash equivalents.

Okay, got it. Okay, Mark, could, maybe could you give us a sense of what your pipelines are, and would you expect this type of loan growth to continue?

Well, if you look at the composition of the loan growth, David, the interesting observation I would make to start is only about $16 million of that growth in the quarter was business related. The remainder, $85 million or so, was consumer related. So the consumer opportunities in our market continue to be very strong. The mortgage business is very good, the pipeline there is, I believe, over $100 million still. So we expect continuation of solid mortgage growth into the third quarter. The commercial pipeline is actually very strong as well, almost at record levels or near or at record levels as well. The activity has actually been quite strong, but so have the unexpected payoffs. So I think some of that is a reflection of the competitive nature of the marketplace, the big banks and others, it’s obviously, it’s a competitive environment right now in terms of loans and earning assets. As margins compress, everybody chases the earning assets, which is certainly expected. So the pipeline in both our mortgage business and the commercial loan business actually right now is very strong, which is why I made the comment that we are hopeful for a very solid credit performance in the third quarter as well.

Our next question is from Damon DelMonte.

Scott, with regard to you commentary on the margin, and the roughly 10 to 15 basis point impact, is that all in the third quarter or is that spread over the second half of the year?

Second half of the year, Damon, because the HSBC portion of this transaction closed three weeks into the quarter. The First Niagara portion will close 10 weeks into the quarter. So when I use that, I’m expecting if you sort of layer that on your second quarter actuals, that’s the result you’d get on a full quarter basis.

Okay, all right. That’s helpful. And could you just recap again what you’ve been buying in anticipation of these branch deals closing. Again, as far as like the yield and the duration?

Sure, the one we talked about in the first quarter was $600 million of Treasury securities at roughly a 10-year duration and a yield of about 2.3%. Since then, most of our purchases have been municipal related, some of those because we had the -- we were cognizant of the cash flows we had, some of those just to replace natural investment runoff. Those yields have been a bit higher than that, maybe approaching 3% to 3.15% on a fully tax equivalent basis. As it relates to duration, modified duration probably in the 8 to 12 years, depending on the instrument, Damon.

Okay. And about how much of the municipal related purchases were there?

Well, we were up about $70 million for the quarter and that’s a net number. So maybe $30 million came off and $100 million went on. I’d have to get back to you on the detail.

Okay, that’s fine, that’s fine. All right, so then you’re going to be getting, well, you’re prefunding right, but I mean, you’re not, you’re going to be paying off short-term borrowings with maturities, correct?

It happened on Friday. So we have zero short-term borrowings today. So the number that was $430 million at the end of the quarter is now zero. And effectively, we’re in a cash position of $100 million today as we speak, and we expect that to go up to $180 million to $200 million when we close the First Niagara portion of the branch deal.

Okay. And what’s the rationale behind this prefunding and buying longer dated securities?

Well, I think when we looked at the acquisition, we know in our marketplaces, when you do a branch acquisition that is so heavily weighted to deposit acquisition as opposed to asset acquisition, because we’ve been through several of these before. It takes us a while to redeploy that liquidity into loan assets, multiple years. So I think we were looking for an asset class in our balance sheet we were comfortable with, with a duration that we thought somewhat matched the core deposit relationships we were acquiring and reflected a yield that we thought was fair in market conditions.

Okay. And then I guess my last question is regarding the strong loan growth you saw this quarter, especially on the commercial side. Are these new relationships that you guys are adding to the bank or are these current customers who are gaining additional appetite to take on additional projects and more borrowings?

I think it’s a mix. It’s probably almost an even mix, I would say. I think we’re seeing a little bit more activity on the business side, interest in projects, I think that some of that is just, is refinancings, and some of it I think is new projects. The other thing I would say is it’s mostly at the larger enterprise level. We are still not seeing tremendous small business demand at this point, but I would say it’s a pretty fair mix between existing customers doing things, including some of it refinancing, as well as kind of new opportunities for us, some of which I suspect are also refinancings from other institutions, given the rate environment we’re in.

Our next question is from Rick Weiss.

I guess a follow up a little on Damon’s question regarding the loan growth, it looks like it’s higher growth that you’ve seen in this quarter than you have to go back several years, was there any disruption that resulted from the HSBC divestiture transactions that’s causing some of this pickup?

I don’t suspect it is. I think it’s just the consumer demand in general in our markets is strong. The mortgage business has been strong the last couple of quarters as it has across the industry, we’re not alone there. And a lot of that is driven by refinancings and some of it’s driven by purchase money kind of ordinary course home buying. And on the indirect auto side, I mean, it’s pretty clear. Our improvement in our results there pretty much mirrors improvement in auto sales that’s happening, which is increasing at a fairly strong clip. So I think what we’re seeing in our markets is just greater consumer demand. I wish there was a bit more small business demand, but it’s just, it’s not there. I also think we’re executing well, particularly on the business side. We are busy and active and engaged at a level in our markets that we probably have not been for a long time. So I don’t think at this point it adds much in relation to the HSBC branch transaction really at all. I do hope that the new influx of 55,000 or so new customer across these 19 branches, that we will be able to penetrate those customers in terms of lending products that maybe we didn’t get as part of the transaction if you just look at the loans deposit ratio, it’s a little bit low. So I think that just creates opportunities for us, and we’ve already had some discussion around a marketing strategy to pursue incremental lending opportunities as it relates to the 55,000 acquired HSBC and First Niagara customers.

Okay, I see. And with customer installment, is that 100% or close to it, indirect auto lending?

Yes, I think the biggest piece to the $100 million is really in mortgages, which for us $45 million or something like that. The home equity, we’re actually down a little bit.

No, I just meant on the -- like on the line item where it says consumer installment indirect, that’s pretty much all auto, like $591 million.

It’s not all auto, but it’s -- I would say 90 something plus percent auto, there’s some very minor boat, RV, snowmobile, motorcycle in there, but it’s very small, the vast majority is auto. And of that, I think 70% or so is used autos.

Okay. And do you have a certain percentage where you would kind of cap that growth as a percentage of your portfolio, like it’s just like 17% now, would you…

Yes.

Would you take it higher?

Yes, I’d be satisfied taking it higher. I think it’s a business we’ve been in a long time. It’s got very good leadership. It’s got very good risk management processes and controls around it. Right now, it’s almost entirely within our existing footprint. If you look at the risk adjusted returns, given the accelerated kind of cash flows and the limited duration of those portfolios relative to the yield and also relative to the losses, it’s a very productive portfolio. In fact, right now it’s got the highest return on equity of any of our lending portfolios right now. So it’s a good business for us. It’s a good business right now provided. We would certainly be satisfied to increase the percentage consisted of the total portfolio. With that said, we like the notion of having a very well balanced product offering and a well-balanced balance sheet in terms of our [Indiscernible] exposure. We like what we’ve got right now where, [Indiscernible] actually a third business, a third mortgage, a third consumer installment. So we like the mix, but I’d expect that the interest rate environment and the demands and opportunities of those different portfolios change over time, some will go up and some will go down. And as of right now, the indirect auto business has been very good and we’ll continue to [Indiscernible] in a disciplined fashion while we have the opportunity.

Our next question is from Joe Fenech.

Most of my questions were asked, but just sort of more of a bigger picture question for you, building on one of the prior questions. You guys have had what I thought was a pretty sophisticated macro view and what that would mean for interest rates over the years, and you’ve positioned the balance sheet to benefit from that and you’ve been dead right. Just curious as to kind of how you’re thinking about things from here looking out a couple of years in terms of balance sheet positioning going forward. Do you maybe start to think about taking a little risk off the table here or is this still more of a long term call that you think has several more years to play out? I think I know the answer to the question, but just want to see if anything has changed in terms of your longer term thinking on balance sheet positioning?

Sure. I think our longer term and shorter term thinking on positioning the balance sheet is to maintain our interest rate risk profile within some very acceptable constraints on either side. So we are not trying to predict which way interest rates are going to go into the future or when they’re going to go. It’s really our -- it’s interesting because the decision you make as it relates to positioning your balance sheet, if you do it the constraints of ALCO, over time in these varying cycles, you will end up making the right decisions. So I think it’s when you try to optimize outcomes based on estimates of interest rate direction, is where you end up making mistakes. So we don’t try to kind of forecast is the low rate environment going to be here for a year or 3 years or 10 years? We look at what is our current interest rate risk profile given the assets and liabilities we have of our balance sheet. And the decisions that we make relative to our balance sheet are always done first within the constraints of maintaining an appropriate interest rate risk profile. And frankly, I think that discipline has ended up with us making the right decisions over time as it relates to maturities and interest rate risk, baking in balance sheet positioning. So it’s probably the answer you expected Joe, but it really is a focus on interest rate risk and maintaining a reasonably tight profile on interest rate risk, regardless of which way rates go and what the yield curve does. The one thing I’ll say is the difficulty is positioning yourself within the context of a flattening yield curve, which is very difficult. And there are some interesting challenges right now, if you look at the yield curve, and the fact that our all-in deposit cost this past quarter were 36, I think, basis points, all right. Yes, we have room to go, but it’s not very far. So if the, kind of the mid to longer end of the curve continues to some down actively, which we think the environment is there that could catalyze that. You only have so far to go on the deposit side. So I think we’ve done a reasonable job of maintaining our margins and have some opportunity to continue to do some things to maintain those margins, but longer term, the flattening of the yield curve, which is likely to happen, it’s already happened to a great degree this year, will make it difficult not just for us, but for a lot of banks to maintain that margin without taking interest rate risk, which we wouldn’t be prepared to do. I think we would prefer to live with a modest period of lower margin than we would to make imprudent balance sheet decisions for the sake of near term margin or earnings.

Our next question is from Matt Schultheis. Your line is open.

My questions have actually been answered.

[Operator Instructions] And I have no further questions in queue.

Very good, thank you, George. Thank you all for joining. We will talk to you next quarter.

That concludes today’s conference. Thank you for your participation. Everybody may disconnect.