Please standby, we are about to begin. Welcome to the Community Bank System First Quarter 2015 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, Nicole. Good morning, everyone. And thank you for joining in our first quarter conference call. We have started out 2015 on a productive note. Operating earnings were very good at $0.55 per share, which is a penny better than 2014, and also an historical high watermark for the first quarter. The margin contracted is expected which Scott will discuss further. Earnings were supported by continued growth in non-interest revenues, very strong credit quality and effective expense management. The one area of underperformance for the quarter was in credit generation. Total loans were down 1.7%, which is a much greater seasonal decline than we typically experience in the first quarter. On a more positive note, the second quarter has started out very strong and we have already grown back a third of that decline over the first three weeks of this quarter. Also our commercial pipeline is 20% higher than the same time last year, the mortgage pipeline is up and we are entering the seasonally strong month of the auto lending business, but we think we are in very good shape heading into our peak Q2 and Q3 lending quarters. In addition, deposit balances grew sequentially by over $190 million or 3%, which will provide low cost funding support for expected loan growth. For the past several quarters, we have commented on our capital levels and our focus on productively deploying excess capital. In that regard, in February, we announced the acquisition of Oneida Financial Corp., an $800 million asset institution with 12 branches across Madison and Oneida Counties. The 60% stock and 40% cash mix of consideration will effectively deploy approximately $55 million of that surplus capital. This transaction is attractive in many respects, including Oneida’s geography, which will give us a number of core deposit market share in Syracuse MSA, its business model, which is very community focused and its culture, which aligned extremely well with ours. Oneida also has significant non-banking businesses that drive more than 60% of its total revenue, including insurance, benefits administration and wealth management, all businesses that will integrate well with our existing and highly profitable businesses. As this close we expect the transaction to be approximately $0.07 per share accretive to 2016 GAAP earnings and $0.11 per share accretive to 2016 cash earnings. We are very pleased that Oneida’s Chairman and CEO, Mike Kallet and its President, Eric Stickels will be joining our Board of Directors. The merger integration is proceeding well and we expect to close in early July. With respect to the remainder of the year, we do expect modest core margin contraction, but improvements in asset generation in banking and non-banking revenues. Asset quality is very strong right now and our focus on expense efficiency will continue. We will remain in surplus capital position even after the Oneida transaction and we will continue our focus on opportunities to deploy that capital in a manner that is productive to our shareholders. Scott?

Thank you, Mark, and good morning, everyone. As Mark mentioned, the first quarter of 2015 was a very solid operating quarter for us, with seasonally modest, yet still productive year-over-year operating improvement trends. I’ll first discuss some balance items. Average earning assets of $6.67 billion for the first quarter were up 1.3% from the first quarter of 2014, of all the growth and earning assets being in loans, a positive relative to mix, meaning that the average loans grew organically $91 million or 2.2%. Average deposits were up 1.5% from the first quarter of last year and the multiyear trends away from timed deposits and into core checking, savings and money market accounts, continued in early 2015, resulting in a further decline in overall funding costs. Average outstanding loans in our business lending portfolio in the first quarter were within 0.2% of the fourth quarter, a seasonally expected outcome. Asset quality results in this portfolio continue to be very favorable with net charge-offs of under 6 basis points of average loans over the last 15 months. Our total consumer real estate portfolios of $1.94 billion comprised of $1.61 billion of consumer mortgages, and $339 million of home equity instruments, were also down modestly on a linked quarter basis. We continue to retain in portfolio of most of our short and mid-duration mortgage production, while selling secondary eligible 30-year instruments. Asset quality results continue to be very favorable in these portfolios, with total net charge-offs over the past five quarters of just under 8 basis points of average loans. Our consumer indirect portfolio of $804 million was down $30 million from the end of the fourth quarter of 2014 inline with seasonal demand characteristics and reflective of the significant quarterly contractual cash flows of this portfolio. Despite solid new car sales…

[Operator Instructions] We will answer our first question from Alex Twerdahl from Sandler O’Neill.

Good morning guys.

Good morning, Alex.

Good morning, Alex.

First, could you talk a little bit more about the characteristics in the loan portfolio during the first quarter specifically, what origination volume was like versus paydown volume?

Sure. Origination volume was lower and paydown volume was higher. I guess was experienced across all of the portfolios. It was more acute in the other lending portfolio, which has cash run-off of about $30 million a month. So because of the short duration of that portfolio and the growth last year in the second, third quarters and particular in that portfolio we experienced higher level of cash flows in the quarter. So, a large part of the first quarter performance was just seasonal, expected cash flows out of the indirect portfolio. The commercial portfolio was down a bit, also a bit more than we historically experienced. I think frankly it was just -- it was seasonally related, just the more acute in terms of the first quarter and just general economic activity in the first quarter more broadly and that played out in commercial as well. Mortgage lending, the application volume in the first quarter of this year was actually higher than the application volume in the first quarter of last year. So, I think we are in pretty good shape, particularly heading into the more seasonally active home buying season here in our market. So hope that gives you the color you are looking for, Alex.

Yeah. Absolutely. Just to circle back on the commercial, so you are saying that the decline was more related to economic activity being down versus competition being a little stronger, slightly more rational in your markets?

I would say both of those things are probably true. I think it was a more seasonally difficult quarter than it has been in the past. But again, if we look at our pipeline right now at the end of the first quarter, you look at the commercial pipeline at the end of the first quarter compared to commercial pipeline at the end of the prior year’s quarter it’s actually 20% higher. So, I think we think that we are in very good shape. In fact, in my prepared commentary, we’ve largely gone back in the first quarter weeks of the second quarter. A third of the loan decline we experienced in the first quarter and leading the charge there is bank commercial. So, I think we are starting to fund that higher pipeline and I believe you are going to see that play itself out similarly over the second, third quarters.

Great. That’s very helpful. And then, Scott, can you just walk us through some of the moving parts in the other expense line and why that might have been higher in the third and fourth quarter of last year?

Sure, Alex. What I’m probably focused on there is the -- what we end up with other for us, essentially are things that are not occupancy related. So they tend to be things like business developments related outcomes, technology related expenses. And what we have found is that as activity levels on the revenue production side of our income statements go down, so goes down some of our operating expenses. So, we’ve got some linear outcomes on things like IT processing, transactional processing and a handful of our IT environment that actually move down or move in sync with the revenue generation. We always set to be a little bit more modest relative to our business development and marketing spend in the first quarter than we are for the balance of year. And I think that’s really just - we know from an access standpoint of our customer base across our geography, some of our great marketing initiatives just don’t take hold of people when their activity what was also modest in that first quarter. Nothing else beyond that, Alex, really stands out and really steps up. But it is in a market comment, similar to the -- the activity levels as that you saw from a standpoint of very modest revenue increases, you also had some activity levels in our own utilization of people and technology that were lower in the first quarter.

Okay. That’s very helpful. That’s all my questions. Thank you.

Thank so much, Alex.

And we will take our next question from David Darst from Guggenheim Securities.

Hey. Good morning.

Good morning, David.

Good morning, Alex.

Mark, maybe you could talk about just the trust business and your benefit plan business, I guess it feels like those growth rates are little bit slower than they were in the past couple years and then maybe transition kind of how you would integrate and expand the insurance business that you are acquiring with Oneida?

Sure. I think -- as you know, we’ve got the business. We’ve been in for a long time. It’s got a number of components to it. The run rate on that business right now is probably $45 million to $50 million. The margins are also very productive at over 25%. So it’s a very attractive business for us. We’ve continued to invest in that business in a lot of different ways over a number of years. Some of it’s been organic investment in technology, because it’s a significant element to that business, that’s technology oriented. It’s people in terms of resources. It’s been new business, investment in new business lines, new revenue lines, some of which have grown really nicely and blossomed into their own business units and some of which have not. So some it’s been almost like a venture capital support if you will for those businesses and some of it’s been the acquisition over the years acquiring resources. Lot of times its expertise, it gets acquired and occasionally it’s just purely revenue. So strategically those businesses continue to be very important for us. They have grown I would say in a relatively linear fashion over time in terms of just consistent and continual growth. Some periods are greater than others in terms of the revenue growth. The business continues to grow. So at the current run rate grown that business let’s say 5% to 10% a year as somewhere $3 million to $5 million increase in revenue. So it does get a little harder over time just by virtue of the numbers to grow at what we saw over years with that business grew organically double-digits and that would be very difficult now I think to do given the scale and breadth of the business, which is…

Okay. So are those insurance locations like physically collocated with bank branches, or is it a separate subsidiary with separate facilities and then how would you scale it throughout the market?

Dave, it’s a combination. There are -- it’s not a one office setting in terms of the non-banking businesses that Oneida has. They have some concentration in Oneida, Madison, and Onondaga County, so Central New York. Whereas Mark pointed out, they are probably deeper relative to the lines of service they are providing at their existing customer base than maybe certain of the activities that we actually do today. In terms of building that out I think to Mark’s point the complementary services to existing clients is being wider and deeper for new customers and it’s being able to say I’ve got a full service solution and being able to say that across employee benefits administration, insurance characteristics, as well as wealth management. So I think knowing the some of the demographic here is that we’re in deeper and more statute complicated advice sales in our marketplace and we think we’ll be able to exploit that. I also think in terms of the build out of that customer base, it is not all residing in central New York or neither has they a down state presence relative to insurance outcomes that is very productive and again, that is more of a producer based activity. We’d love to think that we could grow that organically overtime by adding production resources and we’ll continue to look for that. And not unacceptably, after we announce the Oneida transaction, my phone is ringing relative to other insurance enterprises. So if that’s productive on a longer term basis. We’ll continue to look at that.

Okay. And then maybe just on your treasury portfolio. What’s the average duration today and then what you’re unrealized gain in this quarter?

David, the entire portfolio has effective duration of just about five years and treasury portion of that is a little bit over six. The unrealized gain across the whole portfolio is about $106 million at the end of the quarter, which is probably again, post where it is today. The treasury portion of that is about $69 million.

Okay. And then just as your new purchases are coming, are you trying short up the duration or are you trying to manage to five to six year duration?

David, I think, if opportunities present themselves to shorten a duration a little bit, that’s what certainly we would look at. In the first quarter we added $150 million of treasury, that’s about the 7 to your point, which arguably didn’t shorten the duration. But we like the mix characteristic. I think we were a buyer at about a 205 or 8, where if you ask the same question today, I think you got to remember about 50 below that. The other thing we got to think about is that Oneida brings about $300 million of investment securities. Principally mortgage back securities and municipals. And so we will be doing some repositioning of some of that portfolio. One could argue that that $150 million in the first quarter was partially and early repositioning of some of the stuff they hold, as well as some of our own existing cash flows. If the market presents that same opportunity in the second quarter, you may see us do it again. Just because, from -- I guess, from a positioning standpoint, we get to look at a little bit larger portfolio now and say, what do we want the characteristics of that. So look like both from a duration and a quality perspective. So there could be some moving parts on that until we close it.

Okay. Just -- so how does that integrate or how do you think about this one in your one year outlook for rates? What are your assumptions for the shape of the curve and how would you manage to become more asset sensitive, if you think rates are going up?

Well, I think, first and foremost for us, David, is the continuing challenge of putting investments, putting loans on the books instead of investment securities. Again, a long-term challenge for us just giving some of the demographics that we’re in and because historically we’ve been deposits buyer more often and not from a branch perspective, so that’s first and foremost. I think other than that, David, we have had a long-term approach that does not take credit risk in our investment portfolio and I don’t see that changing in the big way. Certainly, over the course of the next year. To your point, because I think we disclose some of things, we expect that there will be rate changes, rate increases on the short end of the curve later this year and then in some kind of methodical way up as you go into 2016. We do think the yield curve gets back to historical levels of shape. It’s a little -- it's still little bit higher than its historical levels today. So we’re kind of that. And we’re also kind of as we enjoy this funding profile that we think is better than most, so we can have a little bit more duration on the asset side and still feel very comfortable with our balancing. That is unlikely to change in the next year. And so we certainly are seeing signs that long-term rates look like they’re headed for steepening over the course of the next year. So that’s kind of the basis we’re operating under.

Okay. Great. But I guess in that -- over next 12 months, excluding this repositioning, you’re probably trying to shorten the duration of the securities portfolio?

David, I think I would say that we’re trying not to lengthen it but I would also say that just -- the prognostication of where that goes in terms of what we’ve seen for long term rates over the last five versus the next five. We don’t try to bat either direction. We try to balance within a certain level of interest rate sensitivity and that’s the regulatory obligation that we have to do. And again, I think over the last four or five years we’ve proven that we’re pretty adapted that.

Yeah. Okay. Great. Thank you.

Thank you.

And we’ll take our next question from Matt Schultheis from Boenning.

Hi. Good morning.

Good morning, Matt.

Good morning.

Couple of very quick housekeeping type questions. What are your projected acquisition costs for the second and third quarter?

I think we modeled $12 million.

Yeah. We did.

I think we modeled $12 million in total. And I don’t think we think that's going to be radically off net but I’d -- we will have that more centered over the course of the next four weeks than we had over the last four weeks, but I have 12 million in my model as well.

Okay. Thank you. And as far as deposit growth in the quarter, it’s very strong in total on a linked-quarter basis and was wondering if there’s any seasonality factors. We need to consider in there if this is just a very strong quarter for funding?

Actually that's good point, Dave. There is -- we certainly are a net gatherer of deposits in the municipal front in the first quarter of the year and then a little bit again in the third quarter of the year. Matt, that was a little bit stronger than historical on the municipal side. But there is a -- some movement underway that would suggest some of the bigger banks are moving from that municipal of line of business. But that being said we usually actually in the first quarter have a decline in sort of core non municipal balances. And we actually didn’t experience that in the first quarter. So I think it was good across the board from a depository funding standpoints and in fairness lots of these municipal relationships that we’ve either broadened or deepened actually feel like they’ll be sticky for quite a period of time.

Okay. So -- if the bigger banks are getting out of that, does that create a situation where you may become somewhat super cyclical just because tax enclose -- even the municipalities don’t really control the inflows and outflows that, that close fully. So does it mean in the future you may actually have even larger swings in the third quarter than you are used too?

You might see a little bit of that but remember with us, Matt, that the deposits -- the municipal funding for us is 10% or 11% or 12 % of the total mix not 25% or 30%. So a little less data maybe than some of our peers to some of our smaller peers that are in market. The other thing I would also say is that we can say this on a personal level, but we are firm believers in it some of that core accounts went from my checking account to the government’s checking account in the first quarter and don’t expect that, that its quite as profound in the second and third.

Okay. Unfortunately for you, it won’t be coming back the other direction anytime soon. Lastly, you repurchased about a quarter of millions shares during the quarter, were those all repurchased prior to the announcement of Oneida?

They were not. So they were across the quarter. They were handful at tail end of January into early February and then again more like the middle of March to the end of March. So at your point -- but at the end of the day, we acquired enough shares to essentially stay even from total outstanding share standpoint for where we were at the end of the year, which would suggest that we did some housekeeping relative to covering equity plan issuances, stock option exercises and restricted stock investing. So that was the objective and we thought we sort of telegraph that and we are happy to have completed down in the first quarter because we really hadn’t been doing that over the last couple of years.

Okay. Well, thank you very much for your time.

Thanks, Matt.

Thank you.

[Operator Instructions] Our next question comes from Collyn Gilbert from KBW.

Thanks. Good morning, gentlemen.

Good morning.

Just a question on the resi mortgages, what was the mix -- you’d said application volume was up this quarter over last year, what was the mix of ARMs versus fixed that you are seeing?

It’s almost entirely fixed.

Okay. Okay.

The ARM activity would be immaterial.

Okay. Then does that suggest that, that mortgage banking line could stay elevated? I mean, it was a big number this quarter. Is that something you think could stay there, assuming the activities stays at this level?

I don’t know if that was bigger than other quarter as well. I think it was about consistent, I thought.

Okay.

I would think that given the seasonality of where we are headed has affected applications volume has been up. Without looking at the numbers in detail, there is a -- there is some likelihood that the number could get bigger into the next two quarters than it was in the first quarter. And Collyn for us, that line where mortgage banking has varied, so we had it like a $1 million in quarterly revenues, which has been pretty consistent in that whole line but it’s just the mortgage banking side of that, is only about half of that number than the all other everything is the other half.

Okay. Okay. That's fine. And then just the loan growth movement there, a little bit seasonally lower in the first quarter but you are getting some of that back in the second quarter so far. Does that change your outlook? I think you guys had said back in January, you are looking for maybe like a 3% organic loan growth straight for the year, is that still in line with what you are thinking?

Yes. I think that's about where we are thinking. I think the first quarter decline was bigger than we expected and the pipelines were also bigger than we expected. So hopefully, the two of them will wash each other out. We’ll get to back where we hope and expect to be, which is 3% all in.

Okay. Okay. That's helpful. And then just getting a little bit more granular, Scott on the NIM. You said expect continued compression. Just if you could quantify that a little bit, I mean, there’s been a little bit -- you are seeing securities yields fall more certainly -- well maybe not more than what you had anticipated? But is that still like a 2 to 3 basis points compression a quarter, or could that be end up being more exaggerated, I think dividend in the second quarter which reduces that?

Agreed. I think one of the things you get from the fourth quarter is the first quarter and this is pretty granular, is that some of the effective tax rate changes that we went through especially, with New York State. Deep into this earning release, there is a line for fully tax-equivalent yield adjustment and that’s down quite a bit from the fourth quarter. And so really, end of the year was sort of bright line for that. So certain of the activities that we were doing relative to tax planning, sort of came through a natural event in the end of December. So we’ll see a much lower number there, which pulls through on the NIM side. One could argue you don’t necessarily to pay for it your net interest income, but you pay for another tax line. But to get back to your question, I would say 2 to 3 to 4 basis points a quarter is well within our expectations in terms of straight core margin decline. And some of that gets offset in the quarters where we pick up the Federal Reserve Bank dividend, so sort of balancing that back to a two or three sets expectation is probably safer to model that way.

Okay.

I think if you look at -- if you look at the portfolio yields specifically, I mean, what seems to be the trend, the commercial yield on the commercial and CRE continues to decline, a lot of that competitively oriented, market-oriented. On the consumer side and I would put in consumer mortgage, home equity, indirect lending and direct lending through the branch. It feels like it’s pretty much bottomed out or very close to it. So I think we are going to see continued downward pressure on commercial and CRE and pretty much stable to may be very slightly declining yields on the consumer side we get the other lines. As it relates to the deposit funding costs, you can see they pretty much gotten as low as they are going to be, I think they were 17 basis points last quarter. That funding cost isn’t going to go much lower than that. So that’s kind of the underlying dynamics as it relates to the margin.

Okay. That’s really helpful. Thanks. And then just one final question. Can you just give us an update on your oil and gas exposure, I think it was somewhere around $70 million and just what you are saying within that portfolio?

Sure. It’s almost exactly $70 million, the majority, that is pipeline related. To a much lesser degree, it’s a drilling related which is mostly stone and gravel and water. We also have a couple of hotels, lodging that we’ve kind of put underneath the gas portfolio just because of where it’s at and the revenue support for that which is principally gas related. So that’s kind of the mix of the $70 million. The weighted average risk rating of that portfolio is almost exactly what the risk rating is for the entire commercial portfolio as a whole. So that’s good. We continue to monitor all the credits in that portfolio as a group that meets quarterly to review the performance of that portfolio and the underlying financial metrics. In terms of broader based activity on the gas markets there has been a slowdown in drilling activity, but no slowdown whatsoever in the pipeline part of the business which is one of the issues, which is -- there is a tremendous amount of supply. But there is an insufficient infrastructure around transmission, which is needed to free up the supply. So given the majority of our $70 million portfolio is related to pipeline that continues to proceed and in fact grow in some cases in terms of the activity. So we monitor that portfolio regularly and it’s continuing to perform sufficiently well for us at this point consistent with the rest of the commercial portfolio as a whole.

Okay. Great. That’s helpful. That was all I had. Thanks guys.

Thank you.

Thanks, Collyn.

[Operator Instructions] And it appears we have no further questions. So I will turn the call to our speakers for any closing remarks.

Very good. Thank you to call. Thanks to everyone for joining us here today. We’ll talk again next quarter. Thank you.

And once again ladies and gentlemen, that does conclude today’s conference. We appreciate your participation today.