Welcome to the Community Bank System Fourth Quarter and Yearend 2012 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, Erin. Good morning, everyone, and thank you all for joining our fourth quarter conference call. Operating results for the fourth quarter were solid and in line with our expectations and also included the $0.04 per share impact of the litigation settlement related to the processing of retail debit card items and its impact on overdraft fees. We got considerable affirmative defenses to the claims; however, the settlement we were able to achieve was, in our judgment, a superior outcome for shareholders when measured against the cost and, more importantly, the staff resources required for litigation. Scott will comment further on fourth quarter results. Full year 2012 was a very productive year for the company. Excluding acquisition and litigation costs, earnings per share of $2.08 compares well to $2.10 reported in the prior year when considering the $0.21 per share impact of a lower net interest margin. As we said at the end of 2011, our challenge for 2012 would be to overcome that declining net interest margin through a growing balance sheet, tight expense management and higher noninterest income, and that is what we accomplished. For the year, organic loan growth was over $200 million or 7%, with record levels of mortgage and auto originations. We acquired 19 branch offices from HSBC and First Niagara, representing $800 million of deposits. We improved our efficiency ratio from 57.6% to 57.4%, and we increased banking fees 9%, Benefits Administration revenues 14% and Wealth Management revenues 20%. Beyond the operating results, we were very pleased in 2012 to increase our cash dividend for the 20th consecutive year. And despite the consistent increases over a long period of time, reflects a payout ratio of just over 50%. Our board also approved, in December, a stock repurchase program of 2 million shares, which will continue to give us capital management flexibility to optimize returns to shareholders. Looking ahead to 2013, we do expect the margin to decline further at a pace that will challenge us to continue to grow loans, grow noninterest revenues, maintain an efficient expense structure and manage our capital well for the benefit of shareholders. We were able to accomplish that in 2012, and that remains our task into 2013. Scott?

Thank you, Mark, and good morning, everyone. As Mark mentioned, our operating performance for the fourth quarter and full year 2012 remained very favorable. Our fourth quarter reported earnings of $0.47 per share included a $0.01 per share of acquisition expenses as well as a $0.04 per share charge related to the litigation settlement Mark discussed, and $0.01 per share of incremental legal and professional costs associated with the settlement. As a reminder, we completed the acquisition and conversion of 16 former HSBC branches in July and 3 First Niagara branches in September, so the fourth quarter was the first quarter where the various operating attributes of the transactions were fully reflected. Also as a reminder, we did raise the necessary capital to support the branch acquisitions in January of last year, which did negatively impact EPS for the first half of 2012. 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 entailed. I will first discuss some balance sheet items. Average earning assets of $6.69 billion for the fourth quarter were up modestly from this year’s third quarter and included an increase in average loans of a $126 million, offset by a $187 million decline in average investments and cash quotes. Ending loans were up $395 million from year-end 2011 and included increases in all portfolios from solid organic growth as well as those acquired in the branch purchases. Outstandings in our business lending portfolio remained consistent with the third quarter as contractual and other unscheduled principle reductions continued to offset new loan generation. Asset quality results in this portfolio continue to…

Thank you. [Operator Instructions] And I have David Darst.

Yes, just from a big picture perspective, Mark, at the end of your comments, you highlighted the compression in the margin. Considering the branch acquisition, the liquidity that you brought on, your ROAs, looks like on a core basis, it's going to be down like 10 basis points. Going into next year, your ROTE is kind of tracking to something maybe below 15, and you were closer to 17 kind of pre- the acquisition. What levers are you thinking about, and how do you think you can kind of maintain your profitability in this environment?

Well I think we were able to do in 2012, David. We overcame a significant decline in the margin -- if you do the math, it's about $0.20 a share -- by growing revenues and managing the expense structure well, and I think that's going to be the task for 2013, yet again. There's no -- I think -- the reference to the capital that I made was just if you consider the level of Tier 1 capital that we have right now going into 2013 of 8.40-something that we expect to continue to grow quarter-over-quarter, and that excludes, as you know, the impact of the securities -- the unrealized securities gains, that gives us a capacity and flexibility to continue to either grow the balance sheet or to use other utilizations with that capital such as a stock buyback or other maybe restructuring of the balance sheet, which is something that we've considered doing as well. We have a lot of options available to us in that respect, but I think we have a lot of opportunities, and it’s going to be, we always -- we grind it out. We grow the revenues, we manage the expenses, we make what we believe are high-value acquisitions to try to grow our earnings over time, grow our dividend over time and deliver what we think is a superior return to our shareholders in a way that is actually a lower-risk profile than many others.

Yes, certainly, you have done it. So, prioritizing between a stock buyback and a balance sheet restructuring, can you give us any insight as to what we might see materialize?

Well, David, I think it's -- as you know, we are not prognosticators of the long end of the yield curve. So with that in mind, we think we have some elements on our balance sheet that at certain points of -- in the interest rate cycle, would make logical sense to potentially shrink the balance sheet. We don’t need to be in a hurry with those. Dave, we do think that they would be capital additive to us and give us enhanced flexibility should we decide to do that, but that is not what we are focused on, on a day-to-day basis, David. Honestly, that’s a mathematic or an economic value calculation, it’s easy for us to update on a continual basis. To Mark’s point, we are more focused on how we grow the balance sheet, how do we enhance some of the revenue sources that we're used to improving and again, how do we manage a cost structure within an environmental that suggests long-term interest rates will remain low for an extended period of time.

Okay. Scott, could you give us an outlook for maybe the expense run rate for the first and second quarter of ‘13, and was there anything that -- in the other line item that we should consider or take out of the run rate?

David, good question, and I think that's a fair question. I think that for the most part the fourth quarter was relatively indicative of we would see going forward. That being said, there was about a $0.5 million of legal and professional costs that did reside in other in the fourth quarter related to the litigation settlement. It was the first quarter that we had a full-quarter impact of the HSBC, First Niagara folks in play. We kept our marketing expenses at higher levels than we usually do for the fourth quarter because we are trying to make sure that the brands has good knowledge in some of those new marketplaces. And we thought it was an excellent time, quite frankly, to continue to enhance our share in certain of those markets. As is pretty standard at the end of the year, David, you have some adjustments to some of your benefit accruals with, I'll give you an example, with interest rates so low, in fairness, pension costs go up. With the discount rates so low, anything you're associated with pension and retirements plan benefits, the expenses tend to go up a little bit. With that said, David, I think our expectation is a 2.5-or-so increase in core base salary cost going into next year, kind of a core merit change for our folks, and from there, certain line items will get [indiscernible] into zero base increases, others will probably have natural inflationary tick up. We'll get at some maintenance things associated with some of the branches we acquired, but I don't think that those will actually move the needle much early in the year. Just a reminder, and you know this, David: we are more expensive in the first quarter. We are in places that today is minus-something degrees, so the first quarter utilities and maintenance costs tend to be more expensive than any other quarter of the year, and that's at the same time with having an expectation that some of your retail-related debit card fees and overdraft utilization programs are less used in the first quarter. But that's not inconsistent with our historical trend.

The next question comes from Damon DelMonte.

You guys referenced the roughly $130 million of unrealized gains in your AFS portfolio. Would you consider trying to monetize some of that to help support earnings during 2013?

You know, David, I think that what we've talked about there is, "Is there are a logical piece of that portfolio, certainly not all of it -- is there is logical piece that would make sense to do a balance sheet restructuring with certain debt obligations that we have on the other side. So where we would have a modest-to-neutral capital impact and a modest-to-neutral net interest income impact going forward post- some kind of restructuring. That's really the only thing today that's of meaningful interest to us. To your point, monetizing some of those gains, we don't need the impact in capital, and I think we don't need the pickup in realized gains for capital-related purposes. So I think that's lower on our list of priorities.

I would say I think we don't ever think about kind of managing operating results by leaking in securities gains. But I think there are times where we will make decisions to sell securities for ALCO purposes or restructuring purposes. But I think the idea of harvesting some of those gains just to support current-period earnings is not consistent with our thinking around creating long-term value for shareholders.

And then just with respect to the overall portfolio, I think you said the weighted average life was around 6.5 years and the duration was 5.1. Could you just kind of remind us your philosophy with the securities portfolio, because I think if you look across the industry, 5.1 duration is probably on the longer end of the spectrum? And just I guess how you guys get comfortable with a duration of that level.

Well, Damon, the investment securities are only 40% of our earnings assets, and so the investment portfolio at our institution has been managed on a full, integrated ALCO perspective for years. So we have the luxury of knowing that our long-term funding base is incredibly stable, and we've been to actually grow that base over the last several years, also knowing at the same time that we have other classes of assets under the balance sheet that have very quick and very fast cash flows attached to them. Just use the indirect auto portfolio as an example. A $650 million portfolio probably got contractual cash flows of 250 to 275 in one year. So it’s a holistic approach to that, and that kind of goes back to your initial question that Mark answered, which is, we are not trying to look at the ability of the portfolio itself to generate outside earnings results. It has to be there for the purposes of balanced ALCO management.

I think there's two important points. One is the securities portfolio is about ALCO and managing interest rate risk first and foremost, and I mentioned that we shouldn't lose sight of that fact, and I think that's an important point to reiterate. And the other thing I guess I would say, the second point that I think is also relevant: we're asset sensitive. We remain asset sensitive despite the fact, as Scott said, it's 40% of our earning assets and it's got a 5-plus year average life. We are asset sensitive. So in our view, we're recently well positioned for the eventual rise in interest rates. Who knows when that's going to happen. It may be next year, it may be 5 years or longer. As Scott said, we can’t be predicting that. We manage interest rate risk out of a 5 year time horizon and right now, we remain asset sensitive and would be supportive of a rising rate environment.

I guess, you've mentioned that margin is going to come under pressure. So I guess our starting point would be probably 3.79% [ph] when you take out the impacts this quarter that you highlighted, is that correct?

I think that’s fair, and Damon, I think that we are in the -- again, not being the prognosticator of the long end of the curve, 4 to 5 basis points a quarter, which is kind of the trend we have gone through for the last several quarters, of potential erosion. And it's really the replacement of higher -- above-average or above peer level asset yield. At the same point in time, we got a little bit of a ways to go on the funding side. Not a long way to go. We're closing out on an absolute zero relative to funding cost, and we just think this pressure on the asset side, again, in 2013, would be a little quicker than the pressure on the liability side.

And then just lastly on average earning assets, the outlook for the year in that. How do you see the gross in loans shaping up this year? Do you think mid single-digit rate is doable?

We would hope so. The mortgage pipeline remains reasonably strong. We've seen rebounds in some areas on the commercial side. Much of the commercial decline in 2012 was related to the Wilber portfolio that was acquired, some of which were not forming, some of which were. We expect that to moderate substantially in 2012. We had exceptionally good performance in certain regions of the -- markets of the company in 2012 in commercial, so we're looking for an improved performance in commercial in 2012. And the auto business, we expect, will continue to be very strong. It was up 15% in 2012, and I don’t think it’s impossible that we get to another double-digit in that business performance in 2013. So I think we are looking for another decent year in 2013 in terms of loan growth.

The next question comes from John Moran.

Just real quick, Scott, I think you said 275 [ph] is scheduled to roll off the securities book. Did I catch that number right?

You did, yes, exactly.

Okay. And then just in terms of kind of redeploying there, you guys are skewing at the moment well toward kind of US Treasuries. Any sort of thoughts in terms of maybe extending on the muni portion or shifting more into agency, or should we expect the portfolio to kind of look very similar going forward?

John, I think you should suggest that it will look similar going forward. We certainly have an acumen in municipal securities selection and will continue to have that and suspect that, that continues to be a well-balanced portion of the portfolio. We could see ourselves in certain fixed agency bullet securities. We do not see ourselves as an agency MBS buyer in the near term. And John, that kind we goes back to that decision we said before where "Let's portfolio some of our own assets at a 4% at par as opposed to being a buyer at 108 in the MBS side where maybe your effective yield is 2 and maybe your effective yield is 0 if you've gotten the premium amortization wrong." So I see that, to your point, that the balanced characteristics will probably go there. I think we'd like to think that we could be market optimist -- or market opportunistic with our capital structure. So if there are certain times where there's risk on activities through some of the uncertainty from a political standpoint, we are prepared to invest a little bit early if that opportunity comes up. That being said, if we find ourselves with average cash equivalents of 100 million to 200 million during the year, that could be the outcome as well.

I wouldn’t expect any significant change in the composition or profile or even the size of the investment portfolio, and would hope and expect that the cash flow, majority anyway, will be reinvested in the loan portfolio over 2013.

Makes sense, makes sense. And then I don't know if we happen to have handy, how much is scheduled to kind of come off the loan book this year?

Yes, we can talk about that off-line if you'd like. It’s clearly a mixed bag because of the nature of our portfolios. And I will say this, one has to look at his assumptions, because 2011 and ’12, because of the interest rate environment, had a lot more unscheduled payments in multiple portfolios than I think most people would have been forecasting on a longer-term basis. Have we reached a point where interest rates are now so low where that goes back to historical norms? That's in some of our assumptions as well, but we can -- off-line, if you'd like, I can sort of give you my perspective by portfolio.

Yes, that would be helpful. And then it sounds like, on the sort of core commercial side of things, demand drivers are okay but not great. You guys are kind of running in place there in terms of being able to put on originations to sort of offset whatever is coming back at you. Any sort of sense of demand picking up a little bit in the footprint?

I think by region, in the Northern region we were off a little bit in 2012. In the South region, which is kind of the -- all of that out to Syracuse, all the way through the western part of -- southwestern part of New York, what we call the Southern region, we were actually up quite a bit, almost double digits. So it was very good in that market, and then in Pennsylvania, we were off a bit. I mean, the demand has been a little bit sporadic in terms of the regions, which has historically been in our footprint. But I think we expect that the South region, again, will be strong in 2013, that the North region, we hope, will pick up a bit, and we've already seen things start to improve in Northeast Pennsylvania. The other thing, John, just to remind you: different than a lot of our peers, our proportional amount of commercial real estate is much smaller than most of our peers, and so when you have a large just straight C&I portfolio and you have very modest line utilizations characteristics for a couple of years, it does get difficult to continue to grow the portfolio. So I think we're also optimistic that there will be some more line utilization from some of our operating customers in 2013, people that quite frankly have very nice-looking balance sheets right now and have ample cash.

I think the other opportunity we have in 2013 is to acquire branches. As you know, we acquired $800 million deposits but only $150 million or so in loan. So we think we have an opportunity in those branch markets as well to improve on the loan growth performance.

And the last one for me, Wilber, kind of done for a while now, in the rear view, branches kind of closed and everything kind of buttoned up. What's the outlook on M&A? Obviously, you guys have been pretty active. Any sort of increased chatter? Is there more kind of going on?

I don't know if there's any increased level of kind of chatter or opportunities that we're seeing, John. We continue to be active in identifying specific opportunities that we believe would be of high value to the organization and to our shareholders and continue to pursue those actively.

Next is Jake Civiello.

So even with anticipated [indiscernible] to margin contraction in 2013, would you expect to continue to grow at FTE [indiscernible] to income as you did throughout last year?

You know, Jake, I think in terms of a quarter-by-quarter basis, a little bit more of a challenge in 2013, because we knew where the asset growth, whether it would be investment securities or loans, was coming from with the branch acquisitions in 2012. So I mean, right now, clearly we have nothing that we've announced or appears imminent. So I think it’s back to the old-fashioned organic growth and put it on.

That being said, to Mark's point, we have to lift up relative to some of these markets that we are a new participant in or an enhanced participant in that we don't think we've certainly fully leveraged our ability to grow in some of those marketplaces. So is the task a little bit harder than it was in ’12, Jake, in terms of known sources? It probably is. But that’s not dissimilar to the past operating years.

Okay, and then just one other question I had was, is the -- on the non-interest income side, is there any seasonality in the fourth quarter results in terms of the deposit service fees or the benefits plan administration fees?

Actually, on the benefit plan administration side, historically, the first quarter is actually the strongest quarter because, quite frankly, the world has its [indiscernible] fully deployed in that quarter. So nothing that was really fourth quarter related there. On the deposit service fee side, the only thing I would sort of caution for modeling purposes is the first quarter tends to be lower than the second, third and fourth. I think customer utilization of retail products is pretty uniform in the second, third and fourth quarter, but just given our marketplaces, last and the first.

Damon DelMonte.

I just had a quick follow-up for you regarding the provision expense. The last 3 quarters of 2012, you guys were north of $2 million per quarter. The last 2 quarters you were almost $2.6 million, $2.7 million. How should we think about the provision as we look into 2013?

David, that's a good question. Our perspective has been to remain a conservative provider. So in other words, the optics of keeping reserve coverage levels similar to the characteristics that have been out there for a handful of years. So covering charge-offs and/or providing reserves for new loan growth, we think's an important attribute of our historical perspective and our historical practice. That being said, not to be lost on anybody, but when you have a portfolio that’s growing on the consumer real estate side where we’ve had such small levels of historic losses and you're sort of flat on the commercial side, you do get a proportional change relative to the components of necessary reserves. So on a going forward basis, does that create an opportunity for us for lower providing? Probably a modest one, Damon. And as you know, with our numbers being so small, anything moves the needle. So if you go from a $2 million charge-off quarter to a $2.5 million, you move the number by 25%. So I think it’s important for our investors and I think it's important for our stakeholders to understand, we believe it’s appropriate to provide for inherent losses throughout the cycle. So we are certainly not managing our reserves to enhance our operating EPS outcome.

And your charge-offs for the 2012 were around I think 22 basis points for the year. How do you think that shapes up to what you would expect from ’13? Is that a fair -- would expect it to be consistent year-over-year?

I think so, Damon. The numbers have ranged 10 to 12 basis points in the 2005-'06 cycle through to 24 to 27 quote through the distressed part of the cycle. So I just think our portfolios and the nature of the markets that we are in are stable performers. And in comparison, if you said to me, Scott, your charge-off could be 22 basis points for 2013 today, we would book it, no question.

At this time, I have no other questions in queue, sir.

Very good, thank you, Erin. Thank you all for joining our call, and we will chat again next quarter. Thank you.

That concludes today's conference. Thank you for your participation. You may now disconnect.