Welcome to the Community Bank System First Quarter 2018 Earnings Conference Call. Please note that this presentation contains forward-looking statements within the provision 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 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 Joe Sutaris, Senior Vice President of Finance. Gentlemen, you may begin.

Thank you, Laura. Good morning, everyone, and thank you all for joining our Q1 conference call. As you heard in Laura’s introduction being joined today by Joe Sutaris, our Senior Vice President of Finance, and not Scott Kingsley, our CFO. Scott is having knee surgery today so Joe will be pensioning for him and providing the financial commentary. We really couldn’t be more pleased with first quarter results. EPS excluding acquisition expenses was up 30% over 2017 or $0.18 per share due primarily to the strategic deployment of capital last year with the NRS and Merchants Bancshares transaction. We also benefited from a slightly lower effective tax rate that contributed $0.03 of the $0.18 improvement. Our fee-based businesses also had a tremendous quarter with revenues up 30% our organic and reported growth and improved margin as well. Operating expenses were in line with our expectations as was the assets quality with the exception of additional $1 million charge-off related to the single credit we discussed last quarter. Our loan book was down for the quarter as seasonally expected but slightly positive commercial despite $38 million unscheduled paydowns, nearly half of which relates to a single relationship where the underlying businesses sold. At quarter end, both our mortgage commercial pipeline was up 19% to 27% respectively over year-end and loan growth was positive for the month in yesterday. Deposit inflows were robust at the end of the quarter. The total deposit funding costs remained at exactly 10 basis points began for the second quarter. We have significant earnings momentum, we need to support with balance sheet growth, but focus for us for the remainder of the year. We expect our operating and credit costs to be stable. Our fee-based business to grow and our funding costs increased only modestly. In summary, we’re off to an exceptionally start to 2018. Joe?

Thank you, Mark and good morning everyone. As Mark noted the first quarter 2017 was another very solid operating quarter for us. We set a new record for quarterly operating earnings maintain or the processes at zero and report the solid increased to non-interest income. I’ll start off with a few comments about our balance sheet. We close the first quarter of 2018 with just slightly less than $11 billion in total assets. This is up slightly from $10.75 billion in total assets at the end of the fourth quarter of 2017. Other than a small insurance agency tuck-in transaction, we do not have to maintain significant acquisitions during the first quarter of 2018. Average earning assets for the first quarter of 2018 were $90.4 million, which was flat to the linked quarter of 2017, fourth quarter of 2017. While the total earning assets did not change significantly disclaim in linked quarters we experienced a slight change in the composition of earnings assets during the quarter including a $56 million increase in average cash and cash equivalents, a $12 million decrease in average investment security outstanding the $37 million decrease in average loans outstanding. Ending loans at March 31, 2018, were down 29.7 million from year-end 2017. Business loans were up slightly for the quarter despite of $33 of unscheduled pay-offs during the quarter, while in consumer portfolios were down seasonally anticipated. Switching to the annual quarter comparison. Total assets, average earning assets, average loans outstanding were all up by 20% or more between the first quarter of 2017 and the first quarter of 2018 due primarily to our acquisition of Merchants Bancshares in the second quarter of 2017. The transaction resulted in the acquisition of $2 billion of assets, $1.49 billion loans, $370 million of investment securities as well…

Thank you. [Operator Instructions] We’ll take our first question from Alex Twerdahl with Sandler O’Neill.

Just wanted to drill on something you said at the beginning of the call, Mark you said that balance sheet growth will be a priority for 2018, can you just elaborate on that a little bit, is that primarily loan growth that you are referring to or are there some other strategies you guys have in mind to try to put a little bit more cash flow to work on gross margin.

Good question. Loan growth Alex, we’ve -- the last trailing whatever three quarters or something we haven’t had growth I think we had net outflows as they come in last quarter we’ve seen in the last several quarters an unusual level of paid on activity, and do not have to get into the first quarter, $38 million including one credit that was 18 million where the business was sold. So, the pipeline was strong, the underlying market opportunities are not there, so we’ll continue to execute on that, I am not worried about where the remainder of the year is going to be at all, I think as I said our -- at the end of the year our commercial pipeline is 240 million, right now it sits at 305 million at the end of the first quarter, so it’s really not for a lack of effort engagement in the markets, nor a shortage of market opportunities, it’s really the impact of these significant unscheduled pay downs, the mortgage pipeline is picking up, it was 80 million at the end of the year, it’s now 100 million, our market is usually pretty stable, it’s relatively easy to predict where the kind of mortgage production is going to be. The increase in rates in the mortgage market hasn't seemed to have really tapped demand in any real degree that we've been able to like will be filed on the mortgage side and it’s always at the top first quarter on the mortgage side for obvious reasons for us, so I think we’ll have a pretty good year in mortgage. Indirect we’re already up in indirect and kind of the car selling season has started, as we talked about previously we have some level traded off volumes for rates because the spreads,…

Okay, that sounds very good. Additional information there. And then I just wanted to make sure that there’s nothing that I am thinking to get my model, you gave some great color on what’s going on with the fee revenue, the non-interest income stuff. Other than Durbin which we know kicked in starting in the third quarter, did the first quarter, it was -- is this kind of the new base that we should be thinking of in terms of some of these line items or was there some more seasonality that we should be really aware of as we go into the second quarter for things like deposit service fees and wealth management and employee benefit services?

I’d say the non-banking business revenues are generally less seasonal than banking activities. The deposit fees revenues can be somewhat seasonal which is lower in the first quarter and summer time they are better than in the end of year Christmas season, a little better again. So, there’s some seasonality in that the non-banking businesses, particularly the benefits businesses and the wealth management businesses, really a lot seasonable at all, the insurance businesses but that’s the smaller component of our mandating businesses. So, it doesn’t move the needle as much but that sets to be more volatile not really seasonal, it’s just function of when premiums are written and you got the contingency commission from the carriers then in the second quarter. So that has been a little bit more varied throughout the year, it is seasonal as much as the variability in the timing of revenues there. But again, that’s a smaller component really wouldn’t move the needle at all. So, I would expect that by the end of the year the rental rate on our other non-banking businesses will be greater than they are right now.

We will take our next question from Brody Preston with Piper Jaffray.

Yes, so I guess just going back to the margin real quick. Did I hear you say that the margin will be similar to the first quarter moving forward?

Yes, this is Joe. I will take that question. Our basic core market when we sort of takeaway the impacts of the purchase loan accretion and the [FRB] dividend that mid-360s range, 365, 366. When you factor in, this is the purchase loan accretion, we tend to get up a little bit over the 370 level. And I think that’s indicative of at least the future course. With that said, there is some color maybe I could offer relative to some of the asset portfolio, which as Mark mentioned, the investment securities opportunities are a little bit better today than they were in the last few quarters with the 10-year hitting 3% and the 5-year just slightly less than that and some mortgage backed security opportunities. So even though, it’s a relatively big shift so to speak to move at least the new rates are better than the existing book yields. Relative to the loan portfolios, we have begun to sort of witness increases in the new rates, new loans going on relative to what has been running off. Although marginally and we’ll continue to have some competitive challenges with the fully pass along some of the increase in the market rates to our borrowers. But we have seen slight uptake in the consumer and the mortgage portfolios. But again, that’s a big shift to turnaround relative to the existing portfolios and the marginal business. And we’re also an overnight, say our funds position have been where most of the first quarter and actually with an uptick in the fed funds rate, that gives us some marginal opportunity just from a cash and overnight position. So, we think, the 370-range all-in is fair, but there are some of the opportunities we have conversely, our deposit beta has remained at zero. We expect continued challenges over the next few quarters, it’s going to be difficult to maintain that at zero. So, they potentially could offset some of the uptick that we’re going to potentially stand on the asset portfolios.

And with regard to the FRB dividend, you said it will be significantly lower. Is that like half, how should we be thinking about that?

Yes. I think that’s a reasonable expectation for that dividend. That was sort of a situation where we contribute to our second and fourth quarter margin run rate. The effect of that dividend is going to be much reduced going forward, because it now becomes a more nominal part of the total margin equation. So all-in, that’s expected to contribute about effectively on an annualized basis point in the total margin.

And then I guess, maybe if you guys could speak to sort of the capital dynamic. I know, you said you expect growth to pick back up throughout the rest of the year and you’re focusing on balance sheet growth through launch primarily, but also maybe through some securities. But just given the slower growth nature of your markets, I’m assuming the capital is going to continue building. And I wanted to get a sense of where you thought the best incremental dollar of excess capital was to put to work like, where do you think you should best deploy capital moving forward, be that increased dividend or M&A?

Fair question. My ideal preference would to be use this for growth of our business, loan growth by nearly organic growth opportunities, whatever they like be, we are still using capital, so that means principally lending and potentially investment securities, but clearly an incremental dollar of excess capital, rather put to work in credit, we -- because of our low growth markets we accumulate even after a dividend which is about half of our earnings, we still accumulate capital at a fairly rapid pace, certainly in excess of what we need to capitalize organic growth, so historically and I think necessarily for us strategically we have always looked at high value M&A opportunities in the banking space as well as the non-banking space to grow those non-banking fee based businesses through M&A and I think that that will be a strategy that we’ll continue. So, I think certainly if you look at the run rate of our business in terms of GAAP earnings and the adjusted earnings that we include in the back of the press release which we look at as proxy for cash based earnings, to get up over 30% in terms of the run rate over last year, so we’re accumulating capital right now, at a pace that we haven’t hereto foreseen. So it will be incumbent upon us to continue to assess most effective and beneficial ways to deploy that capital for the benefit of shareholders, clearly the most profitable thing you can do is reinvest it in your own business, I would say secondarily investing in other peoples’ businesses and then lastly I would say buying back shares I don’t think our shareholders expect us to deploy capital in a way that creates greater earnings, greater dividend capacity, so buying back shares although I understand why some companies do that helping our shareholders expect us to do that the way to optimize returns over time either, so I think this trend will continue as it has for the recent past.

And just one more I guess with regard to M&A are you seeing more opportunities come to the table on the banking front or are you continuing to see more fee income opportunities in the near future?

I would say on the banking side it’s pretty similar to how it's been post credit prices in the last 8 years, 9 years, spent off the same in terms of the pace for us, we’re also reasonably constrained in terms of our geography, we are not -- it’s not our strategy to go substantially out of market, so that in some respect constrains our focus on New England, Upstate New York, Pennsylvania, New Jersey, Ohio, so I would say the opportunities are similar, we continue to have dialogue with other institutions that we think would be high value partners to us, we continue to get inbound opportunities for consideration as well and so the pace really is similar I would say to where has been on banking side. On the non-banking side, that’s the area where the private equities become much more engaged and where the trillion dollars of liquidity on investment by private equity -- participation by strategic buyers in the invest banking space is getting us more difficult and more aggressive. I think our strategy there has been to seek out opportunities where we have our benefits businesses is a national business. We’ve got great leadership. I think we’ve got some visibility in the -- in that market nationally. And so, there are opportunities, we usually get a look at those, results of those, similar to the banking where we engage someone else because of a what we perceive is a high value partner. So, we will continue to be active in both of those spaces I think on the banking side the price expectation, sellers, they’ve gotten high in many instances by at least the way we approach M&A it’s obviously the same on the non-banking space because of the active engagement of the private equity, we have different models and different capacity of the strategic buyer. But we will continue to be engaged in both of those spaces.

And we will our next question from Russell Gunther with D.A. Davidson.

Just want to follow up on some of the loan commentary that you’ve made. I appreciate the color there. I’m wondering if you could just hone down a little bit into your Merchants footprint. We talked a little bit last quarter about the dynamics there, the intended run off and rebuilding of that pipeline. Just curious if we could get an update on your outlook going forward?

Sure. We had a tough first quarter in the Merchants markets mainly because of the early paid down of the one single large pay down referred to as the Merchants that again pulled others as well. So, the majority of those unscheduled paydowns were in the Merchants marketplace. There continues to be puts and takes. We are slowly rebuilding the pipeline there. We are getting some really high quality looks and opportunities. But we are still facing the fact that when we got those folks on board there was virtually no pipeline but we are getting back there. It’s building. We are getting opportunities. We have over the course of the last 10 months, nine months a bit more run off than what we hoped but I think its moderated. Other than the non-scheduled payoffs this quarter which came primarily again from the Merchants marketplace I think we are doing a better job there and we are building the pipeline.

And then my last question just a follow up to the M&A discussion. Given the growth dynamics as well as your very clear funding advantage, would you characterize your appetite for deposits or M&A as more biased towards something that would be a bit more of a growth opportunity for you?

I think our focus as it relates to M&A versus the high-quality franchisees that we think have the opportunity to grow earnings and dividend capacity in a sustainable fashion. That’s the first lesson. So, we are principally looking for deposit franchises, credit franchises. Although certainly, Merchants was extremely attractive, because of the high-quality commercial credit franchise that they had and the fact that there are markets particularly in Chittenden County were more economically dynamic than the average of the remainder of our markets. But the challenge has been looking at some institutions is, it relates to the deposit franchise, because we have a very high quality, long duration, low costs, stable funding base. And we look at other institutions and they have a different model. We’ve always invested a great deal of management leadership time and effort into our retail banking franchise for this exact reason. And other banks have different models, where the focus on credit side and they just raise rates to the point where they need to fund the loan growth. And so that’s a different model for us. So, it gets to be a challenge when we’re looking at another institution that has 60 basis points of funding costs and the dilution to our deposit base gets to be a challenge. But we typically, because we’re having very high quality, low costs, stable long duration funding base. We typically don’t see that necessarily in a partner. Again, it’s a function of the overall quality and reliability that we would have the confidence that we would have in that franchise to integrate well with us, integrate well with our business model, integrating well with our culture and ultimately have the ability to generate growing earnings and dividend capacity into the future. One of the things we’ve done, as you know, over the years, we require a fair number of branches in branch transitions from mostly larger banks. In the last 10 years, we’ve probably done 6 of them. Frankly, that’s something, we will continue to look at the fact that we don’t need deposit funding. And there would be at this juncture a reasonable challenge about how you invest the whole liquidity, particularly to franchise with lower growth. But those branch transactions, you’re buying customer relationships. So, which are really valuable, kind of the tax structure, those transactions is very favorable. There’s a lot of other banks. So, despite the fact that we don’t need more good core funding, although we can always use as much you get. We would still look at, we would look at retail franchisees in the event that some of the big banks would be interest in disposing. And I know some have over the years, BMA, Key, Citizens. I heard discussions of, I think Wells Fargo has already started some disposition. So, we would look at that as well.

And there’re no further questions at this time. I’d like to turn the conference back to our presenters for any additional or closing remarks.

Thank you, Lauren, that’s it, thank you all for joining the call and we look forward to speaking with you again after the second quarter. Thank you.

And that does conclude today’s conference. We thank you for your participation.