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Community Bank System (NYSE:CBU)

Q4 2008 Earnings Call

January 23, 2009 11:00 am ET

Executives

Mark Tryniski - President and Chief Executive Officer

Scott Kingsley - Executive Vice President & Chief Financial Officer

Analysts

Whitney Young - Bank of America

Rick Weiss - Janney Montgomery Scott

David Darst - FTN Midwest Securities Corp.

Barbara Giannuzzi - Unidentified Company

Michael Cooke - Unidentified Company

John Stewart - Unidentified Company

Operator

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 on Form 10-K filed with the Securities and Exchange Commission. And now, I would like to introduce today’s call leaders, Mr. Mark Tryniski, President and Chief Executive Officer; and Mr. Scott Kingsley, Executive Vice President and Chief Financial Officer of Community Bank System. Gentlemen, you may begin.

Mark Tryniski

Thank you, Betty. Good morning and happy New Year to all and thank you for joining our conference call. I would like to make a couple of comments on the fourth quarter and then comment on the year as a whole. I will begin by saying we’re pleased with fourth quarter performance and earnings per share, which were up 6% over 2007 excluding the impact of a number of non-operating items Scott will discuss further.

In addition to organic loan and core deposit growth for the quarter, our net interest margin rose for the second straight quarter and non-interest income increased by double digits over 2007. In addition to positive operating results, there were three other significant fourth quarter events worthy of comment.

The first is our successful issuance in October of 2.5 million shares of common stock in an offering that was significantly oversubscribed. The purpose of the offering was to provide capital support for the acquisition of 18 branches in Northern New York from Citizens Financial Group, which was closed and integrated successfully in November.

This transaction brings us an attractive base of core funding relationships and economically strong markets and has already begun to provide substantial lending opportunities as well. The transaction will be accretive in 2009.

Lastly, in November we announced that we would not be applying for capital under the federal government’s Troubled Asset Relief Program. Our earnings prospects, balance sheet and capital levels continue to be strong and we believe we will have sufficient capital availability to respond effectively to the opportunities of our marketplace.

With respect to 2008 as a whole, we’re similarly very satisfied with earnings and operating performance particularly in the face of the challenges and difficulties of the current economic environment. Earnings per share excluding the non-operating items I referred to previously were up 8% over 2007.

Margin continued to improve and non-interest income rose 16%. As I’ve discussed in the past, our most significant banking objective, that of growing core deposits, continued to be productive. In 2008, we grew core deposits organically by 7% representing $120 million in new account balances. At the same time, we reduced time deposits by $160 million or 11%, vastly strengthening our overall funding mix.

Loans also grew organically by 7% in 2008, our best performance in many years, with increases across all of our portfolios and all geographic regions. Asset quality continues to be very strong with metrics well above peers in the industry, but has trended slightly downward from the historically exceptional levels of 2007.

We understand asset quality is a predominant focus across the industry, so Scott will be providing further granularity in his commentary than we usually discuss. Beyond the numbers, we were recognized for the second year in a row by J.D. Power and Associates as one of the top 10 banks in the entire company country for customer satisfaction. Being recognized as such for the second time does not diminish the pride and gratification I share on behalf of our employees for this accomplishment. I also believe it’s a validation of our business model as we continue to expand our banking franchise.

All said, our earnings and operating performance in 2008 is one we’re very satisfied with. Looking forward to 2009, we expect even greater economic and cost structure challenges that on our side have operating momentum across the company, a strong balance sheet, growing market share in core deposits and lending and rising non-interest revenues. Scott?

Scott Kingsley

Thank you Mark and good morning everyone. Our fourth quarter earnings of $12.0 million and $0.37 per share were $122,000 above the $11.8 million reported in the fourth quarter of 2007 or a 1% improvement. As Mark mentioned, solid loan and core deposit growth, continued expansion of non-interest income sources and improved net interest margin and stable asset quality resulted in the favorable quarterly operating results. Also in the fourth quarter, the company incurred $1.4 million of acquisition expenses or $0.03 per share related to the November purchase of 18 branch banking centers from Citizens Financial.

We also recorded a $1.7 million non-cash goodwill impairment charge or $0.04 per share in our wealth management businesses, a direct result of the decline in the equity markets in 2008. Also, we recorded a $0.05 per share benefit related to the settlement of certain previously unrecognized tax positions. Net, these three items negatively impacted fourth quarter results by $0.02 per share.

On a comparative basis, the fourth quarter of 2007 included a $0.03 positive net impact from a debt restructuring charge and certain previously unrecognized tax benefits. Full-year earnings of $45.9 million were 7.1% above 2007. Cash earnings per share which excludes the after-tax effect of the amortization of intangible assets, acquisition related adjustments and goodwill impairment were $1.73 per share for the year, a full $0.24 per share above GAAP reported earnings.

I will first discuss the balance sheet. Fourth quarter average earning assets of $4.55 billion were up $304 million from the third quarter of 2008. The continuation of solid organic loan growth and the impact of the Citizens branch acquisition in November generated the increases. In total, we grew loans by $315 million from the end of 2007 including $74 million in business lending, $85 million in consumer mortgages and $156 million in consumer installment products including home equity loans.

Average investment securities including cash equivalents were up $185 million from the third quarter of this year and reflected mid-quarter net liquidity created from the Citizens branch acquisition. Average deposits were $3.53 billion for the fourth quarter of 2008, up 9% from the third quarter and again reflective of the branch acquisition.

As Mark previously mentioned, consistent with our focus on expanding core account relationships and reducing higher cost time deposit levels, core product relationships continued to grow in the fourth quarter while time deposits were allowed to decline. Year-end borrowings of $863 million declined $141 million from the end of the third quarter as a portion of the net liquidity from the branch acquisition was used to eliminate short-term obligations.

Our capital levels in the fourth quarter remained strong. The Tier-1 leverage ratio stood at 7.22% at quarter-end, reflective of the October common stock offerings as well as the November branch acquisition. Our fourth quarter dividend payout ratio was 59% of GAAP earnings and just 48% of cash earnings, allowing for continued meaningful capital growth. Net unrealized gains in our investment portfolio at year-end were $20 million despite the carrying value of our level three investment assets, which is almost entirely comprised of pooled trust preferred securities being $23 million below book value.

The valuation of these assets continued to reflect market and interest rate volatility as well as the absence of an active market for these types of securities. Our holdings, which are super senior and AAA rated, continue to fully perform.

Shifting out of the income statement, our reported net interest margin for the fourth quarter was 3.86%, up four basis points from the third quarter and 23 basis points from the fourth quarter of ‘07. Proactive management of funding costs resulted in the year-over-year improvement as total funding cost declined 76 basis points from last year’s fourth quarter and were partially offset by a 52 basis point decline in earning asset builds.

Fourth quarter non-interest income excluding securities, gains and losses and debt refunding charges was up 10% over the prior year. Our employee benefits administration and consulting business increased revenues by 21% over last year’s fourth quarter, principally on the strength of acquired growth from the Alliance Benefit Group MidAtlantic transaction completed in July.

Deposit service fees increased 7% over last year driven by additional account relationships and growing card-related revenues. Our wealth management businesses experienced a 13% year-over-year decline in revenues, the result of continued erosion in equity market conditions.

Operating expenses excluding acquisition expenses and goodwill impairment of $40.9 million increased $3.6 million or 10% over the fourth quarter of 2007 and reflected the ABG acquisition completed in July and the branch transaction in November. In addition, the company recorded higher FDIC insurance premiums, incurred higher volume-based processing costs and increased facility-based utilities and maintenance cost over last year.

Year-to-date, operating expenses again excluding acquisition expenses and goodwill impairment, were up 10% over 2007 and include four acquisitions completed since May of last year. Our effective tax rate in the fourth quarter was 6.8% reflective of the three non-recurring items I previously discussed, which served to lower full-year effective rate to 19%.

The loan loss provision for the quarter was $2.4 million compared to $2.0 million in the third quarter of 2008 and $0.9 million in last year’s fourth quarter. Net charge-offs for the fourth quarter were $2.4 million, up from $1.7 million reported in the third quarter and up $1.6 million from a very favorable fourth quarter of last year. Our loan loss allowance to total loans outstanding stood at 1.26% at quarter-end versus 1.25% at September 30 and 1.29% a year ago.

These small changes in coverage ratio are due to the solid organic loan growth experienced during the year combined with the stable underlying credit profile of our balanced portfolios. In addition, our coverage ratio of non-performing loans stood at 312% at quarter-end compared to 325% at the end of the third quarter and 410% at the end of a very favorable 2007.

Quarter-end non-performing assets to total assets outstanding were 0.27%, just slightly above the level reported at the end of the third quarter. This favorable and stable asset quality profile is primarily the result of our credit risk management program and continued emphasis on an adherence to disciplined underwriting standards.

As Mark mentioned, since asset quality and credit trend concerns are clearly on the top of most people’s list today, I thought it would be productive to review some of the metrics of our loan portfolios at a bit more granular level. Of the total $3.14 billion of outstandings as of December 31, $1.4 billion or 45% of the portfolio is in consumer mortgage and home equity instruments.

In 2008, we incurred $73,000 of net charge-offs. Let me say that again, $73,000 of net charge-offs or less than one basis point of loss on these products. Business lending relationships constitutes 34% of total loans and include no construction or development related credits. Charge-offs in this portfolio were 20 basis points in 2008 compared to three in 2007.

We incurred 35 basis points of loss in this portfolio in 2006 and 23 basis points in 2005. There is also meaningful geographic dispersion in this portfolio across our three regions. Our indirect auto portfolio of $530 million constitutes 17% of total loans. Our underwriting is accomplished from a centralized function in Olean, New York and our customers are in or within very close proximity to our branch footprint.

The portfolio has very desirable cash flow attributes because of its relatively short duration nature. 85% of the outstandings were originated in the last three years and 91% of the borrowers have an A or B FICO score. The average FICO score in the portfolio is 741 and the portfolio is comprised of two-thirds used car financing and approximately one-third new car, 2008 net charge-offs in this portfolio were 52 basis points compared to 32 in 2007 and 47 basis points of loss in 2006.

The remaining 4% of our loans are in principally small branch originated installment products. And with that I will turn it over to Betty to open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Whitney Young - Bank of America.

Whitney Young - Bank of America

Can you give me any more detail on where FDIC insurance premiums are going next year please?

Scott Kingsley

Sure, Whitney, I will give that a try. In the press release that we issued, you can see we actually broke out the FDIC insurance coverage from 2008 on a quarterly basis and what you can see from that is we had a big tick-up in the third quarter, which really reflected where our ‘credits’ in the FDIC system ran out during 2008. If you look at the fourth quarter ‘08 numbers of a little over $600,000 of FDIC insurance costs, that’s based on an assessment level of about five basis points. The new rules published by the FDIC would suggest we should be using 12 to 13 basis points as our assessment rate in 2009, which on a rough basis would mean that that $600,000 per quarter would move up about $800,000 to $900,000 per quarter in 2009.

Mark Tryniski

I think there is a follow-up as well, in my comments I have made reference to a challenging year from a cost structure point of view that FDIC insurance increase is certainly one of the points that I would reference. The other would be pension costs which I think anybody, any company that sponsors defined benefit plan because of what the market did in 2008 is going to see a fairly significant increase in their pension costs. I don’t know, Scott, you want to comment further on that or not.

Scott Kingsley

I would be happy to, Mark. I think that you hit it right on the head that with the expectation of anybody that was running a 60-40 or a two-thirds/one-third equity two fixed income portfolio that was the underlying asset base in their defined benefit plan probably experienced somewhere between a 20 and a 40% decline in asset valuations.

Our plan definitely experienced a reduction in asset values and we are projecting higher costs for 2009.

Operator

(Operator Instructions) Your next question comes from Rick Weiss - Janney Montgomery Scott.

Rick Weiss - Janney Montgomery Scott

I was wondering if you could just talk a little bit about the economy and what prospects you see for more M&A activity.

Mark Tryniski

Sure, I think in terms of the economy, I will speak to our markets because that is where we operate. I think over the course of 2008, they were stable, which I think is historically what our markets are. They’re relatively stable; they have less beta than other markets typically do. They did not appreciate or see the real estate appreciation in prior years. So there hasn’t been any significant depreciation really to speak of. In fact, Forbes just reported that Syracuse was going to be in the tie, I think second in the country in real estate performance in 2009, which is not a place we are used to being.

I think the economy continues to be relatively stable. Rick, we saw a lot of opportunity in our markets on the business side. In terms of business lending, we had a very good year of business lending. We are continuing to see a lot of demand; our pipeline at the end of 2008 or commercial is higher than it was in 2007. And we continue to see a fair bit of demand. Admittedly, some of that is a flight from the larger banks. So we are seeing some advantage from that.

Unemployment has ticked up a little bit in our widespread markets like it has elsewhere and I suspect that 2009 is going to get more challenging. I think our markets aren’t immune to the things that happen and in fact the rest of the country is just to a much slighter degree. I would expect asset quality particularly as it relates to mortgages, residential real estate to continue to be very strong and stable. I think on the consumer installment side, it is likely we will see a continued uptrend in some of the charge-off statistics and we will provide more provision for that as well and possibly the same on the commercial business side.

So I would say our markets have been stable, continue to provide us with ample opportunity, 7% organic loan growth is a pretty good outcome for us. I think even better, 7% core deposit growth is a very good outcome because our markets are not growing by 7%. So, I suspect we’re getting some share growth there on the core side, not on the time deposit side as I referred to. So, I think our markets continue to offer some good opportunities for us with probably a bit less risk than the average across the country.

In terms of M&A, I think we will continue to see and have opportunities. Obviously, this is a time of great stress and concern and volatility and uncertainty across the industry. So we think that could provide the catalyst for opportunities. With that said though, it strikes me that institutions who have been beaten down and are now selling at 50% of book value and at a PE to match may be disinclined to pursue a sale as a strategy and try to wait out the storm. So, I think there’s obviously a lot of dislocation in the industry, which I think will create opportunities, but I think it could be muted by the notion that we will wait for sunnier days and a stronger PE and multiple before we seek a partner.

Rick Weiss - Janney Montgomery Scott

Mark, do you think that the regulators may force institutions into deals even if they’re not quite ready to do one?

Mark Tryniski

Well, I think we have seen they’ve done that already Rick right at the big bank level.

Rick Weiss - Janney Montgomery Scott

Right, I mean though on the smaller bank level.

Mark Tryniski

Well, I think they might. I think there was, where did I just see that article, it was in the Wall Street yesterday or today about the FDIC being overwhelmed by the failure of some of these small banks and in terms of not having the infrastructure and the like. So, it wouldn’t surprise me as a shortcut to managing the flow of failed institutions particularly the smaller ones, which have not gotten the attention because the regulators are focusing on the larger institutions.

I think they may take a similar approach Rick and I think have in some cases are all ready, they set up some technology where you sign into an FDIC sponsored website and there are banks for sale in a sense on this website that you can go in and you can bid on through the FDIC dissolution process. So, I wouldn’t be surprised to see a lot more of that particularly if they start to become more overwhelmed with the number of smaller bank failures.

Rick Weiss - Janney Montgomery Scott

If I could, just a couple of cleanup things for the model purposes. The tax benefit that was recognized this quarter, are there any other benefits likely to come through in ‘09 or is that it?

Mark Tryniski

No, that’s it, Rick. I mean really it’s a function of, we had the relatively significant one in ‘07 and then sort of a follow-on to that. But it really centers around the closing of open tax years with certain of our taxing authorities, but there really is ‘nothing left’ that would be material. Everything else would come through the rate and you probably wouldn’t notice it.

Rick Weiss - Janney Montgomery Scott

So for modeling purposes it is back to your normalized rate?

Mark Tryniski

Yes, I would say so. I think as the year progresses, Rick, relative to our full redeployment of the liquidity from Citizens and the redeployment of natural cash flows off the portfolio, we will be stepping through how much of that can go to a tax exempt base status and how much of that base will be taxable.

Rick Weiss - Janney Montgomery Scott

And then on the reserves, it looks like there’s an adjustment made. Was that from, I guess about $2.1 million to $2.2 million, was that coming in from the Citizens acquisition?

Mark Tryniski

You are right Rick; you hit it right on the head. That’s exactly it.

Operator

(Operator Instructions) Your next question comes from David Darst - FTN Midwest Securities Corp.

David Darst - FTN Midwest Securities Corp.

Could you give us the incremental of fee income and expense from the acquisition?

Mark Tryniski

David, I actually do not have that sitting in front of me right now, but what I can tell you on the expense side, David, is that from the acquisition which was a mid-November timeframe, the direct operating expense occurrence was a little over $1 million, so about $1.05 million is what I have got and that was roughly 57% or 58% of the quarter. So, I think from a trending standpoint, you can probably build something that suggests that the number won’t exactly double, but it is certainly going up.

David Darst - FTN Midwest Securities Corp.

And then about the margin benefit, I guess I expected a little compression given that you were getting so much liquidity?

Scott Kingsley

Actually, that’s a very good question, because I think we were probably projecting the same outcome, which is that taking on that net liquidity with not a lot of real robust reinvestment opportunities was actually going to result in a small decline. I think what you saw is that we more than productively managed our own core deposit cost and we probably actually inherited core deposit cost from Citizens that were a little bit lower than we had been projected in total.

So, we did that and remember this too, Dave. We also did quote ‘shrink’ the balance sheet a little bit by paying off $140 million or $150 million of obligations, so that if you looked at that in terms of a net and earning asset side that serves to sort of mitigate what probably would have been otherwise a decline from a margin standpoint.

David Darst - FTN Midwest Securities Corp.

Okay and I guess with the balance sheet going forward, do you expect to transition some of this liquidity into your loan portfolio. So we don’t see as much growth?

Scott Kingsley

Absolutely, David. I think we ended the year with about $140 million or $150 million of net liquidity that needless to say is not the most productive overnight asset we have. So we would expect as Mark mentioned to generate against a pretty reasonable loan growth to be able to use some of that and hopefully redeploy it in a higher yielding instrument.

David Darst - FTN Midwest Securities Corp.

Okay and then how is the pipeline? Are you still seeing opportunities?

Mark Tryniski

We are. As I said, David, right now the commercial pipeline is actually a little bit higher than it was last year at this time. So, we are still seeing some pretty strong opportunities.

David Darst - FTN Midwest Securities Corp.

Okay and are any of your markets more susceptible to the downturn, specifically like Plattsburgh given that it’s a border town, the transportation hub?

Mark Tryniski

No, actually Plattsburgh, Clinton County is doing very well economically. They had a slight dip from a real estate perspective, very slight, but that has actually even come back and it has stabilized a bit. So, they’re doing very well in terms of employment and even businesses, new business relocation into Clinton County in the greater Plattsburgh area, which is one of the reasons we were anxious to get into Plattsburgh in Clinton County to begin with, because it did represent a better than our average market opportunity for us economically. But, I don’t really see any of our markets that are more susceptible than others Dave.

We are relatively diversified within our markets and I know that if you look at the math, it’s hard to sense that. But the economy in Northern New York is very different than the economy in Western New York, which is very different than the economy in Northeast Pennsylvania in terms of the kinds of businesses, consumer profile, all of those kinds of things. So, the demographics are different. Even our lending concentrations tend to be a bit different in terms of industry concentration.

So, I think we’re reasonably well diversified. I mean we don’t have a market that I am concerned about. My greatest concern frankly is just the impact on our markets of the continued deterioration in the economic environment outside our markets and to the extent that has an impact on our customers who are importers or manufacturers or any number of other businesses really whose revenue stream is derived principally outside our markets, that is really what concerns me more than the performance of our markets specifically.

David Darst - FTN Midwest Securities Corp.

Okay. So based on your charge-offs and provisioning this quarter, not building the reserve, your outlook seems to be relatively stable from maybe fourth quarter and the second half of ‘08 credit cost and levels going forward? Or do you think you will see some deterioration?

Mark Tryniski

I think if you look at the last couple of quarters, you can see that there’s a deterioration trend for a couple of quarters that has become evident. With that said, I think the full year 20 basis points of charge-offs and delinquencies of 140 at the end of the year is quite good and we will take that any day. Do I think that we will deliver those same results in 2009? Probably not, but they’re going to be materially worse than they were in 2008 which was very good? No.

Scott Kingsley

I agree with you right there. I think the data point is that the six quarters ended June 30, 2008 were clearly credit quality utopia for us. 2007 has been and because if you actually look at some of the data points in the statistics, 2005 and 2006 and the last quarters of 2008 actually look fairly close together. So, David, as we start to establish reserves and start to get to that, what would the trended outcome be? The fourth quarter of 2008 still outperforms the fourth quarter of 2005. So if you start to look at 36-month rolling statistical stuff, we truly have not seen that point where our projected results suggest that we could substantiate reserves any higher than we have.

David Darst - FTN Midwest Securities Corp.

Okay, and do have a pro forma of what you think your regulatory capital levels might be?

Mark Tryniski

I do not have that David, but I would be happy to catch up with you on that when we are done.

Operator

Your next question comes from [Inaudible]

Unidentified Participant

First question is just a clarification. If I heard correctly, you said that the troughs on your books are now held at $23 million below par value or below amortized costs?

Mark Tryniski

That is correct [Timor]. You hit it on the head. I think if the book value is in around 72 or $73 million, we’re carrying it in around 50.

Unidentified Participant

So that’s the same level as they were held on last quarter?

Mark Tryniski

I think a little bit lower but nothing materially lower.

Unidentified Participant

I was wondering if you guys can give us a little bit more color on early stage delinquencies, in particular within maybe the home equity bucket and the indirect auto bucket?

Scott Kingsley

Maybe, I will have you help me to find sort of early stage. If you think about those instruments Timor especially the indirect, there’s a late stage delinquency. Charge-offs happened so fast, in other words, that is a bucket where it’s not like we are looking, we don’t have hardly anything in ‘ninety days past due’ in indirect because we have taken the charge-offs.

So early stage delinquency in and of itself is probably the same outcome as total delinquency in that portfolio. I think what we have been seeing in that portfolio is the delinquency rate in the 1.20% ranges and it’s tended up a little bit in the second half of the year, but not noticeably and it is certainly in line with sort of historical trends that we experienced in that portfolio.

On the home equity side, we actually are not seeing anything that looks at all disturbing. I think in general, we’re seeing a little bit of a tick-up from the low 1% levels to the 1.25, 1.30 levels on all of our real estate products in general. But again, I don’t think, it is not something that ‘just started’ in the fourth quarter. I think actually you have seen a natural trend up in that sort of building in 2008, but again coming up exaggeratedly low levels in 2007.

Operator

Your next question comes from [Barbara Giannuzzi] - Unidentified Company.

Barbara Giannuzzi - Unidentified Company

I used to be a portfolio manager at Bank of America and Wachovia and never thought I’d live to see this mess. And I think my question was answered about, I had a question on the sub-prime mortgages, but I was very impressed with the number of 73,000 I think you said with the charge-offs.

Mark Tryniski

Correct, for the real estate portfolio, Barbara.

Barbara Giannuzzi - Unidentified Company

So, obviously you had stricter standards than most banks when you were doing the home equity loans?

Mark Tryniski

Well, not just on the home equity, on the mortgages as well. I guess I would say that we lend the old-fashioned way, which is you need to have a down payment of 20% or PMI. You need to have enough free income and stable income in order to justify your ability to repay and all those kinds of things that are kind of the old-fashioned way to mortgage lend and we haven’t pursued anything other than that. We didn’t chase anything in the sub-prime area at all.

Now with that said, we do lend to borrowers who would have a technically sub-prime FICO score, but if they put 20% down and have income that can justify successful amortization according to the terms of the credit, we will make that loan. So we do have some that by FICO score would be considered sub-prime. But by and large, we did not enter that wholesale sub-prime business. That’s right.

Barbara Giannuzzi - Unidentified Company

That’s right, exactly. I figured that. And just generally if you wanted to comment, I have noticed of course the decline of the stock price, but I believe my opinions is it’s just due to the general deterioration of the financial market. Did you want to make a comment on that? I mean, when the big banks go, it seems all the financials trend downward?

Mark Tryniski

I think sometimes we have been able to avoid some of that because at some point at the end of last year, the market did make a distinction between the banks that had asset quality and potential capital issues and those that didn’t. But of this latest fear that seems to be sweeping the market over the TARP round two and the nationalization of banks and I think some significant fear over the fourth quarter earnings and charge-offs and what’s ahead for 2009, I think we’ve got another round of it. It is a hurricane and it’s long passed our house as well.

Barbara Giannuzzi - Unidentified Company

Did I hear correctly, you did not take any of the TARP money?

Mark Tryniski

We did not.

Operator

(Operator Instructions) Your next question comes from Michael Cooke - [Unidentified Company]

Michael Cooke - Unidentified Company

A question on the trust preferred pool. Can you tell me what your yield to maturity is based on where you have it marked versus yield to maturity at original cost? Do you roughly know that? And I guess you have got it marked at about 68% of par value. Is that about right?

Mark Tryniski

That’s right on the carrying value. I don’t think we have documents in front of us that would show what that did to the effective yield based on the different carrying value.

Michael Cooke - Unidentified Company

Do you have a guess?

Mark Tryniski

I do have some information in front of me on those Michael, the yield; it’s mainly book value kind of information and market price information. I don’t have the yields. I think we can get back to you on that one.

Michael Cooke - Unidentified Company

What is the size of this pool, the number of issuers in it? And the other question is how did you ascertain the market value?

Scott Kingsley

I think the market value determination was consistent with where we were over the last couple of quarters Michael. In terms of the determination and there is a number of different models that we run and that people have run on the outside relative to expectation of cash flows to duration using discount factors based on risk-free discount rates in the market as well as a premium for illiquidity and/or credit related concerns. We are in three different trust preferred trenches.

The issuers are basically 70% to 75% banking entities and 25% to 30% consumer finance and/or insurance entities. We are in the AAA super senior trenches only in each of those. The default rate in the three, saying that too far. The deferral rates, not the default rates, in the three that we are in range from 2% to 8% and we know that the mechanical feature of deferral is working because to the extent that there has been a couple of deferrals since we are in that super senior class, we’ve been getting principal reduction.

Operator

Your next question comes from John Stewart – [Unidentified Company].

John Stewart - Unidentified Company

Most of all of my questions have been asked, but I just had a couple of number specific questions for you. First, was there anything kind of one-time in nature in that other banking fee line? I think the number that you reported was 876?

Scott Kingsley

John, that is probably, you’re down to the detail on us here. That’s probably 150 to 200 higher than quote ‘run rate’ had been. We did get a distribution of some insurance proceeds in the fourth quarter, something attached to cash render value of a life policy or something.

John Stewart - Unidentified Company

And then just on the non-performers, what was the dollar amount of the non-performers that you inherited from Citizens?

Scott Kingsley

Zero.

John Stewart - Unidentified Company

Were there any losses from that portfolio?

Scott Kingsley

If there was any, John they were very, very small and they would have been only on the small retail side. I know there was nothing in the mortgage in the home equity portfolio for the first 50 days or whatever it was.

Mark Tryniski

John, as part of the negotiated agreement with Citizens, we got to have full discretion in what we took and we didn’t take. So we did some screens around FICO score and LTV on those portfolios and drew a line. So as Scott said, what we brought over was all not sub-prime.

Scott Kingsley

Same thing on the commercial side, John. I think we picked up $27 million or $28 million of loans. What was offered was a significantly larger number than that.

John Stewart - Unidentified Company

Operator

(Operator Instructions) It appears we have no other questions.

Mark Tryniski

Great, thank you all for participating. Thank you Betty.

Operator

You’re welcome. That concludes today’s conference. Thank you for participating and you may now disconnect.

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Source: Community Bank System Q4 2008 Earnings Call Transcript
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