XNAS:ONFC Oneida Financial Corp Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

XNAS:ONFC Fair Value Estimate
Premium
XNAS:ONFC Consider Buying
Premium
XNAS:ONFC Consider Selling
Premium
XNAS:ONFC Fair Value Uncertainty
Premium
XNAS:ONFC Economic Moat
Premium
XNAS:ONFC Stewardship
Premium
 

 

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934
     
  For the quarterly period ended March 31, 2012
     
OR
     
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ___________________ to _______________

 

Securities Exchange Act Number 001-34813

 

ONEIDA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)

 

Maryland   80-0632920
(State or other jurisdiction of   (IRS Employer)
incorporation or organization)   Identification Number)

 

182 Main Street, Oneida, New York 13421


(Address of Principal Executive Offices)

 

(315) 363-2000
Registrant’s telephone number, including area code

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the Registrant is a large accelerated file, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

  £ Large accelerated filer £ Accelerated filer   £ Non-accelerated filer x Smaller reporting company

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).

Yes o No x

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: There were 6,913,049 shares of the Registrant’s common stock outstanding as of May 1, 2012.

     

 

ONEIDA FINANCIAL CORP. 

INDEX

 

      Page
PART I. FINANCIAL INFORMATION      
         
Item 1. Financial Statements   1  
         
  Consolidated Statements of Condition (unaudited) As of March 31, 2012 and December 31, 2011   2  
         
  Consolidated Statements of Operations (unaudited) For the three months ended March 31, 2012 and 2011   3  
         
  Consolidated Statements of Comprehensive Income (Loss) (unaudited) For the three months ended March 31, 2012 and 2011   4  
         
  Consolidated Statements of Changes in Stockholders’ Equity (unaudited) For the three months ended March 31, 2012   5  
         
  Consolidated Statements of Cash Flows (unaudited) For the three months ended March 31, 2012 and 2011   6  
         
  Notes to Consolidated Financial Statements (unaudited)   7  
         
Item 2. Management’s Discussion and Analysis of Financial Condition And Results of Operations   27  
         
Item 3. Quantitative and Qualitative Disclosures about Market Risk   38  
         
Item 4. Controls and Procedures   38  
         
PART II. OTHER INFORMATION   39  
         
Item 1. Legal Proceedings   39  
         
Item 1a. Risk Factors   39  
         
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   39  
         
Item 3. Defaults Upon Senior Securities   40  
         
Item 4. Mine Safety Disclosures   40  
         
Item 5. Other Information   40  
         
Item 6. Exhibits   40  

     

 

PART I. FINANCIAL INFORMATION

 

Item I. Financial Statements

 

Page 1 of 41

 

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CONDITION 

At March 31, 2012 (unaudited) and December 31, 2011 (unaudited)

 

   At March 31,   At December 31, 
   2012   2011 
ASSETS  (In thousands, except share data) 
Cash and due from banks  $21,539   $22,910 
Federal funds sold   29,684    17,662 
TOTAL CASH AND CASH EQUIVALENTS   51,223    40,572 
           
Trading securities   7,446    7,010 
Securities, available for sale   227,482    197,305 
Securities, held to maturity (fair value $45,973 and $49,264 respectively)   44,172    47,199 
           
Mortgage loans held for sale   831    688 
           
Loans receivable   287,298    287,819 
Deferred fees   945    997 
Allowance for loan losses   (3,007)   (2,900)
           
LOANS RECEIVABLE, NET   285,236    285,916 
           
Federal Home Loan Bank stock   2,234    2,102 
Bank premises and equipment, net   21,269    21,380 
Accrued interest receivable   2,513    2,226 
Bank owned life insurance   17,119    16,978 
Other assets   15,379    17,390 
Goodwill   23,982    23,982 
Other intangible assets   874    965 
TOTAL ASSETS  $699,760   $663,713 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Liabilities:          
Interest bearing deposits  $511,982   $481,505 
Non-interest bearing deposits   76,466    69,119 
Borrowings   11,000    11,000 
Other liabilities   11,380    14,128 
TOTAL LIABILITIES   610,828    575,752 
Oneida Financial Corp. Stockholders’ equity:          
Preferred stock, 10,000,000 shares authorized        
Common stock ($.01 par value; 30,000,000 shares authorized 6,915,570 issued)   69    69 
Additional paid-in capital   43,404    43,396 
Retained earnings   48,384    47,211 
Accumulated other comprehensive loss   (2,370)   (2,122)
Treasury stock (at cost, 2,521 and 2,521 shares)   (20)   (20)
Unallocated ESOP (78,956 and 78,956 shares)   (594)   (632)
Total Oneida Financial Corp stockholders’ equity   88,873    87,902 
Noncontrolling interest   59    59 
           
TOTAL STOCKHOLDERS’ EQUITY   88,932    87,961 
           
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY  $699,760   $663,713 

 

The accompanying notes are an integral part of the consolidated financial statements

 

Page 2 of 41

 

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF OPERATIONS 

For the Three Months Ended March 31, 2012 (unaudited) and 2011 (unaudited)

 

   Three Months Ended 
   March 31,   March 31, 
   2012   2011 
   (In thousands, except share and per share data) 
INTEREST INCOME:        
Interest and fees on loans  $3,808   $3,931 
Interest on investment securities   1,807    1,998 
Dividends on equity securities   70    62 
Interest on federal funds sold and interest-earning deposits   6    8 
Total interest and dividend income   5,691    5,999 
INTEREST EXPENSE:          
Core deposits   281    458 
Time deposits   426    570 
Borrowings   118    131 
Note payable   1    1 
Total interest expense   826    1,160 
NET INTEREST INCOME   4,865    4,839 
Less: Provision for loan losses   150    400 
Net interest income after provision for loan losses   4,715    4,439 
INVESTMENT GAINS (LOSSES):          
Total other-than-temporary impairment losses       (204)
Portion of loss recognized in OCI (before taxes)        
Net impairment losses       (204)
Net gains (losses) on sale of securities, net   97    (20)
Changes in fair value of trading securities   436    430 
Total investment gains   533    206 
NON-INTEREST INCOME:          
Commissions and fees on sales of non-banking products   5,503    4,945 
Other operating income   1,324    1,092 
Total non-interest income   6,827    6,037 
NON-INTEREST EXPENSES:          
Compensation and employee benefits   6,034    5,587 
Occupancy expenses, net   1,206    1,214 
Other operating expense   2,138    2,004 
Total non-interest expenses   9,378    8,805 
INCOME BEFORE INCOME TAXES   2,697    1,877 
Provision for income taxes   692    400 
NET INCOME   2,005    1,477 
Less: net income attributable to noncontrolling interest   3    64 
NET INCOME attributable to Oneida Financial Corp.  $2,002   $1,413 
EARNINGS PER SHARE – BASIC  $0.29   $0.20 
EARNINGS PER SHARE – DILUTED  $0.29   $0.20 

 

The accompanying notes are an integral part of the consolidated financial statements.

Page 3 of 41

  

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended March 31, 2012 (unaudited) and 2011 (unaudited)

 

   Three Months Ended 
   March 31,   March 31, 
   2012   2011 
   (In thousands) 
         
Net income  $2,005   $1,477 
           
Other comprehensive income (loss), net of tax:          
           
Net change in unrealized gains (losses):          
Other-than-temporary impaired securities          
Available for sale:          
Unrealized gains on securities arising during period       (71)
Reclassification adjustment for losses included in net income       204 
Net unrealized losses       133 
Income tax effect       (53)
Net change in other-than Temporary securities       80 
           
Securities available for sale:          
Unrealized (losses) gains on securities arising during period   (352)   349 
Reclassification adjustment for (gains) losses included in net income   (97)   20 
Net unrealized (losses) gains   (449)   369 
Income tax effect   180    (147)
Net change in securities available for sale   (269)   222 
           
Unrealized holding (losses) gains on securities, net of tax   (269)   302 
           
Change in unrealized loss on pension benefits   35    31 
Income tax effect   (14)   (13)
Net change in pension benefits   21    18 
           
Other comprehensive (loss) gain, net of tax   (248)   320 
Comprehensive income   1,757    1,797 
Comprehensive income attributable to Noncontrolling interest   (3)   (64)
           
Comprehensive income attributable to Oneida Financial Corp.  $1,754   $1,733 

 

The accompanying notes are an integral part of the consolidated financial statements.

Page 4 of 41

 

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY 

For the Three Months Ended March 31, 2012 (unaudited)

 

   Common Stock   Additional Paid-In   Retained   Accumulated Other Comprehensive   Treasury   Common Stock Issued Under Employee Stock Plans   Total Equity Attributable To Oneida Financial   Non- controlling     
   Shares   Amount   Capital   Earnings   Loss   Stock   Unearned   Corp.   Interest   Total 
   (In thousands, except number of shares) 
                                         
Balance as of January 1, 2012   6,915,570   $69   $43,396   $47,211   $(2,122)  $(20)  $(632)  $87,902   $59   $87,961 
Net income               2,002                2,002    3    2,005 
Distributions to non-controlling interest                                   (3)   (3)
Other comprehensive income, net of tax                   (248)           (248)       (248)
Common stock dividends: $0.12 per share               (829)               (829)       (829)
Shares committed to be released under ESOP plans           8                38    46        46 
                                                   
Balance as of March 31, 2012   6,915,570   $69   $43,404   $48,384   $(2,370)  $(20)  $(594)  $88,873   $59   $88,932 

 

The accompanying notes are an integral part of the consolidated financial statements.

Page 5 of 41

 

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS 

For the three Months Ended March 31, 2012 (unaudited) and 2011 (unaudited)

 

 

   Three Months Ended 
   March 31, 
   2012   2011 
Operating Activities:  (In thousands) 
Net income  $2,005   $1,477 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation and amortization   459    453 
Amortization of premiums/discounts on securities, net   194    198 
Net change in fair value of trading securities   (436)   (430)
Provision for loan losses   150    400 
Loss on impairment of securities       204 
ESOP shares earned   46     
Loss on write down of foreclosed assets   50     
(Gain) loss on sale of securities, net   (97)   20 
Gain on sale of loans, net   (204)   (48)
Income tax payable   539    (42)
Accrued interest receivable   (287)   (262)
Other assets   1,586    1,538 
Other liabilities   (4,713)   (4,379)
Earnings on bank owned life insurance   (141)   (144)
Origination of loans held for sale   (8,323)   (3,693)
Proceeds from sales of loans   8,384    3,750 
Net cash used in operating activities   (788)   (958)
           
Investing Activities:          
Purchase of securities available for sale   (51,773)   (24,031)
Proceeds from sale of securities available for sale   6,853    4,834 
Maturities and calls of securities available for sale   12,404    7,390 
Principal collected on securities available for sale   3,842    3,461 
Purchase of securities held to maturity   (250)    
Maturities and call of securities held to maturity   1,655    1,027 
Principal collected on securities held to maturity   1,575    923 
Proceeds from sale of trading securities       845 
Purchase of FHLB stock   (186)   (62)
Redemption of FHLB stock   54    33 
Net decrease (increase) in loans   530    (432)
Purchase of bank premises and equipment   (257)   (92)
Purchase of employee benefits company       (94)
Purchase of insurance company       (350)
Net cash used in investing activities   (25,553)   (6,548)
Financing Activities:          
Net increase in demand deposit, savings, money market, super now and escrow   39,810    22,850 
Net (decrease) increase in time deposits   (1,986)   1,122 
Dividends on preferred stock of subsidiary held by noncontrolling interest   (3)   (64)
Cash dividends   (829)    
Net cash provided by financing activities   36,992    23,908 
Increase in cash and cash equivalents   10,651    16,402 
Cash and cash equivalents at beginning of period   40,572    33,741 
Cash and cash equivalents at end of period  $51,223   $50,143 
           
Supplemental disclosures of cash flow information:          
Cash paid for interest   826    1,161 
Cash paid for income taxes   150    440 
           
Supplemental noncash disclosures:          
Transfer of loans to other real estate       123 
Dividends declared and unpaid   829    859 
Notes payable issued in connection with acquisition       362 
Purchase of securities not settled   2,000     

 

The accompanying notes are an integral part of the consolidated financial statements.

Page 6 of 41

 

Oneida Financial Corp. 

Notes to Consolidated Financial Statements 

(Unaudited) 

MARCH 31, 2012

 

Note A – Basis of Presentation

 

The accompanying unaudited consolidated financial statements include Oneida Financial Corp. (the “Company”), a Maryland corporation and its wholly owned subsidiary, Oneida Savings Bank (the “Bank”) as of March 31, 2012 and December 31, 2011 and for the three month periods ended March 31, 2012 and 2011. All inter-company accounts and transactions have been eliminated in consolidation. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates, assumptions, and judgments are based on information available through the date of the filing of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, the fair value of trading securities and investment securities and the evaluation of other-than-temporary impairment on securities whose fair value is less than amortized cost to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available. Actual results could differ from those estimates. In the opinion of management, the unaudited consolidated financial statements include all necessary adjustments, consisting of normal recurring accruals, necessary for a fair presentation for the periods presented. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be achieved for the remainder of 2012. On July 7, 2010, Oneida Financial MHC completed its second step conversion to stock form. At that date, Oneida Financial Corp., a Maryland corporation, became the stock holding company of the Bank. Oneida Financial Corp., a Federal corporation, was merged with and into Oneida Financial Corp., a Maryland corporation.

 

The data in the consolidated statements of condition for December 31, 2011 was derived from the audited financial statements included in the Company’s 2011 Annual Report on Form 10-K. That data, along with the interim financial information presented in the consolidated statement of condition, statements of operations, comprehensive income, changes in stockholders’ equity and cash flows should be read in conjunction with the 2011 consolidated financial statements, including the notes thereto included in the Company’s Annual Report on Form 10-K.

 

Amounts in the prior period’s consolidated financial statements are reclassified when necessary to conform with the current period’s presentation. Reclassifications did not impact prior period’s net income or stockholders’ equity.

 

Note B – Earnings per Share

 

Basic earnings per share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. ESOP shares are considered outstanding for the calculation unless unearned. Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable using the treasury stock method.

 

Earnings per common share have been computed based on the following for the three months ended March 31, 2012 and 2011:

 

   Three Months Ended 
   March 31,   March 31, 
   2012   2011 
         
Basic        
Net earnings allocated to common stock  $2,001,628   $1,412,987 
           
Weighted average common shares outstanding   6,913,049    7,162,273 
Less: Average unallocated ESOP shares   78,904    118,228 
Weighted average shares   6,834,145    7,044,045 
           
Basic earnings per share  $0.29   $0.20 
Diluted          
Net earnings allocated to common stock  $2,001,628    $1, 412,987 
           
Weighted average common shares outstanding for basic earnings per common share   6,834,145    7,044,045 
Add: Dilutive effects of assumed exercise of stock options        
Weighted average shares and dilutive potential common shares   6,834,145    7,044,045 
           
Diluted earnings per common share  $0.29   $0.20 

Page 7 of 41

Note B – Earnings per Share (Continued) 

 

There were no potentially dilutive securities outstanding for the three months ended March 31, 2012 and March 31, 2011.

 

Note C – Investment Securities and Mortgage-Backed Securities

 

Investment securities and mortgage-backed securities consist of the following at March 31, 2012 and December 31, 2011:

 

   March 31, 2012 
   Amortized   Gross Unrealized   Fair 
Available-for-sale portfolio:  Cost   Gains   Losses   Value 
Investment Securities  (In thousands) 
Debt securities:                
U. S. Agencies  $44,988   $103   $(159)  $44,932 
Corporate   42,869    607    (2,014)   41,462 
Trust preferred securities   5,916        (2,459)   3,457 
State and municipal   44,393    1,850        46,243 
Small business administration   11,826    139    (1)   11,964 
   $149,992   $2,699   $(4,633)  $148,058 
Mortgage-Backed Securities                    
Fannie Mae  $30,783   $710   $   $31,493 
Freddie Mac   15,374    188        15,562 
Government National Mortgage Assoc.   29,612    799    (38)   30,373 
Collateralized Mortgage Obligations   1,981    43    (28)   1,996 
   $77,750   $1,740   $(66)  $79,424 
Total available-for-sale  $227,742   $4,439   $(4,699)  $227,482 

 

   March 31, 2012 
   Amortized   Gross Unrecognized   Fair 
Held-to-maturity portfolio:  Cost   Gains   Losses   Value 
Investment Securities  (In thousands) 
Debt securities:                
U. S. Agencies  $11,979   $123   $   $12,102 
State and municipal   8,386    928        9,314 
Small business administration   485    5        490 
   $20,850   $1,056   $   $21,906 
                     
Mortgage-Backed Securities                    
Fannie Mae  $13,176   $439   $   $13,615 
Freddie Mac   4,253    125        4,378 
Government National Mortgage Assoc.   5,893    181        6,074 
   $23,322   $745   $   $24,067 
Total held-to-maturity  $44,172   $1,801   $   $45,973 

Page 8 of 41

 

Note C – Investment Securities and Mortgage-Backed Securities (Continued)

 

   December 31, 2011 
   Amortized   Gross Unrealized       Fair 
Available-for-sale portfolio:  Cost   Gains   Losses   Value 
Investment Securities  (In thousands) 
Debt securities:                
U. S. Agencies  $30,422   $173   $(17)  $30,578 
Corporate   38,925    395    (2,240)   37,080 
Trust preferred securities   6,266        (2,651)   3,615 
State and municipal   45,524    2,510        48,034 
Small business administration   9,996    160    (5)   10,151 
   $131,133   $3,238   $(4,913)  $129,458 
Mortgage-Backed Securities                    
Fannie Mae  $34,619   $819   $   $35,438 
Freddie Mac   7,161    222        7,383 
Government National Mortgage Assoc.   22,124    893        23,017 
Collateralized Mortgage Obligations   2,079    19    (89)   2,009 
   $65,983   $1,953   $(89)  $67,847 
Total available-for-sale  $197,116   $5,191   $(5,002)  $197,305 

 

   December 31, 2011 
   Amortized   Gross Unrecognized   Fair 
Held-to-maturity portfolio:  Cost   Gains   Losses   Value 
Investment Securities  (In thousands) 
Debt securities:                
U. S. Agencies  $13,627   $193   $   $13,820 
State and municipal   8,161    1,102        9,263 
Small business administration   503    5        508 
   $22,291   $1,300   $   $23,591 
Mortgage-Backed Securities                    
Fannie Mae  $14,132   $450   $   $14,582 
Freddie Mac   4,631    112        4,743 
Government National Mortgage Assoc   6,145    203        6,348 
   $24,908   $765   $   $25,673 
Total held-to-maturity  $47,199   $2,065   $   $49,264 

 

The amortized cost and fair value of the investment securities portfolio at March 31, 2012 are shown by contractual maturities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

   Available for Sale   Held to Maturity 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
   (In thousands) 
Within one year  $9,437   $9,466   $1,256   $1,264 
After one year through five years   20,770    20,927    3,096    3,238 
After five years through ten years   51,423    52,441    10,564    11,085 
After ten years   68,362    65,224    5,934    6,319 
Total  $149,992   $148,058   $20,850   $21,906 

 

Sales of securities were as follows for the three months ended: 

 

   March 31, 2012   March 31, 2011 
   (In thousands) 
Proceeds  $6,853   $5,679 
Gross Gains  $97   $5 
Gross Losses  $   $(25)

Page 9 of 41

 

 

Note C – Investment Securities and Mortgage-Backed Securities (Continued)

 

Securities with unrealized losses at March 31, 2012 and December 31, 2011, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

 

 

March 31, 2012  Less than 12 Months   More than 12 Months   Total 
   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
Description of Securities  Value   Loss   Value   Loss   Value   Loss 
   (In thousands) 
U.S. Agency  $14,340   $(159)  $   $   $14,340   $(159)
Corporate   12,112    (452)   6,429    (1,562)   18,541    (2,014)
Trust preferred securities           3,457    (2,459)   3,457    (2,459)
State and municipal                        
Small business administration   974    (1)   5        979    (1)
Fannie Mae                        
Freddie Mac                        
Government National Mortgage Assoc   7,147    (38)           7,147    (38)
Collateralized mortgage obligations           765    (28)   765    (28)
Total securities available-for-sale in an unrealized loss position  $34,573   $(650)  $10,656   $(4,049)  $45,229   $(4,699)

 

 

December 31, 2011  Less than 12 Months   More than 12 Months   Total 
   Fair   Unrealized   Fair   Unrealized   Fair    Unrealized 
Description of Securities  Value   Loss   Value   Loss   Value   Loss 
   (In thousands) 
U.S. Agency  $3,981   $(17)  $   $   $3,981   $(17)
Corporate   16,548    (602)   6,352    (1,638)   22,900    (2,240)
Trust preferred securities           3,615    (2,651)   3,615    (2,651)
State and municipals                        
Small business administration   1,047    (5)   5        1,052    (5)
Fannie Mae                        
Freddie Mac                        
Ginnie Mae                        
Collateralized mortgage obligations           724    (89)   724    (89)
Total securities available-for-sale in an unrealized loss position  $21,576   $(624)  $10,696   $(4,378)  $32,272   $(5,002)

 

Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses. The Company evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of the impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows to be collected and the amortized cost basis.

 

In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there is an adverse change in the remaining expected future cash flows.

 

As of March 31, 2012, the Company’s security portfolio consisted of 365 securities, 47 of which were in an unrealized loss position. The majority of the unrealized losses are related to the Company’s agency, mortgage-backed securities, corporate and trust preferred securities as discussed below.

Page 10 of 41

 

Note C – Investment Securities and Mortgage-Backed Securities (Continued)

 

U.S. Agency and Agency Mortgage-Backed Securities

 

Fannie Mae, Freddie Mac, Ginnie Mae and the Small Business Administration guarantee the contractual cash flows of our agency and mortgage-backed securities. Fannie Mae and Freddie Mac are institutions which the government has affirmed its commitment to support. Our Ginnie Mae mortgage-backed securities are backed by the full faith and credit of the U.S. Government. All of the agency mortgage-backed securities are residential mortgage-backed securities. At March 31, 2012, of the twenty U.S. Government sponsored enterprise agency and mortgage-backed securities in an unrealized loss position in our available-for-sale portfolio, only one was in a continuous unrealized loss position for 12 months or more. The unrealized losses at March 31, 2012 were primarily attributable to changes in interest rates and illiquidity and not credit quality. The Company does not have the intent to sell these agency and mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2012.

 

Non-Agency Collateralized Mortgage Obligations.

 

All of our non-agency collateralized mortgage obligations carry various amounts of credit enhancements. These securities were purchased based on the underlying loan characteristics such as loan to value ratio, credit scores, property type, location and the level of credit enhancement. Current characteristics of each security are reviewed regularly by management. If the level of credit loss coverage is sufficient, it indicates that we will receive all of the originally scheduled cash flows.

 

At March 31, 2012, the one non-agency collateralized mortgage obligation in an unrealized loss position was in a continuous unrealized loss position more than 12 months. It was rated Aaa or better at the time of purchase. Including the security just disclosed, the Bank currently has two obligations totaling $1.4 million that based on the expected cash flows, delinquencies and credit support the Company has considered impaired and are currently below investment grade. There was no impairment recorded for the first quarter of 2012. The total impairment recorded during 2011 was $75,334; none of which was recorded in the first quarter of 2011. The securities remain classified as available-for-sale at March 31, 2012.

 

Corporate Debt and Municipal Securities

 

At March 31, 2012, of the seventeen corporate debt securities in an unrealized loss position, five were in a continuous unrealized loss position of 12 months or more. We have assessed these securities and determined that the decline in fair value was temporary. In making this determination, we considered the period of time the securities were in a loss position, the percentage decline in comparison with the securities’ amortized cost, the financial condition of the issuer, and the delinquency or default rates based on the applicable bond ratings. In addition, we do not have the intent to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost basis, which may be at maturity. Included in the five securities whose unrealized loss position exceeds 12 months was a $2.5 million Strats-Goldman Sachs Corporation obligation, maturing February 15, 2034 which is a variable rate note based on the 6 month libor. The current rate on the security is 1.74%. The unrealized loss was $1,190,000 at both March 31, 2012 and December 31, 2011. In addition to the items noted above, we reviewed capital ratios, public filings of the issuer and related trust documents in the review of the unrealized loss. The Strats-Goldman Sachs Corporation obligation is paying as agreed. The other four securities in a continuous unrealized loss position were finance sector corporate debt securities all rated above investment grade with variable interest rates that have maturities ranging from 2015 to 2020. The Company does not consider these securities to be other-than-temporarily impaired at March 31, 2012.

 

Trust Preferred Securities

 

The Company currently has $3.5 million invested in nine trust preferred securities as of March 31, 2012 whose unrealized losses have been in a continuous loss position exceeding 12 months or more. All of the trust preferred securities are pooled issuances. Of the $3.5 million, $865,000 have variable rates of interest. All of the securities are on nonaccrual as of March 31, 2012. The unrealized losses at March 31, 2012 and December 31, 2011 on the nine securities totaled $2.5 million and $2.7 million respectively.

Page 11 of 41

 

Note C – Investment Securities and Mortgage-Backed Securities (Continued)

 

The following table provides detailed information related to the trust preferred securities held as of March 31, 2012:

 

 

                           Actual  Expected Additional   
                         Number of  Deferrals  Deferrals  Excess 
                         Banks and  and  and  Subordination 
                         Insurance  Defaults   Defaults  Defaults 
     Book        Realized  Lowest  Companies  as % of  as % of  as % of 
Description   Class  Value (2)   Fair Value   Unrealized Loss   Loss (2) (3)   Rating (1)   Currently Performing   Original Collateral   Performing
Collateral
   Performing Collateral 
       (Dollars In thousands)                            
Preferred Term Ltd.   Mezz  $667   $617   $(50)  $(337)   C    14    39.50%   18.46%   -30.25%
Preferred Term Ltd.   Mezz   1,347    1,185    (162)   (683)   C    14    39.50%   18.46%   -30.25%
Preferred Term Ltd.   Mezz   897    790    (107)   (456)   C    14    39.50%   18.46%   -30.25%
Preferred Term X   B-3   813    337    (476)   (1,163)   C    33    49.98%   12.74%   -80.13%
Preferred Term XV   B-2   634    176    (458)   (366)   C    49    35.97%   15.64%   -41.12%
Preferred Term XV   B-3   641    177    (464)   (359)   C    49    35.97%   15.64%   -41.12%
Preferred Term XXVI   C-1   673    125    (548)   (312)   C    49    27.54%   18.32%   -21.17%
Preferred Term XXVI   D-1               (497)   C    49    27.54%   18.32%   -30.05%
MMCF IX   B-2   244    50    (194)   (710)   D    14    50.68%   14.15%   -84.73%
     $5,916  $3,457  $(2,459) (4,883)                         

 

(1) The table represents ratings information as of March 31, 2012. The securities had “investment grade” ratings by Moody’s (Baa2 or better) at time of purchase, but have since been downgraded by the rating agencies.

 

(2) Book value has been reduced by realized losses to reflect a new amortized cost basis.

 

(3) Represents life to date cumulative loss recognized in the income statement.

 

The structuring of trust preferred securities generally provide for a waterfall approach to absorbing losses whereby lower tranches are initially impacted and more senior tranches are impacted after lower tranches can no longer absorb losses. Likewise, the waterfall approach also applies to principal and interest payments received, as senior tranches have priority over lower tranches in the receipt of payments. In addition, there may be multiple classes within a single tranche that react differently to assumptions utilized in cash flow models due to the different features of the class such as fixed rate, floating rate, or a combination of both. In determining the amount of “currently performing” collateral for purposes of the table above, the total amount of issuers’ balances outstanding have been reduced by the amount in deferral and default. Also, for some of the securities, management has further reduced the total performing balance for the effects of issuers’ subsequent announcements of their intent to defer on the next applicable payment, and for other relevant circumstances through the date of issuance of the financial statements. Management considered all such announcements and circumstances known to us in evaluating the pooled trust preferred securities for OTTI as of March 31, 2012.

 

In the table above, “Excess Subordination Defaults as % of Performing Collateral” (Excess Subordination Ratio) was calculated as follows: total face value of performing collateral minus face value of all outstanding note balances not subordinate to our investment, divided by total face value of performing collateral. The Excess Subordination Ratio measures the extent to which there may be tranches within each pooled trust preferred structure available to absorb credit losses before the Company’s securities would be adversely impacted. In 2008, 2009 and 2010, the amount of deferrals and defaults on the pools described above rose significantly, which has resulted in substantial reductions in the amounts of performing collateral. As a result, the negative Excess Subordination Ratio percentages shown in the table signify there is no support from subordinate tranches available to absorb losses before the Company’s securities would be adversely impacted. A negative Excess Subordination Ratio is not definitive, in isolation, for determining whether or not OTTI should be recorded for a pooled trust preferred security. Other factors affect the timing and amount of cash flows available for payments to the note holders (investors); including the excess interest paid by the issuers (the issuers typically pay higher rates of interest than are paid out to the note holders).

 

The Company uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimates to ensure there are no adverse changes in cash flows during the quarter. The OTTI model considers the structure and term of the trust preferred securities and the financial condition of the underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the models are as follows:

Page 12 of 41

 

Note C – Investment Securities and Mortgage-Backed Securities (Continued)

 

   Significant inputs at March 31, 2012 
Annual prepayment   1% annually 
Projected severity of loss on current defaults   100%
Projected severity of loss on current deferrals   0% - 80% 
Projected severity of loss on specific deferrals   0% - 80% 
Projected additional defaults   0.375% applied annually 
Projected severity of loss on additional defaults   0% - 100% 
Present value discount rates for OTTI   3.69% - 9.91% 
Present value discount rates for fair value   15%

 

The Company reviews the assumptions quarterly for reasonableness and will update those assumptions that management believes have changed given market conditions, changes in deferral and defaults, as well as other factors that can impact these assumptions. The discount rates range can vary depending on the index the instruments are tied to as well as the spread for each instrument. The Company uses market-based yield indicators as a baseline for determining appropriate discount rates, and then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific trust preferred securities. The Company looks principally to market yields to maturity for investment grade and non investment grade trust preferred securities for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that nevertheless exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific trust preferred securities. In addition, utilization of the individual trust preferred investment’s interest crediting rate and if applicable, margin index is utilized in calculating the expected cash flows.

 

Prepayments can occur at the discretion of the issuer on predetermined call increments. The call provision allows the issuer to prepay some or the entire outstanding debt obligation on the fifth year and every fifth year thereafter. Due to the general weakness of the financial sector and the regulatory requirements to maintain and increase the capitalization of U.S. banks, the Company concluded that the issuers were unlikely to prepay their outstanding debt obligation and thereby reducing their individual capital ratios during this difficult economic cycle.

 

The Company reviews each issuer individually for projected future deferrals and defaults. The purpose of the individual issuer review is to determine if an individual issuer demonstrates a significant likelihood of potential deferral/default so as to require a further addition to the projected additional default percentages as outlined in the table above. This review includes obtaining quarterly financial information and monitoring new releases and pertinent information relative to those issuers. The Company specifically reviews certain financial ratios including Fitch Score and “Texas Ratio” as well as capital adequacy and participation in the Troubled Asset Relief Program of each issuer. The Company believes the “Texas Ratio (“TR”)” is a prominent indicator of the stress a financial institution is experiencing. The TR is calculated by dividing nonperforming assets and loans, including past due 90 days or more, by the sum of tangible equity and loan loss reserves. Management judgmentally establishes various credit criteria, and combinations of credit criteria and those issuers meeting some combination of such criteria are considered additional deferrals as of the reporting date. Based on the results of this analysis, the Company ensures that actual deferrals/defaults as well as forecasted deferrals/defaults of specific institutions are appropriately factored into the cash flow projections for each security. The default and recovery probabilities for each piece of collateral were formed based on the evaluation of collateral credit and a review of historical default data and current/near term operating conditions. There is no recovery estimated for actual defaulted issuers. Projected deferrals are modeled in a consistent manner with actual deferrals. One of these securities was fully impaired in 2009. Upon completion of the March 31, 2012 analysis, our model indicated that there was no other-than temporary impairment on these securities for the quarter ended March 31, 2012.

 

These eight securities remain classified as available-for-sale at March 31, 2012. It is possible that the underlying collateral of these securities will perform worse than expectations including an increase in deferrals/defaults above projections, which may lead to adverse changes in cash flows on these securities and potential future other-than-temporary impairment losses. Events that may trigger material declines in fair value for these securities in the future would include, but are not limited to, deterioration of credit metrics, such as significantly higher levels of defaults, and severity of loss on the underlying collateral and further illiquidity.

 

The table below presents a roll-forward of the credit losses recognized in earnings for the three months ended March 31, 2012 and 2011:

Page 13 of 41

 

Note C – Investment Securities and Mortgage-Backed Securities (Continued)

 

   March 31, 2012   March 31, 2011 
   (In thousands) 
Beginning Balance  $6,107   $5,740 
           
Additional credit loss for which other-than-temporary impairment was previously recognized       204 
Ending Balance  $6,107   $5,944 

 

Unrealized losses on other investments have not been recognized into income because the issuer(s) securities are of investment grade (except as indicated above), management does not intend to sell and it is not more likely than not that management would be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bond(s) approach maturity.

 

Note D – Loans Receivable

 

The components of loans receivable at March 31, 2012 and December 31, 2011 are as follows:

 

   March 31, 2012   December 31, 2011 
   (In thousands) 
         
Residential mortgages  $88,781   $88,534 
Home equity loans   44,980    44,980 
Consumer loans   33,017    34,341 
Commercial real estate   80,664    82,269 
Commercial loans   39,856    37,695 
    287,298    287,819 
Deferred fees   945    997 
Allowance for loan losses   (3,007)   (2,900)
Net loans  $285,236   $285,916 

 

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

 

A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

 

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

 

If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if repayment is expected solely from collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Page 14 of 41

 

Note D – Loans Receivable (Continued)

 

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loans effective rate at inception. If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net at the fair value of the collateral. For the troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

 

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent 3 years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability and depth of the lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following portfolio segments have been identified: commercial real estate, commercial loans, consumer loans, home equity loans and residential mortgages loans.

 

Loans secured by commercial real estate and multi-family residential properties generally are larger than one-to-four family residential loans and involve a greater degree of risk. Commercial and multi-family residential mortgage loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on the results of operations and management of the properties or underlying businesses, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of commercial real estate loans makes them more difficult for management to monitor and evaluate.

 

Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based, with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans may be collateralized by equipment or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because equipment and other business assets may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary and often insufficient source of repayment.

 

Consumer loans generally have shorter terms and higher interest rates than one-to-four family mortgage loans. In addition, consumer loans expand the products and services we offer to better meet the financial services needs of our customers. Consumer loans generally involve greater credit risk than residential mortgage loans because of the difference in the underlying collateral. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage to, loss of, or depreciation in the underlying collateral. The remaining deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections depend on the borrower’s personal financial stability. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.

 

Home equity loans are secured by a borrower’s primary residence. Home equity loans are underwritten under the same criteria that we use to underwrite one-to-four family fixed-rate loans. Home equity loans may be underwritten with a loan to value ratio of 90% when combined with the principal balance of an existing mortgage loan. Home equity loans generally involve greater credit risk than the primary residential mortgage loans due to the potential of declines in collateral values, collectability as a result of foreclosure processes if the Bank is considered to be in a secondary position as well as the amount of expenses incurred during the process.

 

Residential real estate loans have as collateral a borrower’s primary residence. The risk of loss on these loans would be due to collateral deficiencies due to market deterioration or location and condition of the property. The foreclosure process of a primary residence is usually the final course of action on these types of loans. Given our underwriting criteria and the volume and balance of the loans as compared to collateral, the risk in this portfolio segment is less than that of the other segments.

Page 15 of 41

 

Note D – Loans Receivable (Continued)

 

The following table sets forth the activity in the allowance for loan losses by portfolio segment:

 

   Commercial   Commercial   Consumer   Home   Residential     
March 31, 2012  Loans   Real Estate   Loans   Equity   Mortgages   Total 
   (In thousands) 
Allowance for loan losses:                        
Beginning balance  $535   $1,310   $326   $265   $464   $2,900 
Charge-offs           (69)           (69)
Recoveries   1        24        1    26 
Provision for loan losses   40        46    16    48    150 
Ending balance  $576   $1,310   $327   $281   $513   $3,007 

 

   Commercial   Commercial   Consumer   Home   Residential     
March 31, 2011  Loans   Real Estate   Loans   Equity   Mortgages   Total 
Allowance for credit losses:  (In thousands) 
Beginning balance  $2,668   $576   $337   $264   $431   $4,276 
Charge-offs   (19)       (40)           (59)
Recoveries   2    2    19    1        24 
Provision for loan losses   (2)   352    14    (6)   42    400 
Ending balance  $2,649   $930   $330   $259   $473   $4,641 

 

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method: 

 

   Commercial   Commercial   Consumer   Home   Residential     
March 31, 2012  Loans   Real Estate   Loans   Equity   Mortgages   Total 
   (In thousands) 
Ending balance attributable to loans:                        
Individually evaluated for impairment  $   $661   $   $   $   $661 
Collectively evaluated for impairment   576    649    327    281    513    2,346 
Total  $576   $1,310   $327   $281   $513   $3,007 
                               
Loans:                              
Individually evaluated for impairment  $   $836   $   $   $   $836 
Collectively evaluated for impairment   39,856    79,828    33,017    44,980    88,781    286,462 
Total  $39,856   $80,664   $33,017   $44,980   $88,781   $287,298 

 

   Commercial   Commercial   Consumer   Home   Residential     
December 31, 2011  Loans   Real Estate   Loans   Equity   Mortgages   Total 
   (In thousands) 
Ending balance attributable to loans:                        
Individually evaluated for impairment  $   $661   $         $661 
Collectively evaluated for impairment   535    649    326    265    464    2,239 
Total  $535   $1,310   $326   $265   $464   $2,900 
Loans:                              
Individually evaluated for impairment  $   $836   $   $   $   $836 
Collectively evaluated for impairment   37,695    81,433    34,341    44,980    88,534    286,983 
Total  $37,695   $82,269   $34,341   $44,980   $88,534   $287,819 

Page 16 of 41

 

Note D – Loans Receivable (Continued)

 

The following table presents information related to loans individually evaluated for impairment by segment of loans as of March 31, 2012 and December 31, 2011:

 

   March 31, 2012 
   Unpaid      Allowance for 
   Principal   Recorded   Loan Losses 
   Balance   Investment   Allocated 
   (In thousands) 
With no related allowance recorded:            
Commercial real estate  $   $   $ 
Commercial loans            
Consumer loans            
Home equity            
Residential mortgages            
                
With an allowance recorded:               
Commercial real estate   836    836    661 
Commercial loans            
Consumer loans            
Home equity            
Residential mortgages            
Total  $836   $836   $661 

 

   December 31, 2011 
   Unpaid      Allowance for  
   Principal   Recorded   Loan Losses 
   Balance   Investment   Allocated 
   (In thousands) 
With no related allowance recorded:               
Commercial real estate  $   $   $ 
Commercial loans            
Consumer loans            
Home equity            
Residential mortgages            
                
With an allowance recorded:               
Commercial real estate   836    836    661 
Commercial loans            
Consumer loans            
Home equity             
Residential mortgages            
Total  $836   $836   $661 

 

The average recorded investment of impaired commercial real estate loans with an allowance recorded was $836,000 and $1.4 million for the three months ended March 31, 2012 and 2011 respectively. The average recorded investment of impaired commercial loans with an allowance recorded was $2.0 million for the three months ended March 31, 2011. This loan was fully charged off in April 2011. There were no impaired commercial loans for the three months ended March 31, 2012. Cash basis interest income was not recognized for the three months ended March 31, 2012 and 2011.

 

The recorded investment in loans exclude accrued interest receivable and loan originations fees, net due to immateriality.

 

The following table presents the recorded investment in nonaccrual and past due loans over 90 days still on accrual by segment as of March 31, 2012 and December 31, 2011:

 

   March 31, 2012 
       Loans Past Due 
       Over 90 days still 
   Nonaccrual   Accruing 
   (In thousands) 
Commercial real estate  $836   $ 
Commercial loans   103     
Consumer loans        
Home equity   179     
Residential mortgages   559     
Total  $1,677   $ 

Page 17 of 41

 

Note D – Loans Receivable (Continued) 

 

   December 31, 2011 
       Loans Past Due 
       Over 90 days still 
   Nonaccrual   Accruing 
   (In thousands) 
Commercial real estate  $836   $ 
Commercial loans   69     
Consumer loans        
Home equity   150     
Residential mortgages   382     
Total  $1,437   $ 

 

The following represents the aging of the recorded investment in past due loans as of March 31, 2012 and December 31, 2011 by class of loans.

 

   March 31, 2012 
   Total   30-59 Days Past Due   60-89 Days Past Due   Greater than 90 Days Past Due   Total Past Due   Loans Not Past Due 
   (In thousands) 
Commercial real estate  $80,664   $48   $   $836   $884   $79,780 
Commercial loans   39,856    2        36    38    39,818 
Consumer loans   33,017    63            63    32,954 
Home equity   44,980    20    814    150    984    43,996 
Residential mortgages   88,781    23        559    582    88,199 
Total  $287,298   $156   $814   $1,581   $2,551   $284,747 

 

   December 31, 2011 
   Total   30-59 Days Past Due   60-89 Days Past Due   Greater than 90 Days Past Due   Total Past Due   Loans Not Past Due 
   (In thousands) 
Commercial real estate  $82,269   $   $   $836   $836   $81,433 
Commercial loans   37,695    36            36    37,659 
Consumer loans   34,341    109            109    34,232 
Home equity   44,980            150    150    44,830 
Residential mortgages   88,534    5    332    196    533    88,001 
Total  $287,819   $150   $332   $1,182   $1,664   $286,155 

 

Credit Quality Indicators

 

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes non-homogenous loans, such as commercial and commercial real estate with an outstanding relationship greater than $250,000. Homogenous loans are reviewed when appropriate given foreclosures, bankruptcies or relationships that include non-homogenous loans. For homogenous loan pools, such as residential mortgages, home equity and consumer loans, the Company uses the payment status to identify the credit risk in these loan portfolios. Payment status is reviewed on at least a monthly basis by the Company’s personnel and on a quarterly basis with respect to determining the adequacy of the allowance for loan losses. This analysis is performed on at least an annual basis. The Company uses the following definitions for risk ratings:

 

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncovered, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

Page 18 of 41

 

Note D – Loans Receivable (Continued)

 

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debts. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

 

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are either less than $250,000 or are included in groups of homogenous loans. Based on the most recent analysis performed (all loans graded within past 12 months), the risk category by class of loan is as follows:

 

   March 31, 2012 
   Not       Special         
   Rated   Pass   Mention   Substandard   Doubtful 
   (In thousands) 
Commercial real estate  $15,856   $62,265   $1,030   $646   $867 
Commercial loans   16,279    23,324    71    87    95 
Total  $32,135   $85,589   $1,101   $733   $962 

 

   December 31, 2011 
   Not       Special         
   Rated   Pass   Mention   Substandard   Doubtful 
   (In thousands) 
Commercial real estate  $13,520   $66,173   $1,038   $671   $867 
Commercial loans   15,320    22,089    131    58    97 
                          
Total  $28,840   $88,262   $1,169   $729   $964 

 

Note E – Segment Information

 

The Bank has determined that it has four primary business segments, its banking franchise, its insurance activities, its employee benefit consulting activities and risk management activities. For the three months ended March 31, 2012 and 2011, the Bank’s insurance activities consisted of those conducted through its wholly owned subsidiary, Bailey & Haskell Associates, Inc. The Bank’s benefit consulting activities consisted of those conducted through its wholly owned subsidiary Benefit Consulting Group, Inc. The risk management activities consisted of those conducted through its wholly owned subsidiary Workplace Health Solutions Inc. Information about the Bank’s segments is presented in the following table for the periods indicated:

 

   Three Months Ended March 31, 2012 
   Banking   Insurance   Benefit Consulting   Risk Management     
   Activities   Activities   Activities   Activities   Total 
   (In thousands) 
Net interest income  $4,865   $   $   $   $4,865 
Provision for loan losses   150                150 
                          
Net interest income after provision for loan losses   4,715                4,715 
                          
Investment gains, net   533                533 
Non-interest income   1,324    3,105    1,916    482    6,827 
Non-interest expenses   4,484    2,543    1,450    442    8,919 
Depreciation and amortization   397    41    21        459 
                          
Income before income taxes   1,691    521    445    40    2,697 
Income tax expense   275    224    183    10    692 
                          
Net income   1,416    297    262    30    2,005 
Less: net income attributable to noncontrolling interest   3                3 
                          
Net income attributable to Oneida Financial Corp.  $1,413   $297   $262   $30   $2,002 
                          
Total Assets  $650,233   $19,416   $6,519   $446   $676,614 

 

Page 19 of 41

 

Note E – Segment Information (Continued)

 

   Three Months Ended March 31, 2011 
   Banking   Insurance   Benefit Consulting   Risk Management     
   Activities   Activities   Activities   Activities   Total 
   (In thousands) 
Net interest income  $4,839   $   $   $   $4,839 
Provision for loan losses   400                400 
                          
Net interest income after provision for loan losses   4,439                4,439 
Investment losses, net   206                206 
Non-interest income   1,092    3,232    1,411    302    6,037 
Non-interest expenses   4,217    2,560    1,268    307    8,352 
Depreciation and amortization   383    45    25        453 
                          
Income (Loss) before income taxes   1,137    627    118    (5)   1,877 
Income tax expense (benefit)   81    272    49    (2)   400 
                          
Net income (loss)   1,056    355    69    (3)   1,477 
Less: net income attributable to noncontrolling interest   64                64 
                          
Net income (loss) attributable to Oneida Financial Corp.  $992   $355   $69   $(3)  $1,413 
                          
Total Assets  $665,278   $18,134   $5,440    $225   $689,077  

 

The following represents a reconciliation of the Company’s reported segment assets to consolidated assets as of March 31:

 

   2012   2011 
   (In thousands) 
Total assets for reportable segments  $676,614   $689,077 
Elimination of intercompany cash balances   (6,854)   (5,841)
Consolidated Total  $669,760   $683,236 

 

Note F – Fair Value

 

Fair Value Measurement

 

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

 

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date.

Page 20 of 41

 

Note F – Fair Value (Continued)

 

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3: Significant unobservable inputs that reflect a Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The Company used the following methods and significant assumptions to estimate fair value:

 

Securities: The fair values of trading securities and securities available for sale are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair value is calculated based on market price of similar securities (Level 2). For securities where quoted prices or market prices are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). The fair value of level 3 investment securities are determined by the Company’s Finance Department, which reports to the Chief Financial Officer (CFO). The CFO reviews the values and these are reported to the Investment Committee on a quarterly basis. The discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit swap and optionality. Default and deferrals on individual securities are reviewed and incorporated into the calculations. During times when trading is more liquid, broker quotes are used (if available) to validate the model.

 

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and the client’s business, resulting in a level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

 

Other Real Estate: Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals and may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

 

Loans Servicing Rights: On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Fair value is based on market prices for comparable mortgage servicing contracts (Level 1), when available, or alternatively, based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2).

 

Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value, which is evaluated in total. The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan or other observable market data, such as outstanding commitments from third party investors (Level 2).

 

Assets and liabilities measured at fair value on a recurring basis, including financial assets for which the Company has elected the fair value option, are summarized below:

 

   Fair Value Measurements at March 31, 2012 Using 
       Quoted Prices in Active Markets for Identical Assets   Significant Other Observable Inputs   Significant Unobservable Inputs 
Assets:  Total   (Level 1)   (Level 2)   (Level 3) 
   (In thousands) 
Trading securities                
Common and preferred equities  $7,446   $3,249   $2,290   $1,907 
                     
Available-for-sale securities                    
U.S. Agency   44,932        44,932     
Corporate   41,462        41,462     
Trust preferred securities   3,457            3,457 
State and municipal   46,243        39,863    6,380 
Small Business Administration   11,964        11,964     
Residential mortgage-backed securities   77,428        77,428     
Collateralized mortgage obligations   1,996        1,996     
Total  $234,928   $3,249   $219,935   $11,744 

Page 21 of 41

 

Note F – Fair Value (Continued)

 

   Fair Value Measurements at December 31, 2011 Using 
       Quoted Prices in Active Markets for Identical Assets   Significant Other Observable Inputs   Significant Unobservable Inputs 
Assets:  Total   (Level 1)   (Level 2)   (Level 3) 
   (In thousands) 
Trading securities                
Common and preferred equities  $7,010   $3,004   $2,087   $1,919 
Available-for-sale securities                    
U.S. Agency   30,578        30,578     
Corporate   37,080        37,080     
Trust preferred securities   3,615            3,615 
State and municipal   48,034        40,539    7,495 
Small Business Administration   10,151        10,151     
Residential mortgage-backed securities   65,838        65,838     
Collateralized mortgage obligations   2,009        2,009     
Total  $204,315   $3,004   $188,282   $13,029 

 

There were no transfers between Level 1 and Level 2 during 2012. The Bank transferred $3,004,597 in common and preferred equity securities from Level 2 to Level 1 during 2011. The securities represented an investment in a mutual fund which has daily market values and is actively traded and therefore is more represented by Level 1 pricing.

 

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31:

 

   Fair Value Measurements Using Significant 
   Unobservable Inputs (Level 3) 
   Trading   Trust   Municipal     
   Securities   Preferreds   Securities   Total 
   (In thousands) 
Beginning balance January 1, 2012  $ 1,919   $ 3,615   $ 7,495   $ 13,029 
Total gains or losses (realized/unrealized)                    
Included in earnings                    
Other changes in fair value   (12)          (12) 
Net impairment losses recognized in earnings               —  
Interest payments applied to principal       (350)       (350)
Paydowns and maturities           (1,073)   (1,073)
Included in other comprehensive income       192    (42)   150 
Ending balance March 31, 2012  $1,907   $3,457   $6,380   $11,744 

Page 22 of 41

 

Note F – Fair Value (Continued)

 

   Fair Value Measurements Using Significant 
   Unobservable Inputs (Level 3) 
   Trading   Trust     
   Securities   Preferreds   Total 
   (In thousands) 
Beginning balance January 1, 2011  $1,901   $3,404   $5,305 
Total gains or losses (realized/unrealized)               
Included in earnings               
Interest income on securities   (10)       (10)
Other changes in fair value   (5)       (5)
Net impairment losses recognized in earnings        (204)   (204)
Interest payments applied to principal      (7)   (7)
Included in other comprehensive income       376    376 
                
Ending balance March 31, 2011  $1,886   $3,569   $5,455 

 

The fair value for our non-rated local municipalities with a fair value of $7.5 million as of December 31, 2011 were transferred from Level 2 to Level 3 because of a lack of observable market date for these investments. They represent Bond Anticipation Notes which are localized within our own market. The Company’s policy is to recognize transfers into and out of a level as of the end of the reporting period. As a result, the fair value of these securities were transferred on December 31, 2011.

 

The fair value of the Company’s trust preferred securities are determined internally by calculating discounted cash flows. Information such as historical and current performance of the underlying collateral, deferral/default rates, collateral coverage ratios, break in yield calculations, cash flow projections, liquidity and credit premiums required by a market participant, and financial trend analysis with respect to the individual issuing financial institutions and insurance companies, are utilized in determining individual security valuations. Assumptions are back-tested on a quarterly basis as specific-issuer deferral and defaults that occurred are compared to those that were projected and ongoing assumptions are adjusted in accordance with the level of unexpected deferrals and defaults that occurred. See Note C to the Financial Statements for the significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities.

 

The Company’s Level 3 state and local municipal securities valuations were supported by analysis prepared by an independent third party. The third party’s approach to determining fair value involves using recently executed transactions for similar securities and market quotations for similar securities. As these securities are not rated by the rating agencies and are localized to our market area, it was determined that these were valued using Level 3 inputs. In addition, the Company reviews past history of the contractual payments and financial condition of the municipalities in determining an appropriate market value for this type of security.

 

The Company’s Level 3 common and preferred equity security valuation was supported by analysis prepared by an independent third party. The third party’s approach to determining fair value is based on the security characteristics including benchmark yields, reported trades, rating data and industry research reports. Due to the limited trading activity of this individual security in the market, it was determined that this was valued using Level 3 inputs. In addition, the Company reviews past history of the contractual payments and financial condition of the equity security in determining an appropriate market value for this type of security.

 

Assets measured at fair value on a non-recurring basis are summarized below:

 

       Fair Value Measurements at March 31, 2012 Using 
       Quoted Prices in Active Markets for Identical Assets   Significant Other Observable Inputs   Significant Unobservable Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
Impaired loans:  (In thousands) 
Commercial real estate  $175   $   $   $175 
Other real estate owned, net:                    
Residential  $67   $   $   $67 
Commercial real estate  $72   $   $   $72 

Page 23 of 41

 

Note F – Fair Value (Continued)

 

   Fair Value Measurements at December 31, 2011 Using 
       Significant Quoted Prices in Active Markets for Identical Assets   Significant Other Observable Inputs   Significant Unobservable Inputs 
   Fair Value   (Level 1)   (Level 2)   (Level 3) 
Impaired loans:  (In thousands) 
Commercial real estate  $175   $   $   $175 
Other real estate owned, net:                    
Residential  $67   $   $   $67 
Commercial real estate  $122   $   $   $122 

 

Impaired commercial real estate loans that are measured for impairment using the fair value of collateral for collateral dependent loans, had a principal balance of $836,000, with a valuation allowance of $661,000 at March 31, 2012 and December 31, 2011 which resulted in no additional provision for loan losses for the quarter ended March 31, 2012. The fair value of this impaired relationship is based on a payment that is due from a third party which is deemed to be collectible. The remaining balance has been considered a loss and was used in the basis for determining the fair value.

 

Other real estate owned measured at fair value less costs to sell, had a net carrying amount of $139,000, which is made up of the outstanding balance of $209,000, net of a valuation allowance of $70,000 at March 31, 2012 resulting in a charge of $50,000 for the quarter ended March 31, 2012. At December 31, 2011, other real estate owned had a net carrying amount of $189,000, made up of the outstanding balance of $209,000, net of a valuation allowance of $20,000. The fair value of the properties is based on the sales comparison approach which have been discounted due to costs to sell and time the property has been on the market.

 

Fair Value Option

 

The Company has elected the fair value option for certain preferred and common equity securities as they do not have stated maturity values and the fair value fluctuates with market changes. The decision to elect the fair value option is made individually for each instrument and is irrevocable once made. Changes in fair value for the selected instruments are recorded in earnings. Interest income is recorded based on the contractual amount of interest income earned on financial assets (except any that are in nonaccrual status). Dividend income is recorded based on cash dividends. Cash flows from the purchase and sale of securities for which the fair value option has been elected are shown as investing activities in the consolidated statement of cash flows.

 

The total amount of gains and losses from changes in fair value included in earnings for financial assets and liabilities carried at fair value for the three months ended March 31 were:

 

   March 31,   March 31, 
   2012   2011 
  (In thousands) 
Interest income  $    $ 10 
Interest expense        
Change in fair value   436    420 
           
Total change in fair value  $436   $430 

 

Fair Value of Financial Instruments

 

Carrying amounts and estimated fair values of financial instruments at March 31, 2012 and December 31, 2011 were as follows:

Page 24 of 41

 

Note F – Fair Value (Continued)

 

   Carrying   Fair Value Measurements Using 
March 31, 2012  Value   Level 1   Level 2   Level 3   Total 
   (In thousands) 
Financial assets:                    
Cash and cash equivalents  $51,223   $51,223   $   $   $51,223  
Trading securities   7,446    3,249    2,290    1,907    7,446 
Investment securities, available-for-sale   227,482        217,645    9,837    227,482 
Investment securities, held-to-maturity   44,172        44,027    1,946    45,973 
Loans held for sale   831        853        853 
Loans receivable, net   285,236            297,331    297,331 
Federal Home Loan Bank stock   2,234    N/A    N/A    N/A    N/A 
Accrued interest receivable   2,513        1,432    1,081    2,513 
                          
Financial liabilities:                         
Deposits  $588,448   $450,106   $141,262   $   $591,368 
Federal Home Loan Bank advances   11,000        11,191        11,191 
Accrued interest payable   35    3    2    30    35 

 

   Carrying   Estimated 
December 31, 2011  Amount   Fair Value 
   (In thousands) 
Financial assets:        
Cash and cash equivalents  $40,572   $40,572 
Trading securities   7,010    7,010 
Investment securities, available-for-sale   197,305    197,305 
Investment securities, held-to-maturity   47,199    49,264 
Loans held for sale   688    710 
Loans receivable, net   285,916    297,488 
Federal Home Loan Bank stock   2,102    N/A 
Accrued interest receivable   2,226    2,226 
           
Financial liabilities:          
Deposits  $550,624   $553,670 
Federal Home Loan Bank advances   11,000    11,260 
Accrued interest payable   35    35 

 

The methods and assumptions, not previously presented, used to estimate fair values are describes as follows:

 

(a) Cash and Cash Equivalents 

The carrying value of our cash and cash equivalents approximates fair value and is classified as Level 1.

 

(b) Loans Held for Sale 

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

 

(c ) Loans  

Fair value of loans, excluding loans held for sale, are estimated as follows: for variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price

 

(d) FHLB Stock 

It is not practicable to estimate the fair value of FHLB stock due to restrictions placed on its transferability.

Page 25 of 41

 

Note F – Fair Value (Continued)

 

(e ) Deposits 

The fair value disclosed for non-interest bearing deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of variable rate interest bearing deposits approximate their fair values at the reporting date resulting in Level 1 classification. Fair values for fixed rate certificates of deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits resulting in a Level 2 classification.

 

(f) Borrowings 

The fair value of the Company’s borrowings are estimated using discounted cash flows analyses based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

 

(g) Accrued Interest Receivable/Payable 

The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification based on the level of the asset or the liability with which the accrual is associated.

 

(h) Off-balance Sheet Instruments 

Fair value for off-balance sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings. The fair value of commitments is not material.

 

Note G – Accounting Pronouncements

 

In May 2011, the FASB issued an amendment to achieve overall common fair value measurement and disclosure requirements between U.S. and International accounting principles. Overall, the guidance is consistent with existing U.S. accounting principles; however, there are some amendments that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 31, 2011. The effect of adopting this standard did not have a material effect on the Company’s operating results or financial condition, but the additional disclosures are included in Note F.

 

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendment requires that comprehensive income be presented in either a single continuous statement or in two separate consecutive statements. The amendments in this guidance are effective as of the beginning of the fiscal reporting year, and interim periods within that year, that begins after December 31, 2011. The adoption of this amendment had no impact on the consolidated financial statements as the prior presentation of comprehensive income was in compliance with this amendment.

 

In September 2011, the FASB amended existing guidance related to goodwill impairment testing. The amendment permits an assessment of qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing these events and circumstances, it is concluded that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. The amendments in this guidance are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011 if financial statements for the most recent annual or interim period have not been issued. The adoption of this guidance is not expected to have a material effect on the Company’s operating results or financial condition.

 

Note H – Acquisitions

 

On March 10, 2011, the Company completed its acquisition of David Holmes Agency, Inc., an insurance agency operating in Utica, New York. The Bank paid $361,718 in cash and established a note payable for $361,718 to be paid over 24 months with interest at 3.00% per annum for fixed assets and other intangible assets. Goodwill in the amount of $575,000 and intangible assets in the amount of $137,000 was recorded in conjunction with the transaction. David Holmes Agency, Inc. has been subsequently merged into Bailey and Haskell Associates, Inc.

Page 26 of 41

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations

Page 27 of 41

 

management’s discussion and analysis of

 

financial condition and results of operations

 

This section presents Management’s discussion and analysis of and changes to the Company’s consolidated financial results of operations and condition and should be read in conjunction with the Company’s financial statements and notes thereto included herein.

 

When used in this quarterly report the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

 

The Company does not undertake, and specifically declines any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

 

GENERAL

 

Oneida Financial Corp. is the parent company of Oneida Savings Bank (“the Bank”). The Company is a Maryland corporation and the successor to a Federal corporation of the same name through a second step conversion transaction completed on July 7, 2010. The Company conducts no business other than holding the common stock of the Bank and general investment activities resulting from the capital it holds. Consequently, the net income of the Company is primarily derived from its investment in the Bank. Our results of operations depend primarily on our net interest income. Net interest income is the difference between interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities, mortgage-backed securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting primarily of deposits and Federal Home Loan Bank advances and other borrowings. Net interest income is a function of our interest rate spread, which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest-bearing liabilities, as well as a function of the average balance of interest-earning assets compared to interest-bearing liabilities. Also contributing to our earnings is noninterest income, which consists primarily of service charges and fees on loan and deposit products and services, fees from our insurance agency, benefit consulting and risk management subsidiaries and fees from trust services, and net gains and losses on sale of investments. Interest income and noninterest income are offset by provisions for loan losses, general administrative and other expenses, including employee compensation and benefits and occupancy and equipment costs, as well as by state and federal income tax expense.

 

Our results of operations are also significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulation or government policies may materially affect our financial condition and results of operations.

 

RECENT DEVELOPMENTS

 

The Company announced a quarterly cash dividend of $0.12 per share, which was paid on April 24, 2012 to its shareholders of record on March 29, 2012.

 

RECENT LEGISLATION

 

In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which is significantly changing the bank regulatory structure and affecting the lending, investment, trading and operating activities of depository institutions and their holding companies. As of July 21, 2011, the Dodd-Frank Act authorized the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies like the Company, in addition to bank holding companies which it currently regulates. The Office of Thrift Supervision, which was the Company’s prior

Page 28 of 41

 

regulator was eliminated. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for bank and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Bank holding companies with assets of less than $500 million are exempt from these capital requirements. Under the Dodd-Frank Act, the proceeds of trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directed the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

 

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets continue to be examined for compliance by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorney generals’ the ability to enforce applicable federal consumer protection laws.

 

The legislation broadened the base for Federal Deposit Insurance Corporation insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a depository institution. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2012. The Dodd-Frank Act also provided for regulations requiring that originators of securitized loans retain a percentage of the risk of transferred credits, directed the Federal Reserve to Board to regulate pricing of certain debit card exchange fees, repealed restrictions on paying interest on commercial checking accounts and contained a number of reforms related to mortgage origination.

 

The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.

 

FINANCIAL CONDITION

 

ASSETS. Total assets at March 31, 2012 were $699.8 million, an increase of $36.1 million, or 5.4%, from $663.7 million at December 31, 2011. The increase in total assets was primarily attributable to an increase in securities available for sale and cash and cash equivalents.

 

Mortgage-backed securities increased $9.9 million, or 10.7%, to $102.7 million at March 31, 2012 as compared with $92.8 million at December 31, 2011. Investment securities increased $17.2 million, or 11.3%, to $168.9 million at March 31, 2012 as compared to $151.7 million at December 31, 2011. The increase in mortgage-backed and investment securities was due to an increase in municipal deposits which require full collateralization with treasury, agency and municipal securities.

 

Cash and cash equivalents increased $10.6 million, or 26.1%, to $51.2 million at March 31, 2012 from $40.6 million at December 31, 2011. The increase in cash and cash equivalents was due to the increase in both retail and municipal deposits and the timing of the investing of excess cash on hand.

 

Trading securities increased $436,000, or 6.2%, to $7.4 million at March 31, 2012 as compared with $7.0 million at December 31, 2011 and represent common and preferred equity securities that we have elected to adjust to fair value. The increase in trading securities represents the increase in fair value during 2012 that was reflected through the income statement.

 

Loans receivable, including loans held for sale, decreased $537,000, or 0.2%, to $286.1 million at March 31, 2012 as compared with $286.6 million at December 31, 2011. We continue to maintain a diversified loan portfolio mix. We sold $8.2 million in fixed rate residential loans during the three months ended March 31, 2012. Overall loan demand is slightly higher than a year ago with loan originations during the first three months of 2012 totaling $25.6 million as compared to total loan originations during the three months ended March 31, 2011 of $18.8 million.

Page 29 of 41

 

LIABILITIES. Total liabilities increased by $35.1 million, or 6.1%, to $610.9 million at March 31, 2012 from $575.8 million at December 31, 2011. The increase was primarily the result of an increase in deposits of $37.8 million, partially offset by a decrease in other liabilities of $2.7 million.

 

Deposit accounts increased $37.8 million, or 6.9%, to $588.4 million at March 31, 2012 from $550.6 million at December 31, 2012. Interest-bearing deposit accounts increased by $30.5 million, or 6.3%, to $512.0 million at March 31, 2012 from $481.5 million at December 31, 2011. Non-interest bearing deposit accounts increased $7.3 million, or 10.6%, to $76.4 million at March 31, 2012 from $69.1 million at December 31, 2011. The increase in deposit accounts was primarily a result of an increase in municipal deposits offered through our limited purpose commercial banking subsidiary, State Bank of Chittenango. Municipal deposits increased $25.0 million to $143.9 million at March 31, 2012 from $118.9 million at December 31, 2011. This increase reflects the deposit of local tax collections by various municipalities combined with the addition of new account relationships.

 

Borrowings remained stable at $11.0 million at both March 31, 2012 and December 31, 2011.

 

Other liabilities decreased $2.7 million, or 19.1%, to $11.4 million at March 31, 2012 from $14.1 million at December 31, 2011. The decrease in other liabilities is primarily due to a decrease in premiums payable at our insurance subsidiary as a result of a decrease in future dated commissions at March 31, 2012 from December 31, 2011.

 

STOCKHOLDERS’ EQUITY. Total stockholders’ equity at March 31, 2012 was $88.9 million, an increase of $971,000, or 1.1%, from $88.0 million at December 31, 2011. The increase in stockholders’ equity was a result of net income of $2.0 million for the three months ended March 31, 2012.

 

Partially offsetting the increases in stockholders’ equity was the payment of cash dividends to stockholders. Stockholders were paid a quarterly dividend during the first quarter of 2012 of $0.12 per share resulting in a reduction in stockholders’ equity of $829,000. In addition, there was an increase in the accumulated other comprehensive loss of $248,000 at March 31, 2012 resulting from a decrease in the market value of mortgage-backed and investment securities.

 

ANALYSIS OF NET INTEREST INCOME

 

Oneida Savings Bank’s principal business has historically consisted of offering savings accounts and other deposits to the general public and using the funds from such deposits to make loans secured by residential and commercial real estate, as well as consumer and commercial business loans. Oneida Savings Bank also invests a significant portion of its assets in investment securities and mortgage-backed securities both of which have classifications of available-for-sale and held-to- maturity. Our results of operations depends primarily upon net interest income, which is the difference between income earned on interest-earning assets, such as loans and investments, and interest paid on interest-bearing liabilities, such as deposits and borrowings. Net interest income is directly affected by changes in volume and mix of interest-earning assets and interest-bearing liabilities which support those assets, as well as the changing interest rates when differences exist in the repricing of assets or liabilities

 

AVERAGE BALANCE SHEET. The following table sets forth certain information relating to our average balance sheet, average yields and costs, and certain other information for the three months ended March 31, 2012 and 2011 and for the year ended December 31, 2011. For the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities is expressed in thousands of dollars and rates. No tax equivalent adjustments were made. The average balance is computed based upon an average daily balance. Non-accrual loans and investments have been included in the average balances.

Page 30 of 41

 

TABLE 1. Average Balance Sheet.

 

   Three Months Ended March 31,   Twelve Months Ended Dec. 31,  
       2012           2011           2011     
   Average   Interest       Average   Interest       Average   Interest     
   Outstanding   Earned/   Yield/   Outstanding   Earned/   Yield/   Outstanding   Earned/   Yield/ 
Assets  Balance   Paid   Rate   Balance   Paid   Rate   Balance   Paid   Rate 
Interest-earning Assets:  ( Dollars in Thousands) 
Loans Receivable  $289,053   $3,808    5.27%  $286,686   $3,931    5.48%  $287,098   $15,588    5.43%
Investment and Mortgage-Backed Securities   246,300    1,807    2.93%   260,616    1,998    3.07%   260,077    7,848    3.02%
Federal Funds   34,054    6    0.07%   26,899    8    0.12%   24,561    21    0.09%
Equity Securities   7,020    70    3.99%   7,434    62    3.34%   7,321    326    4.45%
Total Interest-earning Assets   576,427    5,691    3.95%   581,635    5,999    4.13%   579,057    23,783    4.11%
                                              
Non interest-earning Assets:                                             
Cash and due from banks   11,995              11,737              10,969           
Other assets   79,958              74,266              75,597           
Total assets  $668,380             $667,638             $665,623           
                                              
Liabilities and Stockholders’ Equity                                             
Interest-bearing Liabilities:                                             
Money Market Deposits  $180,974   $199    0.44%  $180,262   $331    0.74%  $178,414   $1,014    0.57%
Savings Accounts   105,886    68    0.26%   92,412    104    0.46%   99,127    358    0.36%
Interest-bearing Checking   66,029    14    0.09%   69,478    23    0.13%   65,321    63    0.10%
Time Deposits   137,548    426    1.25%   151,336    570    1.53%   146,843    2,077    1.41%
Borrowings   11,000    118    4.31%   12,000    131    4.43%   11,552    503    4.35%
Notes Payable   183    1    2.20%   4    1     N/M    205    8    3.90%
Total Interest-bearing Liabilities   501,620    826    0.66%   505,492    1,160    0.93%   501,462    4,023    0.80%
                                              
Non-interest-bearing Liabilities:                                             
Demand deposits   67,870              63,488              67,436           
Other liabilities   10,248              11,912              8,029           
Total liabilities  $579,738             $580,892             $576,927           
Stockholders’ equity   88,642              86,746              88,696           
Total liabilities and stockholders’ equity  $668,380             $667,638             $665,623           
                                              
Net Interest Income       $4,865             $4,839             $19,760      
Net Interest Spread             3.29%             3.19%             3.30%
   $74,807             $76,143             $77,595           
Net yield on average                                             
Interest-earning assets        3,38%             3.33%             3.41%     
                                             
Average interest-earning assets to average                                             
Interest-bearing liabilities        114.91%             115.06%             115.47%     

 

RESULTS OF OPERATIONS

 

General. Net income for the three months ended March 31, 2012 was $2.0 million compared to $1.4 million for the three months ended March 31, 2011. For the three months ended March 31, 2012, basic and diluted net income per share was $0.29 as compared with basic and diluted net income per share of $0.20 for the three months ended March 31, 2011. The increase in net income is primarily the result of an increase in net interest income, an increase in net investment gains, an increase in non-interest income and a decrease in the provision for loan loss reserves. These increases in income were partially offset by an increase in non-interest expenses and an increase in income tax provisions during the three months ended March 31, 2012 as compared with the three months ended March 31, 2011.

 

Net income from operations, excluding noncash investment securities income of $436,000, net of $112,000 income taxes, was $1.7 million. Non-cash investment securities income consisted of the non-cash increase to earnings recognized in connection with the increase in market value of our trading securities.

Page 31 of 41

 

This compares to net income from operations for the same period in 2011 of $1.2 million. Net income excluding the non-cash charges and benefits to earnings increased due primarily to an increase in net interest income, an increase in investment gains, an increase in non-interest income and a decrease in the provision for loan loss reserves offset by an increase in non-interest expense and the provision for income taxes. The table below summarizes the Company’s operating results excluding these cumulative non-cash charges related to the change in fair value of trading securities and the non-cash impairment charges recorded as net investment losses in each period.

 

  Reported Results
  (including non-cash gains and losses recognized under ASC 320)
  (All amounts in thousands except net income per diluted share)

 

   Quarter Ending   Quarter Ending 
   March 31,   March 31, 
   2012   2011 
Net interest income  $4,865   $4,839 
Provision for loan losses   150    400 
Investment gains (losses)   97    (224)
Change in fair value of investments   436    430 
Non-interest income   6,827    6,037 
Non-interest expense   9,378    8,805 
Income tax provision   692    400 
Net income   2,005    1,477 
Income attributable to noncontrolling interest   (3)   (64)
Net income attributable to Oneida Financial Corp.  $2,002   $1,413 
           
Net income per diluted share  $0.29   $0.20 

 

  Operating Results / Non-GAAP
  (excluding non-cash gains and losses recognized under ASC 320)
  (All amounts in thousands except net income per diluted share)

 

   Quarter Ending   Quarter Ending 
   March 31,   March 31, 
   2012   2011 
Net interest income  $4,865   $4,839 
Provision for loan losses   150    400 
Investment gains (losses)   97   (20)
Non-interest income   6,827    6,037 
Non-interest expense   9,378    8,805 
Income tax provision   580    350 
Net income   1,681    1,301 
Income attributable to noncontrolling interest   (3)   (64)
Net income attributable to Oneida Financial Corp.  $1,678   $1,237 
           
Net income per diluted share  $0.25   $0.18 

 

We believe these non-GAAP financial measures provide a meaningful comparison of the underlying operational performance of our business, and facilitate investors’ assessments of business and performance trends in comparison to others in the financial services industry. In addition, we believe the exclusion of these items enables management to perform a more effective evaluation and comparison of our results and assess performance in relation to our ongoing operations.

 

Interest and Dividend Income. Interest and dividend income decreased by $308,000, or 5.1%, to $5.7 million for the three months ended March 31, 2012 from $6.0 million for the three months ended March 31, 2011. Interest and fees on loans decreased by $123,000 for the three months ended March 31, 2012 as compared with the same period in 2011. Interest and dividend income on mortgage-backed and other investment securities decreased $183,000 to $1.9 million for the three months ended March 31, 2012 from $2.0 million for the three months ended March 31, 2011. Interest income earned on federal funds sold decreased $2,000 during the three months ended March 31, 2012 as compared with the three months ended March 31, 2011.

Page 32 of 41

 

The decrease in income on loans resulted from a decrease of 21 basis points in the average yield on loans to 5.27% from 5.48% offset by an increase of $2.4 million in the average balance of loans to $289.1 million in the first quarter of 2012 from $286.7 million in the first quarter of 2011. At March 31, 2012, net loans receivable were $286.1 million as compared with $284.3 million at March 31, 2011, an increase of 0.6%. The decrease in the yield on loans is a result of the continued low market interest rates resulting in lower yields earned on new loans and variable rate loans.

 

The decrease in interest income from investment and mortgage-backed securities was the result of a decrease of $14.3 million in the average balance of investment and mortgage-backed securities to $246.3 million during the first quarter of 2012 from $260.6 million during the first quarter of 2011 as well as a decrease of 14 basis points in the average yield earned to 2.93% from 3.07%. The decrease in average yield is the result of lower market interest rates. The decrease in the average balance of investment and mortgage-backed securities is the result of the timing of investing excess cash on hand during the first quarter of 2012.

 

Interest income on federal funds sold decreased as a result of a decrease in the average yield partially offset by an increase of $7.2 million in the average balance of federal funds sold to $34.1 million during the first quarter of 2012 as compared with $26.9 million during the three months ended March 31, 2011.

 

Income from equity securities increased $8,000 due to an increase in the average yield of 65 basis points partially offset by a decrease of $414,000 in the average balance from $7.4 million for the three months ended March 31, 2011 to $7.0 million for the three months ended March 31, 2012. The decrease in the average balance was the result of sales of certain preferred equity securities during the quarter ended March 31, 2011.

 

Interest Expense. Interest expense decreased $334,000, or 28.8%, to $826,000 for the three months ended March 31, 2012 from $1.2 million for the three months ended March 31, 2011. The decrease in interest expense was primarily due to a decrease in interest paid on deposit accounts during the first quarter of 2012 of $321,000, decreasing to $707,000 from $1.0 million during the first quarter of 2011. In addition, borrowing expense decreased to $118,000 for the three months ended March 31, 2012 compared with $131,000 for the three months ended March 31, 2011.

 

The decrease in interest expense paid on deposits was primarily due to a decrease in the average cost of deposits. Core deposits, consisting of money market accounts, savings accounts and interest-bearing checking accounts, experienced an increase in the average balance of $10.7 million, or 3.1%, to $352.9 million at an average cost of 0.32% during the first quarter of 2012 from $342.2 million at an average cost of 0.54% during the first quarter of 2011. During the same period the average balance of time deposits decreased $13.8 million, or 9.1%, to $137.5 million in the first quarter of 2012 from $151.3 million during the first quarter of 2011 and the average rate paid on time deposits decreased 28 basis points.

 

The decrease in borrowing expense for the first quarter 2012 as compared to the first quarter 2011 was due to a decrease in the average balance of borrowings outstanding in the March 31, 2012 period to $11.0 million as compared with $12.0 million during the March 31, 2011 period as well as a 12 basis point decrease in the average rate paid on borrowed funds to 4.31% for the 2012 period. The decrease in borrowings was due to our decision not to renew the FHLB advances that matured during 2011.

 

Provision for Loan Losses. The total provision for loan losses was $150,000 for the three months ended March 31, 2012 as compared to a provision of $400,000 for the three months ended March 31, 2011. Oneida Savings Bank establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level deemed appropriate to absorb probable incurred credit losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Management continues to monitor the adequacy of the allowance for loan losses given the risk assessment of the loan portfolio and current economic conditions making appropriate provisions for loan losses on a quarterly basis.

 

The provision for loan losses made in the first quarter 2012 is primarily the result of changes in the portfolio mix and criticized asset balances. Loans individually evaluated for impairment totaled $836,000 and had an allocated allowance for loan loss reserve of $661,000 at both March 31, 2012 and December 31, 2011.

 

Nonperforming loans totaled $1.7 million or 0.58% of total loans at March 31, 2012 compared with $4.1 million or 1.41% of total loans at March 31, 2011. Net charge-off activity for the three months ended March 31, 2012 was $43,000 as compared with $35,000 in net charge-offs during the three months ended March 31, 2011. The balance of the allowance for loan losses was $3.0 million or 1.05% of loans receivable at March 31, 2012 compared with $4.6 million or 1.64% of loans receivable at March 31, 2011. The decrease in nonperforming loans and the balance of the allowance for loan losses from March 31, 2011 to March 31, 2012 is primarily attributable to the charge-off of a fully reserved, impaired, unsecured commercial loan with a principal balance of $2.0 million in April 2011.

Page 33 of 41

 

Investment Gains (losses): Investment gains (losses) consists of changes in fair value of trading securities, net gains on sales of securities as well as impairment losses recognized in earnings.

 

We have identified the preferred and common equity securities we hold in the investment portfolio as trading securities and as such the change in fair value of these securities is reflected as a non-cash adjustment through the income statement. For the three months ended March 31, 2012 the market value of our trading securities increased $436,000 as compared with an increase of $430,000 in the 2011 period.

 

During the first quarter of 2012 the Company realized $97,000 of investment gains; this compares with realized losses of $20,000 during the three months ended March 31, 2011.

 

There were no impairment losses for the three months ended March 31, 2012. Net impairment losses for the three months ended March 31, 2011 were $204,000. The net investment losses were the result of non-cash impairment charges recorded for eight trust preferred securities which were determined to be other-than-temporarily impaired. The trust preferred securities are diversified pools of collateralized debt obligations primarily issued by domestic financial institutions and their holding companies. See Footnote C Investment Securities in the consolidated financial statements for more detailed information on other-than-temporary impairment review.

 

Non-Interest Income. Non-interest income increased by $790,000, or 13.1n%, to $6.8 million for the three months ended March 31, 2012 from $6.0 million for the three months ended March 31, 2011.

 

Revenue derived from Oneida Savings Bank’s non-banking subsidiaries increased $558,000, or 11.3%, to $5.5 million during the three months ended March 31, 2012 as compared with $4.9 million during the three months ended March 31, 2011. Insurance subsidiary revenue of Bailey & Haskell Associates was $3.1 million for the three months ended March 31, 2012 as compared with $3.2 million during the three months March 31, 2011. Insurance subsidiary revenue retention is primarily due to consistent sales volume and a high level of account revenue retention from the prior year. Consulting activities of Benefit Consulting Group generated revenue of $1.9 million for the three months ended March 31, 2012 as compared with $1.4 million during the first quarter of 2011. The increase in benefit consulting revenue was the result of new business development during 2011 which resulted in annual revenue increase for 2012. Risk management activities of Workplace Health Solutions generated $482,000 of revenue for the three months ended March 31, 2012 as compared with $302,000 in revenue during the same period of 2011. The increase in risk management revenue was the result of continued client growth for this new subsidiary established at the beginning of 2008.

 

Deposit account service fees increased slightly to $632,000 during the three months ended March 31, 2012 from $601,000 during the three months ended March 31, 2011. The increase is the result of increased usage of ATM and other services during 2012 as compared with 2011.

 

We also experienced an increase in income from the sale and servicing of fixed-rate residential real estate loans. The increase is primarily the result of an increase in the volume of loan sale activity in the first quarter of 2012 as compared with the first quarter of 2011. Income from the sale and servicing of fixed-rate residential real estate loans was $311,000 during the three months ended March 31, 2012 compared with $121,000 during the three months ended March 31, 2011.

 

Non-Interest Expense. Non-interest expense increased by $573,000, or 6.5%, to $9.4 million for the three months ended March 31, 2012 from $8.8 million for the three months ended March 31, 2011. The increase was primarily due to an increase in operating expenses associated with our insurance agency and consulting subsidiaries associated with commissions paid concurrent with revenue increases.

 

Salaries, wages and other compensation paid to the employees of Oneida Financial Corp. during the three months ended March 31, 2012 was $6.0 million, an increase of $447,000, or 8.0%, as compared with compensation expense of $5.6 million during the first quarter of 2011. The increase in compensation expense was primarily the result of the increase in sales of insurance and other non-banking products through our subsidiaries resulting in an increase in commissions paid and employee benefit expense.

Page 34 of 41

 

Building occupancy and equipment expense decreased $8,000, or 0.7%, for the three months ended March 31, 2012. This expense was $1.2 million during the three months ended March 31, 2012 and 2011.

 

Other operating expenses increased $134,000, or 6.7%, to $2.1 million for the three months ended March 31, 2012 as compared to $2.0 million during the three months ended March 31, 2011.

 

Provision for Income Taxes. Provision for income taxes was $692,000 for the three months ended March 31, 2012, an increase of $292,000 from the first quarter 2011 income tax provision recorded of $400,000. The increase in income tax provision reflects the increase in net income for the three months ended March 31, 2012. The effective tax rate was 25.7% during the first three months of 2012 as compared with an effective tax rate of 22.1% for the same time period in 2011. The change in the effective tax rates for the specific periods is due to changes in the Bank’s tax exempt and tax preferred investment income and the overall tax rate in effect for the year.

 

Liquidity and Capital Resources. Our primary source of funds are deposits; FHLB borrowings; proceeds from the principal and interest payments on loans and mortgage-related, debt and equity securities; and to a lesser extent, proceeds from the sale of fixed rate residential real estate loans and additional borrowings ability availability as needed. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, mortgage prepayments, mortgage loan sales and borrowings are greatly influenced by general interest rates, economic conditions and competition.

 

Our primary investing activities are the origination of residential mortgages, commercial loans and consumer loans, as well as the purchase of mortgage-backed and other debt securities. During the first quarter of 2012, loan originations totaled $25.6 million compared to $18.8 million during the first quarter of 2011. The purchases of securities available for sale totaled $51.8 million during the first quarter of 2012 as compared to $24.0 million during the first quarter of 2011. The purchases of investment securities were funded due to an increase in municipal deposits which require full collateralization.

 

Cash flow from operations, deposit growth, as well as the sales, maturity and principal payments received on loans and investment securities were used to fund the investing activities described above. If Oneida Savings Bank requires funds beyond its ability to generate them internally, it has the ability to borrow funds from the FHLB. Oneida Savings Bank may borrow from the FHLB under a blanket agreement which assigns all investments in FHLB stock as well as qualifying first mortgage loans equal to 150% of the outstanding balance as collateral to secure the amounts borrowed. Additionally, we also maintain lines of credit with various other commercial banks as an additional source of short-term borrowing that provides funding sources for lending, liquidity and asset and liability management as needed.

 

In the normal course of business, the Company extends commitments to originate residential and commercial loans and other consumer loans. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since the Company does not expect all of the commitments to be funded, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. Collateral may be obtained based upon management’s assessment of the customers’ creditworthiness. Commitments to extend credit may be written on a fixed rate basis exposing the Company to interest rate risk given the possibility that market rates may change between the commitment date and the actual extension of credit. As of March 31, 2012 the Company had outstanding commitments to originate loans of approximately $15.0 million, which generally have an expiration period of less than 120 days. Commitments to sell residential mortgages amounted to $6.2 million at March 31, 2012.

 

The Company extends credit to consumer and commercial customers, up to a specified amount, through lines of credit. The borrower is able to draw on these lines as needed, thus the funding requirements are generally unpredictable. Unused lines of credit amounted to $48.0 million at March 31, 2012 and generally have an expiration period of less than one year. It is anticipated that there will be sufficient funds available to meet the current loan commitments and other obligations through the sources described above. The credit risk involved in issuing these commitments is essentially the same as that involved in extending loans to customers and is limited to the contractual notional amount of those instruments.

 

Cash, interest-earning demand accounts at correspondent banks, federal funds sold, and other short-term investments are the Company’s most liquid assets. The level of these assets are monitored daily and are dependent on operating, financing, lending and investing activities during any given period. Excess short-term liquidity is usually invested in overnight federal funds sold. In the event that funds beyond those generated internally are required due to higher expected loan commitment fundings, deposit outflows or the amount of debt being called, additional sources of funds are available through the use of repurchase agreements, the sale of loans or investments or the Company’s various lines of credit. As of March 31, 2012 the total of cash, interest-earnings demand accounts and federal funds sold was $51.2 million.

Page 35 of 41

 

At March 31, 2012, the Bank exceeded all regulatory capital requirements. The current requirements and the actual levels for the Bank are detailed in the following table.

 

                   To Be Well 
                   Capitalized Under 
           For Capital   Prompt Corrective 
   Actual   Adequacy Purposes   Action Provisions 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (Dollars in thousands) 
As of March 31, 2012:                        
Total Capital                        
(to Risk Weighted Assets)  $66,350    16.05%  $33,073    8%  $41,341    10%
Tier I Capital                              
(to Risk Weighted Assets)  $63,343    15.32%  $16,536    4%  $24,804    6%
Tier I Capital                              
(to Average Assets)  $63,343    9.84%  $25,755    4%  $32,193    5%

 

                   Capitalized Under 
           For Capital   Prompt Corrective 
   Actual   Adequacy Purposes   Action Provisions 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
   (Dollars in thousands) 
As of December 31, 2011:                        
Total Capital                        
(to Risk Weighted Assets)  $64,045    15.62%  $32,798    8%  $40,997    10%
Tier I Capital                              
(to Risk Weighted Assets)  $61,146    14.91%  $16,399    4%  $24,598    6%
Tier I Capital                              
(to Average Assets)  $61,146    9.62%  $25,433    4%  $31,791    5%

Page 36 of 41

 

ONEIDA FINANCIAL CORP.

 

SELECTED FINANCIAL RATIOS

At and for the Three Months Ended March 31, 2012 and 2011 (unaudited)

 

(Annualized where appropriate)  Three Months Ending 
   March 31, 
   2012   2011 
Performance Ratios:        
Return on average assets   1.20%   0.85%
Return on average equity   9.03%   6.52%
Return on average tangible equity   12.57%   9.08%
Interest rate spread   3.29%   3.22%
Net interest margin   3.38%   3.33%
Efficiency Ratio   77.98%   80.01%
Non-interest income to average total assets   4.14%   3.62%
Non-interest expense to average total assets   5.55%   5.28%
Average interest-earning assets as a ratio to average interest-bearing liabilities   114.91%   115.06%
           
Asset Quality Ratios:          
Non-performing assets to total assets   0.75%   1.16%
Non-performing loans to total loans   0.58%   1.41%
Net charge-offs to average loans   0.02%   0.01%
Allowance for loan losses to non-performing loans   179.31%   114.45%
Allowance for loan losses to loans receivable   1.05%   1.64%
           
Capital Ratios:          
Average equity to average total assets   13.26%   12.99%
Equity to total assets (end of period)   12.71%   12.70%
Tangible equity to tangible assets (end of period)   9.49%   9.36%

Page 37 of 41

 

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

 

Various forms of market risk are inherent in the business of the Bank including concentration risk, liquidity management, credit risk and collateral risk among others. However, the Bank’s most significant form of market risk is interest rate risk, as the majority of the Bank’s assets and liabilities are sensitive to changes in interest rates. Ongoing monitoring and management of this risk is an important component of the Company’s asset and liability management process. The Bank’s interest rate risk management program focuses primarily on evaluating and managing the composition of the Bank’s assets and liabilities in the context of various interest rate scenarios. Factors beyond Management’s control, such as market interest rates and competition, also have an impact on interest income and expense. Based on the asset-liability composition at March 31, 2012, in a rising interest rate environment, Management would expect that the Company’s cost of shorter-term deposits might rise faster than its earnings on longer-term loans and investments. Conversely, as interest rates decrease, the prepayment of principal on loans and investments tends to increase, causing the Company to invest funds in a lower rate environment. To mitigate the effect of interest rate changes, Management has taken steps to emphasize core deposits, monitor certificate of deposit rates to better match asset changes, and sell substantially all newly originated longer term fixed rate loans in the secondary market without recourse. Management believes this approach will help reduce the exposure to interest rate fluctuations and enhance long-term profitability.

 

For a discussion of the Company’s asset and liability management policies as well as the potential impact of interest rate changes upon the earnings of the Company, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s 2011 Annual Report to Stockholders. There has been no material change in the Company’s interest rate risk profile since December 31, 2011.

 

ITEM 4. Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(3) and 15d – 15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the period covered by this quarterly report, the Company’s disclosure controls and procedures are effective to ensure that information to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods or submits specified in the Securities and Exchange Commission’s rules and forms. There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

Page 38 of 41

 

ONEIDA FINANCIAL CORP.

AND SUBSIDIARIES

 

Part II – Other Information

 

Item 1 Legal Proceedings

 

Much of the Bank’s market area is included in the 270,000-acre land claim of the Oneida Indian Nation (“Oneidas”). The land claim area is held primarily by private persons. Over 15 years ago the United States Supreme Court ruled in favor of the Oneidas in a lawsuit which management believes was intended to encourage the State of New York to negotiate an equitable settlement in a land dispute that has existed over 200 years.

 

In June 1998, the United States Justice Department intervened in the action on behalf of the Oneidas against Madison County and Oneida County in New York State. In September 1998, an U.S. District Court removed a stay of litigation, having been in place since the late 1980’s pending settlement negotiations. In December 1998, both the Oneidas and the U.S. Justice Department filed motions to amend the long outstanding claim against the State of New York. The motion attempts to include in the claim, various named and 20,000 unnamed additional defendants, who own real property in parts of Madison and Oneida counties, thereby including the additional defendants in the original suit. The U.S. District Court granted the motions to add as a defendant the State of New York, but denied the motions to add the private landowners. Neither the Bank nor the Company is a named defendant in the motion. The court further rejected as not being viable the remedies of ejectment and/or of monetary damages against private landowners. In January 2001, amended complaints were served by the Oneidas and the United States which seek to eject the Counties of Madison and Oneida from lands owned by the counties, and the Oneidas also seek a declaration that they have the right to possess all land within the land claim area. In June 2001, the court determined that certain land purchased by the Oneidas in 1997 and 1998 are exempt from real estate taxes, accepting the Oneidas argument that the acquired parcels lie within the boundaries of the “reservation” established in 1974 by the Federal Government. The State of New York, Counties of Madison and Oneida and the City of Sherrill appealed the court’s decision with a court date of March 2002. In February 2002, a joint statement was issued by the Oneidas, State of New York, and the counties of Madison and Oneida, indicating that the framework for a settlement had been agreed upon subject to the approval by the State legislature and the Federal Government. The Oneidas of Wisconsin and the Stockbridge-Munsee Band of the Mohican Indians have commenced separate actions in the United State District Court for the Northern District of New York to dispute and interrupt any settlement pending. In July 2003, the United States Court of Appeals affirmed the decision of the lower court against the City of Sherrill but appeals continue relative to the decision against the Counties of Madison and Oneida. In January 2005 the United State Supreme Court heard the appeal brought forward by the City of Sherrill against the Oneidas arguing that the acquisition of real property by the Oneidas within the land claim area does not return the property to sovereign status. Therefore, the City of Sherrill contends that the property is subject to the payment of real property taxes or reverts to the ownership of the taxing authority if assessed property taxes are not paid. The United States Supreme Court filed their decision in March 2005, ruling in favor of the City of Sherrill. The Oneida Indian Nation is attempting to put all land acquired to date in a federal land trust. All parties involved continue to pursue all legal options available.

 

To date neither the original claim nor the motion to amend has had an adverse impact on the local economy or real property values. In addition, title insurance companies continue to underwrite policies in the land claim area with no change in premiums or underwriting standards. Oneida Savings Bank requires title insurance on all residential real estate loans, excluding home equity loans. Both the State of New York and the Oneidas have indicated in their respective communications that individual landowners will not be adversely affected by the ongoing litigation. Oneida Financial Corp. continues to monitor the situation.

 

We and our subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on our financial position or results of operations.

 

Item 1a Risk Factors

 

There has not been any material change in the risk factors disclosure from that contained in the Company’s Form 10-K for the fiscal year ended December 31, 2011.

 

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

 

(a) Not applicable

 

(b) Not applicable

Page 39 of 41

 

(c) There were no shares repurchased of our common stock during the first quarter 2012. The maximum number of shares yet to be purchased under previously announced repurchase plans is 103,453 shares.

 

Item 3 Defaults upon Senior Securities
   
  Not applicable.
   
Item 4 Mine Safety Disclosures
   
  Not applicable
   
Item 5 Other Information
   
  None
   
Item 6 Exhibits

  

  (a) All required exhibits are included in Part I under Consolidated Financial Statements, Notes to Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, and are incorporated by reference, herein.
     
    Exhibits
     
    Exhibit 31.1 – Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
    Exhibit 31.2 – Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes – Oxley Act of 2002
     
    Exhibit 32.1 – Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
    Exhibit 101* - The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Condition, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.
     
    *Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

Page 40 of 41

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.

 

 

      ONEIDA FINANCIAL CORP.
       
Date: May 14, 2012 By: /s/ Michael R. Kallet
      Michael R. Kallet
      President and Chief Executive Officer
       
Date: May 14, 2012 By: /s/ Eric E. Stickels
      Eric E. Stickels
      Executive Vice President and Chief
      Financial Officer

 

Page 41 of 41

XNAS:ONFC Oneida Financial Corp Quarterly Report 10-Q Filling

Oneida Financial Corp XNAS:ONFC Stock - Get Quarterly Report SEC Filing of Oneida Financial Corp XNAS:ONFC stocks, including company profile, shares outstanding, strategy, business segments, operations, officers, consolidated financial statements, financial notes and ownership information.

XNAS:ONFC Oneida Financial Corp Quarterly Report 10-Q Filing - 3/31/2012
Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol |  Title Star Rating |  Category |  Total Assets |  Top Holdings |  Top Sectors |  Symbol |  Name Title |  Date |  Author |  Collection |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Star Rating |  Market Cap |  Stock Type |  Sector |  Industry Star Rating |  Investment Style |  Total Assets |  Category |  Top Holdings |  Top Sectors |  Symbol / Ticker |  Title Star Rating |  Category |  Total Assets |  Symbol / Ticker |  Name Title |  Date |  Author |  Collection |  Popularity |  Interest Title |  Date |  Company |  Symbol |  Interest |  Popularity Topic |  Sector |  Key Indicators |  User Interest |  Market Cap |  Industry Name |  Ticker |  Popularity |  Our Choices |  Most Recent Title |  Date |  Company |  Symbol |  Interest |  Popularity

Previous: XNAS:ONFC Oneida Financial Corp Insider Activity 4 Filing - 9/11/2012  |  Next: XNAS:ONFC Oneida Financial Corp Quarterly Report 10-Q Filing - 6/30/2012