Oneida Financial Corp. - FORM 10-Q

Attached files

file	filename
EX-31.1 - EXHIBIT 31.1 - Oneida Financial Corp.	ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - Oneida Financial Corp.	ex31_2.htm
EX-32.1 - EXHIBIT 32.1 - Oneida Financial Corp.	ex32_1.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

T	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2011

£	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 T No £

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 £ No £

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 T 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 £ No T

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 7,162,273 shares of the Registrant’s common stock outstanding as of May 1, 2011.

ONEIDA FINANCIAL CORP.

INDEX

		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Statements of Condition (unaudited)	2
	As of March 31, 2011 and December 31, 2010

	Consolidated Statements of Operations (unaudited)	3
	For the three months ended March 31, 2011 and 2010

	Consolidated Statements of Comprehensive Income (unaudited)	4
	For the three months ended March 31, 2011 and 2010

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited)	5
	For the three months ended March 31, 2011

	Consolidated Statements of Cash Flows (unaudited)	6
	For the three months ended March 31, 2011 and 2010

	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition	28
	And Results of Operations

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	39

Item 4.	Controls and Procedures	39

PART II.	OTHER INFORMATION	41

Item 1.	Legal Proceedings	40

Item 1a.	Risk Factors	40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40

Item 3.	Defaults Upon Senior Securities	41

Item 4.	[ Reserved]	41

Item 5.	Other Information	41

Item 6.	Exhibits	41

Index

PART I.

FINANCIAL INFORMATION

Item I. Financial Statements

Page 1 of 42

Index

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

At March 31, 2011 (unaudited) and December 31, 2010 (unaudited)

	At March 31,			At December 31,
	2011			2010
ASSETS	(in thousands, except share data)
Cash and due from banks	$	18,333		$	15,608
Federal funds sold		31,810			18,133
TOTAL CASH AND CASH EQUIVALENTS		50,143			33,741

Trading securities		7,252			7,691
Securities, available for sale		235,948			227,478
Securities, held to maturity (fair value $23,063
and $25,070 respectively)		22,176			24,143

Mortgage loans held for sale		848			857

Loans receivable		287,123			286,850
Allowance for loan losses		(4,641	)		(4,276	)
LOANS RECEIVABLE, NET		282,482			282,574

Federal Home Loan Bank stock		2,137			2,109
Bank premises and equipment, net		19,645			19,903
Accrued interest receivable		2,717			2,455
Bank owned life insurance		16,476			16,332
Other assets		18,189			19,777
Goodwill		23,971			23,301
Other intangible assets		1,252			1,218
TOTAL ASSETS	$	683,236		$	661,579
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Interest bearing deposits	$	508,240		$	486,985
Non-interest bearing deposits		67,896			65,179
Borrowings		12,000			12,000
Other liabilities		8,306			11,495
TOTAL LIABILITIES		596,442			575,659
Oneida Financial Corp. Stockholders’ equity:
Preferred stock, 10,000,000 shares authorized		-			-
Common stock ($.01 par value; 30,000,000 shares authorized
7,164,794 issued)		72			72
Additional paid-in capital		45,636			45,636
Retained earnings		45,370			44,816
Accumulated other comprehensive loss		(5,878	)		(6,198	)
Treasury stock (at cost, 2,521 and 2,521 shares)		(20	)		(20	)
Unallocated ESOP (118,228 and 118,228 shares)		(946	)		(946	)
Total Oneida Financial Corp stockholders’ equity		84,234			83,360
Noncontrolling interest		2,560			2,560
TOTAL STOCKHOLDERS’ EQUITY		86,794			85,920
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	683,236		$	661,579

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

Page 2 of 42

Index

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2011 (unaudited) and 2010 (unaudited)

	Three Months Ended
	March 31, March 31,
	2011			2010
	(in thousands, except share and per share data)
INTEREST INCOME:
Interest and fees on loans	$	3,931		$	4,318
Interest on investment securities		1,998			1,438
Dividends on equity securities		62			74
Interest on federal funds sold and
interest-earning deposits		8			7
Total interest and dividend income		5,999			5,837
INTEREST EXPENSE:
Core deposits		458			530
Time deposits		570			697
Borrowings		131			329
Note payable		1			-
Total interest expense		1,160			1,556
NET INTEREST INCOME		4,839			4,281
Less: Provision for loan losses		400			400
Net interest income after provision for loan losses		4,439			3,881
INVESTMENT GAINS (LOSSES):
Total other-than-temporary impairment losses		(204	)		(642	)
Portion of loss recognized in OCI (before taxes)		-			(348	)
Net impairment losses		(204	)		(990	)
Net (losses) gains on sale of securities, net		(20	)		309
Changes in fair value of trading securities		430			139
Total investment gains (losses)		206			(542	)
NON-INTEREST INCOME:
Commissions and fees on sales of
non-banking products		4,945			4,662
Other operating income		1,092			1,166
Total non-interest income		6,037			5,828
NON-INTEREST EXPENSES:
Compensation and employee benefits		5,587			5,237
Occupancy expenses, net		1,214			1,274
Other operating expense		2,004			1,768
Total non-interest expenses		8,805			8,279
INCOME BEFORE INCOME TAXES		1,877			888
Provision for income taxes		400			196
NET INCOME		1,477			692
Less: net income attributable to noncontrolling interest		64			65
NET INCOME attributable
to Oneida Financial Corp.	$	1,413		$	627
EARNINGS PER SHARE – BASIC	$	0.20		$	0.09
EARNINGS PER SHARE – DILUTED	$	0.20		$	0.09

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

Page 3 of 42

Index

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended March 31, 2011 (unaudited) and 2010 (unaudited)

	Three Months Ended
	March 31,			March 31,
	2011			2010
	(In thousands)

Net income attributable to Oneida Financial Corp.	$	1,413		$	627

Other comprehensive income (loss), net of tax:

Net change in unrealized gains (losses):
Other-than-temporary impaired securities
Available for sale:
Unrealized (gains) losses on securities
arising during period		(71	)		(642	)
Reclassification adjustment for
losses included in net income		204			990
Net unrealized gains		133			348
Income tax effect		(53	)		(139	)
		80			209
Securities available for sale:
Unrealized gains on securities
arising during period		349			1,102
Reclassification adjustment for
losses (gains) included in net income		20			(309	)
Net unrealized gains		369			793
Income tax effect		(147	)		(317	)
		222			476
Unrealized holding gains on securities.
net of tax		302			685

Change in unrealized loss on pension benefits		31			32
Income tax effect		(13	)		(13	)
		18			19

Other comprehensive gain , net of tax		320			704

Comprehensive income attributable to
Oneida Financial Corp.	$	1,733		$	1,331

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

Page 4 of 42

Index

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

																Common Stock			Total Equity
										Accumulated						Issued Under			Attributable
					Additional					Other						Employee			To Oneida			Non-
	Common Stock				Paid-In		Retained			Comprehensive			Treasury			Stock Plans			Financial			controlling
	Shares		Amount		Capital		Earnings			Loss			Stock			Unearned			Corp.			Interest			Total
	(In thousands, except number of shares)

Balance as of January 1, 2011		7,164,794	$	72	$	45,636	$	44,816		$	(6,198	)	$	(20	)	$	(946	)	$	83,360		$	2,560		$	85,920
Net income		-		-		-		1,413			-			-			-			1,413			64			1,477
Distributions to non-controlling interest		-		-		-		-			-			-			-			-			(64	)		(64	)
Other comprehensive income,
net of tax		-		-		-		-			320			-			-			320			-			320
Common stock dividends: $0.12 per share		-		-		-		(859	)		-			-			-			(859	)		-			(859	)

Balance as of March 31, 2011		7,164,794	$	72	$	45,636	$	45,370		$	(5,878	)	$	(20	)	$	(946	)	$	84,234		$	2,560		$	86,794

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

Page 5 of 42

Index

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

For the three Months Ended March 31, 2011 (unaudited) and 2010 (unaudited)

	Three Months Ended
	March 31,
	2011			2010
Operating Activities:	(in thousands)
Net income attributable to Oneida Financial Corp.	$	1,413		$	627
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization		453			510
Amortization of premiums/discounts on securities, net		198			83
Net change in fair value of trading securities		(430	)		(139	)
Provision for loan losses		400			400
Stock compensation earned		-			62
Loss on impairment of securities		204			990
Loss (gain) on sale of securities, net		20			(309	)
Gain on sale of loans, net		(48	)		(61	)
Income tax payable		(42	)		194
Accrued interest receivable		(262	)		131
Other assets		1,602			2,029
Other liabilities		(4,379	)		(3,378	)
Earnings on bank owned life insurance		(144	)		(167	)
Origination of loans held for sale		(3,693	)		(4,518	)
Proceeds from sales of loans		3,750			4,443
Net cash (used in) provided by operating activities		(958	)		897
Investing Activities:
Purchase of securities available for sale		(24,031	)		(31,382	)
Proceeds from sale of securities available for sale		4,834			8,340
Maturities and calls of securities available for sale		7,390			4,242
Principal collected on securities available for sale		3,461			5,658
Maturities and call of securities held to maturity		1,027			4,016
Principal collected on securities held to maturity		923			933
Proceeds from sale of trading securities		845			-
Purchase of FHLB stock		(62	)		-
Redemption of FHLB stock		33			363
Net (increase) decrease in loans		(432	)		2,310
Purchase of bank premises and equipment		(92	)		(292	)
Purchase of employee benefits company		(94	)		(117	)
Purchase of insurance company		(350	)		-
Net cash used in investing activities		(6,548	)		(5,929	)
Financing Activities:
Net increase in demand deposit, savings,
money market, super now and escrow		22,850			15,506
Net decrease in time deposits		1,122			645
Dividends on preferred stock of subsidiary held by minority interest		(64	)		(65	)
Proceeds from borrowings		-			110
Repayment of borrowings		-			(7,610	)
Cash dividends		-			(844	)
Stock issued – noncontrolling interest		-			1
Exercise of stock options (using treasury stock)		-			170
Purchase of treasury stock		-			(136	)
Net cash provided by financing activities		23,908			7,777
Increase in cash and cash equivalents		16,402			2,745
Cash and cash equivalents at beginning of period		33,741			39,537
Cash and cash equivalents at end of period	$	50,143		$	42,282

Supplemental disclosures of cash flow information:
Cash paid for interest		1,161			1,569
Cash paid for income taxes		440			-

Supplemental noncash disclosures:
Transfer of loans to other real estate		123			241
Dividends declared and unpaid		859			-
Notes payable issued in connection with acquisition		362			-

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

Page 6 of 42

Index

ONEIDA FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

MARCH 31, 2011

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, 2011 and December 31, 2010 and for the three month periods ended March 31, 2011 and 2010. 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 as of the date 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, 2011 are not necessarily indicative of the results to be achieved for the remainder of 2011. On July 7, 2010, Oneida Financial MHC completed its second step conversion to stock form (the “Conversion”). 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. As a result of the second-step conversion, all share and per share information have been restated giving retroactive recognition to the second-step conversion ratio of 0.9136. See Note J for more information.

The data in the consolidated statements of condition for December 31, 2010 was derived from the audited financial statements included in the Company’s 2010 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 2010 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

The Company had stock compensation awards with non-forfeitable rights which are considered participating securities prior to 2011. All compensation awards were vested as of December 31, 2010. As such, earnings per share is computed using the two-class method. Basic earnings per share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period, excluding outstanding participating securities. Diluted earnings per common share includes the dilutive effect of additional potential common shares from stock-based compensation plans, but excludes awards considered participating securities.

Page 7 of 42

Index

Note B – Earnings per Share (Continued)

Earnings per common share have been computed based on the following for the three months ended March 31, 2011 and 2010:

	Three Months Ended
	March 31,		March 31,
	2011		2010

Net income attributable to Oneida Financial Corp.	$	1,412,987	$	627,085
Net earnings allocated to participating securities		-		(3,140	)
Net earnings allocated to common stock	$	1,412,987	$	623,945

Basic
Distributed earnings allocated to common stock	$	859,473	$	840,263
Undistributed (overdistributed) earnings allocated
to common stock		553,514		(216,318	)
Net earnings allocated to common stock	$	1,412,987	$	623,945

Weighted average common shares outstanding
including shares considered participating securities		7,044,045		7,151,452
Less: Average participating securities		-		(14,973	)
Weighted average shares		7,044,045		7,136,479

Basic earnings per share	$	0.20	$	0.09

Diluted
Net earnings allocated to common stock	$	1,412,987	$	623,945

Weighted average common shares outstanding
for basic earnings per common share		7,044,045		7,136,479
Add: Dilutive effects of assumed
exercise of stock options		-		8,402
Weighted average shares and dilutive
potential common shares		7,044,045		7,144,881

Diluted earnings per common share	$	0.20	$	0.09

There were no stock options considered in computing diluted earnings per common share for the three months ended March 31, 2011 as all options expired April 25, 2010. Stock options for 81,406 shares of common stock were not considered in computing diluted earnings per common share for the three months ended March 31, 2010 because they were antidilutive. Dividends of $3,936 as of March 31, 2010 were declared on unvested shares with non-forfeitable dividend rights none of which was included in net income as compensation expense because all the awards are expected to vest.

Note C – Stock-Based Compensation

The Company’s 2000 Stock Option Plan, which was shareholder approved, permitted the granting of share options to its directors, officers and key employees for up to 342,205 shares of common stock. The exercise price of options granted was equal to the market value of the Company’s shares at the date of grant. All outstanding options expired on April 25, 2010, unless previously exercised. The plan also had a reload feature which entitled the option holder, who had delivered common stock as payment of the exercise price for option stock, to a new option to acquire additional shares in the amount equal to the shares traded in. The option period during which the reload option may be exercised expires at the same time as that of the original option that the holder has exercised. The Company has a policy of using shares held as treasury stock to satisfy share option exercises.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below. Expected volatilities are based on historic volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The fair value of options granted was determined using the following weighted-average assumptions as of the grant date.

	2010
Risk-free interest rate		0.50	%
Expected stock price volatility		66.44	%
Expected dividend rate		3.00	%
Expected life	0.17 years

Page 8 of 42

Index

Note C – Stock-Based Compensation (Continued)

Information related to the stock option plan during the 2010 period is as follows:

	2010
Intrinsic value of options exercised	$	163,977
Cash received from option exercises	$	34,835
Tax benefit realized from option exercises	$	25,644
Weighted average fair value of options granted	$	1.057

There was no unrecognized compensation cost for this plan as of March 31, 2010 as all shares vested under the terms of the plan. Compensation recorded in conjunction with the new grants totaled $13,102 for the three months ended March 31, 2010.

The Company’s Management Recognition and Retention Plans provided for the issuance of shares of restricted stock to directors, officers and key employees. Compensation expense equal to the market value of Oneida Financial Corp’s stock on the grant date is recognized ratably over the five year vesting period for shares of restricted stock granted that was fully vested at December 31, 2010. Compensation expense recorded in conjunction with this plan was $48,464 for the three months ended March 31, 2010. Shares unallocated under the plans available for future awards were 9,662 at March 31, 2010.

Note D – Pension Plan

The Bank provides a noncontributory defined benefit retirement accumulation plan covering substantially all employees. Under the plan, retirement benefits are primarily a function of the employee’s years of service and level of compensation. As of June 15, 2004, the Bank had a plan amendment to freeze the plan benefits for plan participants. The Bank uses a December 31 measurement date for its pension plan.

State Bank of Chittenango, a limited purpose commercial bank subsidiary of Oneida Savings Bank, participated in the New York State Bankers Retirement System plan which was a noncontributory defined benefit plan covering substantially all employees. Under the plan, retirement benefits were primarily a function of the employee’s years of service and level of compensation. The plan was frozen as of May 31, 2002. State Bank of Chittenango uses a December 31 measurement date for its pension plan.

Net pension and postretirement cost, which is recorded within compensation and employee benefits expenses in the consolidated statements of operations, is comprised of the following:

	Oneida Savings Bank						State Bank of Chittenango
	Three			Three			Three			Three
	Months Ended			Months Ended			Months Ended			Months Ended
	March 31,			March 31,			March 31,			March 31,
	2011			2010			2011			2010
Service cost	$	-		$	-		$	6,600		$	5,500
Interest cost		52,250			52,000			30,900			33,000
Expected return on plan assets		(65,500	)		(60,000	)		(35,500	)		(39,000	)
Net amortization and deferral		30,500			32,000			12,200			10,700
Net periodic pension cost	$	17,250		$	24,000		$	14,200		$	10,200

Net gain		(18,300	)		(19,000	)		-			-
Prior service cost		-			-			-			-
Total recognized in other comprehensive income		(18,300	)		(19,000	)		-			-
Total recognized in net periodic benefit cost and
Other comprehensive (loss) income	$	(1,050	)	$	5,000		$	14,200		$	10,200

Weighted-average assumptions as of December 31:		2011			2010			2011			2010

Discount rate		5.05	%		3.97	%		5.38	%		5.89	%
Expected return on plan assets		7.50	%		7.50	%		7.50	%		7.50	%

As of March 31, 2011, contributions to the pension plans totaled $60,950. The Bank anticipates contributing $222,000 in 2011 to fund the pension plans.

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Index

Note E – Investment Securities and Mortgage-Backed Securities

Investment securities and mortgage-backed securities consist of the following at March 31, 2011 and December 31, 2010:

	March 31, 2011
	Amortized		Gross Unrealized					Fair
Available-for-sale portfolio:	Cost		Gains		Losses			Value
Investment Securities	(In thousands)
Debt securities:
U. S. Agencies	$	68,149	$	81	$	(1,574	)	$	66,656
Corporate		25,129		269		(960	)		24,438
Trust preferred securities		6,648		-		(3,079	)		3,569
State and municipal		52,514		480		(1,257	)		51,737
Small business administration		3,002		-		(94	)		2,908
	$	155,442	$	830	$	(6,964	)	$	149,308
Mortgage-Backed Securities
Fannie Mae	$	41,947	$	296	$	(665	)	$	41,578
Freddie Mac		16,948		222		(112	)		17,058
Government National Mortgage Assoc.		25,610		209		(370	)		25,449
Collateralized Mortgage Obligations		2,632		24		(101	)		2,555
	$	87,137	$	751	$	(1,248	)	$	86,640
Total available-for-sale	$	242,579	$	1,581	$	(8,212	)	$	235,948

Held-to-maturity portfolio
Investment Securities
Debt securities:
U. S. Agencies	$	3,000	$	105	$	-		$	3,105
State and municipal		8,268		479		-			8,747
Small business administration		642		-		-			642
	$	11,910	$	584	$	-		$	12,494
Mortgage-Backed Securities
Fannie Mae	$	5,024	$	166	$	-		$	5,190
Freddie Mac		1,060		22		-			1,082
Government National Mortgage Assoc.		4,182		115		-			4,297
	$	10,266	$	303	$	-		$	10,569
Total held-to-maturity	$	22,176	$	887	$	-		$	23,063

	December 31, 2010
	Amortized		Gross Unrealized					Fair
Available-for-sale portfolio:	Cost		Gains		Losses			Value
Investment Securities	(In thousands)
Debt securities:
U. S. Agencies	$	70,214	$	136	$	(1,205	)	$	69,145
Corporate		25,139		157		(1,043	)		24,253
Trust preferred securities		6,858		-		(3,454	)		3,404
State and municipal		50,249		529		(1,708	)		49,070
Small business administration		3,027		-		(91	)		2,936
	$	155,487	$	822	$	(7,501	)	$	148,808
Mortgage-Backed Securities
Fannie Mae	$	38,331	$	288	$	(511	)	$	38,108
Freddie Mac		14,928		173		(151	)		14,950
Government National Mortgage Assoc.		22,164		277		(307	)		22,134
Collateralized Mortgage Obligations		3,701		9		(232	)		3,478
	$	79,124	$	747	$	(1,201	)	$	78,670
Total available-for-sale	$	234,611	$	1,569	$	(8,702	)	$	227,478

Page 10 of 42

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

Held-to-maturity portfolio
Investment Securities
Debt securities:
U. S. Agencies	$	3,998	$	140	$	-	$	4,138
State and municipal		8,270		484		-		8,754
Small business administration		663		-		-		663
	$	12,931	$	624	$	-	$	13,555
Mortgage-Backed Securities
Fannie Mae	$	5,567	$	177	$	-	$	5,744
Freddie Mac		1,306		27		-		1,333
Government National Mortgage Assoc.		4,339		99		-		4,438
	$	11,212	$	303	$	-	$	11,515
Total held-to-maturity	$	24,143	$	927	$	-	$	25,070

The amortized cost and fair value of the investment securities portfolio at March 31, 2011 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	$	6,279	$	6,295	$	1,007	$	1,032
After one year through five years		21,494		21,637		3,128		3,296
After five years through ten years		65,142		64,663		5,400		5,530
After ten years		62,527		56,713		2,375		2,636
Total	$	155,442	$	149,308	$	11,910	$	12,494

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

	March 31, 2011			March 31, 2010
	(In thousands)
Proceeds	$	5,679		$	8,340
Gross Gains	$	5		$	309
Gross Losses	$	(25	)	$	-

Securities with unrealized losses at March 31, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

March 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	$	52,921	$	(1,574	)	$	-	$	-		$	52,921	$	(1,574	)
Corporate		9,047		(78	)		1,608		(882	)		10,655		(960	)
Trust preferred securities		-		-			3,569		(3,079	)		3,569		(3,079	)
State and municipal		30,072		(1,257	)		-		-			30,072		(1,257	)
Small business administration		2,902		(94	)		5		-			2,907		(94	)
Fannie Mae		26,051		(665	)		-		-			26,051		(665	)
Freddie Mac		7,216		(112	)		-		-			7,216		(112	)
Government National Mortgage Assoc.		10,911		(370	)		-		-			10,911		(370	)
Collateralized mortgage obligations		-		-			1,899		(101	)		1,899		(101	)

Total securities available-for-sale in
an unrealized loss position	$	139,120	$	(4,150	)	$	7,081	$	(4,062	)	$	146,201	$	(8,212	)

Small business administration	$	-	$	-		$	642	$	-		$	642	$	-

Total securities held-to-maturity in
an unrealized loss position	$	-	$	-		$	642	$	-		$	642	$	-

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

December 31, 2010	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	$	50,289	$	(1,205	)	$	-	$	-		$	50,289	$	(1,205	)
Corporate		9,033		(97	)		4,043		(946	)		13,076		(1,043	)
Trust preferred securities		-		-			3,404		(3,454	)		3,404		(3,454	)
State and municipals		32,162		(1,708	)		-		-			32,162		(1,708	)
Small business administration		2,930		(91	)		5		-			2,935		(91	)
Fannie Mae		22,786		(511	)		-		-			22,786		(511	)
Freddie Mac		10,256		(151	)		-		-			10,256		(151	)
Ginnie Mae		11,531		(307	)		-		-			11,531		(307	)
Collateralized mortgage obligations		-		-			2,746		(232	)		2,746		(232	)
Total securities available-for-sale in
an unrealized loss position	$	138,987	$	(4,070	)	$	10,198	$	(4,632	)	$	149,185	$	(8,702	)

Small business administration	$	-	$	-		$	663	$	-		$	663	$	-
Total securities held-to-maturity in
an unrealized loss position	$	-	$	-		$	663	$	-		$	663	$	-

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”) at least on 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 assess 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) other-than temporary impairment (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, 2011, the Company’s security portfolio consisted of 377 securities, 157 of which were in an unrealized loss position. The majority of the unrealized losses are related to the Company’s agency, mortgage-backed securities, state and local municipalities, and corporate and trust preferred securities as discussed below.

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, 2011, of the eighty-seven U.S. Government sponsored enterprise agency and mortgage-backed securities in an unrealized loss position in our available-for-sale and held-to-maturity portfolios, only two were in a continuous unrealized loss position for 12 months or more. The unrealized losses at March 31, 2011 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, 2011.

Non-Agency Collateralized Mortgage Obligations.

All of our non-agency collateralized mortgage obligations carry various amounts of credit enhancement and none are

Page 12 of 42

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

collateralized with subprime loans. 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, 2011, of the two non-agency collateralized mortgage obligations in an unrealized loss position; all were in a continuous unrealized loss position of 12 months or more. All were rated above investment grade at time of purchase. One is currently rated below investment grade. We have assessed these securities in an unrealized loss position at March 31, 2011 and determined that the decline in fair value was temporary. We believe the decline in fair value was caused by the significant widening in liquidity spreads across sectors related to the continued illiquidity and uncertainty in the markets and not the credit quality of the individual issuer or underlying assets. In making this determination, we considered the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized cost, the financial condition of the issuer, and the delinquency or default rates of the underlying collateral. The Company monitors to insure it has adequate credit support. In addition, we do not intend to sell these securities and it is likely that we will not be required to sell the securities before their anticipated recovery.

Corporate Debt and Municipal Securities

At March 31, 2011, of the fifty-nine corporate debt and municipal securities in an unrealized loss position, one was in a continuous unrealized loss position of 12 months or more. We have assessed this security and determined that the decline in fair value was temporary. In making this determination, we considered the period of time the security was 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 this security and it is not more likely than not that we will be required to sell this security before the recovery of their amortized cost basis, which may be at maturity. The 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 1.46%. The unrealized loss at March 31, 2011 and December 31, 2010 was $882,000 and $914,000 respectively. 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 security is paying as agreed.

Trust Preferred Securities

The Company currently has $3.6 million invested in nine trust preferred securities as of March 31, 2011 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 $3.6 million, $1.0 million have variable rates of interest. All of the securities are on nonaccrual as of March 31, 2011. The unrealized losses at March 31, 2011 and December 31, 2010 on the nine securities totaled $3.1 million and $3.5 million respectively.

The following table provides detailed information related to the trust preferred securities held as of March 31, 2011:

																				Expected
															Number of		Actual			Additional			Excess
															Banks and		Deferrals and			Deferrals and			Subordination
															Insurance		Defaults			Defaults			Defaults
															Companies		as % of			as % of			as % of
			Book		Fair		Unrealized			Realized			Lowest		Currently		Original			Performing			Performing
Description	Class		Value (2)		Value		Loss			Loss (2) (3)			Rating (1)		Performing		Collateral			Collateral			Collateral
							(Dollars In thousands)
Preferred Term Ltd.	Mezz		$	819	$	612	$	(207	)	$	(337	)	Ca			16		42.76	%		28.29	%		-42.70	%
Preferred Term Ltd.	Mezz			1,638		1,176		(462	)		(683	)	Ca			16		42.76	%		28.29	%		-42.70	%
Preferred Term Ltd.	Mezz			1,092		784		(308	)		(456	)	Ca			16		42.76	%		28.29	%		-42.70	%
Preferred Term X		B-3		813		371		(442	)		(1,163	)		C		36		45.49	%		10.42	%		-66.72	%
Preferred Term XV		B-2		649		217		(432	)		(351	)		C		51		35.38	%		23.59	%		-41.51	%
Preferred Term XV		B-3		657		219		(438	)		(344	)		C		51		35.38	%		23.59	%		-41.51	%
Preferred Term XXVI		C-1		673		129		(544	)		(312	)		C		50		29.56	%		15.74	%		-24.21	%
Preferred Term XXVI		D-1		-		-		-			(497	)		N/R		50		29.56	%		15.74	%		-33.95	%
MMCF IX		B-2		307		61		(246	)		(653	)	Caa3			19		39.07	%		10.47	%		-50.96	%
			$	6,648	$	3,569	$	(3,079	)	$	(4,796	)

(1) The table represents ratings information as of March 31, 2011. 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.

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

(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, 2011.

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 and 2009, 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:

	Significant inputs at March 31, 2011
Annual prepayment	1% annually
Projected severity of loss on current defaults	85% - 100%
Projected severity of loss on current deferrals	0% - 100%
Projected severity of loss on specific deferrals	0% - 80%
Projected additional defaults
Thereafter	0.375% applied annually
Projected severity of loss on additional defaults	0% - 100%
Present value discount rates for OTTI	5.27% - 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.

Page 14 of 42

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

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, 2011 analysis, our model indicated other-than temporary impairment on two of these securities for the quarter ended March 31, 2011, which resulted from management projecting additionaldefaults and deferrals during the period.

Two of theeight securities had OTTI losses of $204,000 of which $204,000 was recorded as expense during the period. These eight securities remain classified as available-for-sale at March 31, 2011. 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, 2011 and 2010 (in thousands):

	March 31, 2011		March 31, 2010
Beginning Balance	$	5,740	$	3,317

Additional credit loss for which other-than-temporary impairment
was previously recognized		204		990
Ending Balance	$	5,944	$	4,307

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 F – Loans Receivable

The components of loans receivable at March 31, 2011 and December 31, 2010 are as follows:

	March 31, 2011			December 31, 2010
	(In thousands)

Residential mortgages	$	88,866		$	90,033
Home equity loans		41,834			42,122
Consumer loans		33,935			35,879
Commercial real estate		81,262			77,851
Commercial loans		41,226			40,965
		287,123			286,850
Allowance for loan losses		(4,641	)		(4,276	)
Net loans	$	282,482		$	282,574

Page 15 of 42

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Note F – Loans Receivable (Continued)

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 by 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, 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.

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.

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 mortgages, commercial loans, consumer loans, home equity loans and residential real estate 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.

Page 16 of 42

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Note F – Loans Receivable (Continued)

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.

The following table sets forth the activity 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, 2011	Loans			Real Estate			Loans			Equity			Mortgages			Total
	(In thousands)
Allowance for credit losses:
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

Ending balance attributable to loans:
Individually evaluated
for impairment	$	2,019		$	386		$	-		$	-		$	-		$	2,405
Collectively evaluated
for impairment		630			544			330			259			473			2,236
Total	$	2,649		$	930		$	330		$	259		$	473		$	4,641
Loans:
Individually evaluated
for impairment	$	2,019		$	1,383		$	-		$	-		$	-		$	3,402
Collectively evaluated
for impairment		39,207			79,879			33,935			41,834			88,866			283,721
Total	$	41,226		$	81,262		$	33,935		$	41,834		$	88,866		$	287,123
March 31, 2010

Allowance for credit losses:
Beginning balance	$	1,259		$	635		$	431		$	191		$	385		$	2,901
Charge-offs		-			-			(35	)		(46	)		-			(81	)
Recoveries		16			1			63			-			-			80
Provision for loan losses		495			(63	)		(57	)		46			(21	)		400
Ending balance	$	1,770		$	573		$	402		$	191		$	364		$	3,300

Ending balance attributable to loans:
Individually evaluated
for impairment	$	1,108		$	-		$	-		$	-		$	-		$	1,108
Collectively evaluated
for impairment		662			573			402			191			364			2,192
Total	$	1,770		$	573		$	402		$	191		$	364		$	3,300

Page 17 of 42

Index

Note F – Loans Receivable (Continued)

December 31, 2010
Ending balance attributable to loans:
Individually evaluated
for impairment	$	2,043	$	98	$	-	$	-	$	-	$	2,141
Collectively evaluated
for impairment		625		478		337		264		431		2,135
Total	$	2,668	$	576	$	337	$	264	$	431	$	4,276
Loans:
Individually evaluated
for impairment	$	2,043	$	1,383	$	-	$	-	$	-	$	3,426
Collectively evaluated
for impairment		38,922		76,468		35,879		42,122		90,033		283,424
Total	$	40,965	$	77,851	$	35,879	$	42,122	$	90,033	$	286,850

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2011 and December 31, 2010:

	March 31, 2011
									Cash basis
	Unpaid				Allowance for		Average		Interest
	Principal		Recorded		Loan Losses		Recorded		Income
	Balance		Investment		Allocated		Investment1		Recognized1
With no related	(In thousands)
allowance recorded:
Commercial real estate	$	-	$	-	$	-	$	-	$	-
Commercial loans		-		-		-		-		-
Consumer loans		-		-		-		-		-
Home equity		-		-		-		-		-
Residential mortgages		-		-		-		-		-
With an allowance
recorded:
Commercial real estate		1,383		1,383		386		1,383		-
Commercial loans		2,019		2,019		2,019		2,035		-
Consumer loans		-		-		-		-		-
Home equity		-		-		-		-		-
Residential mortgages		-		-		-		-		-
Total	$	3,402	$	3,402	$	2,405	$	3,418	$	-

	December 31, 2010
									Cash basis
	Unpaid				Allowance for		Average		Interest
	Principal		Recorded		Loan Losses		Recorded		Income
	Balance		Investment		Allocated		Investment1		Recognized1
With no related	(In thousands)
allowance recorded:
Commercial real estate	$	-	$	-	$	-	$	-	$	-
Commercial loans		-		-		-		-		-
Consumer loans		-		-		-		-		-
Home equity		-		-		-		-		-
Residential mortgages		-		-		-		-		-
With an allowance
recorded:
Commercial real estate		1,383		1,383		98		1,383		67
Commercial loans		2,043		2,043		2,043		2,144		35
Consumer loans		-		-		-		-		-
Home equity		-		-		-		-		-
Residential mortgages		-		-		-		-		-
Total	$	3,426	$	3,426	$	2,141	$	3,527	$	102

(1) Based on 12 month average

Page 18 of 42

Index

Note F – Loans Receivable (Continued)

Nonaccrual loans and loans past due 90 days still on accrual include both smaller balance homogenous loans that are collectively evaluated for impairment and individually classified as impaired loans.

The following table presents the recorded investment in nonaccrual and past due loans over 90 days still on accrual by class as of March 31, 2011 and December 31, 2010:

	March 31, 2011
			Loans Past Due
			Over 90 days still
	Nonaccrual		Accruing
	(In thousands)
Commercial real estate	$	1,473	$	-
Commercial loans		2,149		-
Consumer loans		-		-
Home equity		22		-
Residential mortgages		411		6
Total	$	4,055	$	6

	December 31, 2010
			Loans Past Due
			Over 90 days still
	Nonaccrual		Accruing
	(In thousands)
Commercial real estate	$	1,555	$	-
Commercial loans		2,175		-
Consumer loans		-		-
Home equity		-		-
Residential mortgages		247		-
Total	$	3,977	$	-

The following represents the aging of the recorded investment in past due loans as of March 31, 2011 and December 31, 2010 by class of loans.

	March 31, 2011
			30-59		60-89		Greater than
			Days		Days		90 Days		Total		Loans Not
	Total		Past Due		Past Due		Past Due		Past Due		Past Due
	(In thousands)
Commercial real estate	$	81,262	$	-	$	137	$	1,473	$	1,610	$	79,652
Commercial loans		41,226		-		247		53		300		40,926
Consumer loans		33,935		92		-		-		92		33,843
Home equity		41,834		-		13		9		22		41,812
Residential mortgages		88,866		-		138		279		417		88,449
Total	$	287,123	$	92	$	535	$	1,814	$	2,441	$	284,682

	December 31, 2010
			30-59		60-89		Greater than
			Days		Days		90 Days		Total		Loans Not
	Total		Past Due		Past Due		Past Due		Past Due		Past Due
	(In thousands)
Commercial real estate	$	77,851	$	99	$	1,522	$	90	$	1,711	$	76,140
Commercial loans		40,965		11		275		53		339		40,626
Consumer loans		35,879		90		-		-		90		35,789
Home equity		42,122		5		-		-		5		42,117
Residential mortgages		90,033		-		95		247		342		89,691
Total	$	286,850	$	205	$	1,892	$	390	$	2,487	$	284,363

Page 19 of 42

Index

Note F – Loans Receivable (Continued)

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. 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.

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. As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed (all loans graded within past 12 months), the risk category:

	March 31, 2011
	Not				Special
	Rated		Pass		Mention		Substandard		Doubtful
	(In thousands)
Commercial real estate	$	17,500	$	62,213	$	-	$	1,515	$	34
Commercial loans		19,763		18,617		301		340		2,205
Total	$	37,263	$	80,830	$	301	$	1,855	$	2,239

	December 31, 2010
	Not				Special
	Rated		Pass		Mention		Substandard		Doubtful
	(In thousands)
Commercial real estate	$	17,051	$	59,250	$	-	$	1,550	$	-
Commercial loans		13,097		24,858		436		340		2,234

Total	$	30,148	$	84,108	$	436	$	1,890	$	2,234

Note G – 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, 2011 and 2010, 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:

Page 20 of 42

Index

Note G – Segment Information (Continued)

	Three Months Ended March 31, 2011
	Banking		Insurance		Benefit Consulting		Risk Management			Total
	Activities		Activities		Activities		Activities
	(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 gains, 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

	Three Months Ended March 31, 2010
	Banking			Insurance		Benefit Consulting		Risk Management			Total
	Activities			Activities		Activities		Activities
	(In thousands)
Net interest income	$	4,281		$	-	$	-	$	-		$	4,281
Provision for loan losses		400			-		-		-			400
Net interest income after provision for loan losses		3,881			-		-		-			3,881
Investment losses, net		(542	)		-		-		-			(542	)
Non-interest income		1,166			3,021		1,440		201			5,828
Non-interest expenses		4,175			2,244		1,141		209			7,769
Depreciation and amortization		432			46		31		1			510
(Loss) income before income taxes		(102	)		731		268		(9	)		888
Income tax (benefit) expense		(229	)		318		110		(3	)		196
Net income (loss)		127			413		158		(6	)		692
Less: net income attributable to
noncontrolling interest		65			-		-		-			65
Net income (loss) attributable to Oneida
Financial Corp.	$	62		$	413	$	158	$	( 6	)	$	627

Total Assets	$	579,650		$	17,354	$	4,924	$	122		$	602,050

Page 21 of 42

Index

Note G – Segment Information (Continued)

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

Assets	2011			2010
	(In thousands)
Total assets for reportable segments	$	689,077		$	602,050
Elimination of intercompany cash balances		(5,841	)		(5,785	)
Consolidated Total	$	683,236		$	596,265

Note H – Fair Value

Fair Value Option

The Company has elected to record at fair value certain preferred and common equity securities, in accordance with accounting guidance, 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.

The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets and liabilities carried at fair value for the three months ended March 31:

Changes in Fair Values for the three months ended March 31, 2011, for items

Measured at Fair Value Pursuant to Election of the Fair Value Option

Total Changes

In Fair Values

Other

Included in

Gains and

Interest

Current Period

(Losses)

Income

Expense

Earnings

(In thousands)

Assets:

Trading securities

420

430

Changes in Fair Values for the three months ended March 31, 2010, for items

Measured at Fair Value Pursuant to Election of the Fair Value Option

Total Changes

In Fair Values

Other

Included in

Gains and

Interest

Current Period

(Losses)

Income

Expense

Earnings

(In thousands)

Assets:

Trading securities

130

139

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 has the ability to access as of the measurement date.

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 reporting entity’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 used to estimate the fair value of items:

Page 22 of 42

Index

Note H – Fair Value (Continued)

Securities: The fair values of trading securities and securities available for sale are determined by quoted market prices, if available (Level 1 inputs). 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). 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.

Trust Preferred Securities which are issued by financial institutions and insurance companies were historically priced using Level 2 inputs. The decline in the level of observable inputs and market activity in this class of investments by the measurement date has been significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, vary widely. The once active market has become comparatively inactive. As such, these investments are now priced using Level 3 inputs.

The Company has developed an internal model for pricing these securities. 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. Due to current market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.

Corporate securities were historically priced using Level 2 inputs. Due to the lack of market of similar type investments, one of our corporate securities was considered Level 3 during 2010. The Company does obtain some broker quotes on this investment based on trading desk information in which the prices are heavily influenced by unobservable market inputs.

Common and preferred equity securities are generally priced using Level 1 or Level 2 inputs due to the market activity of these types of securities. One of the preferred securities is considered level 3 pricing due to the limited trading activity of the individual security in the market and lack of certain brokers providing quotes on this type of security. The company does obtain available, if any broker quotes, reviews past history of contractual payments and financial condition of the corporation in determining an appropriate market value for this type of security.

Impaired Loans: 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 $1.4 million, with a valuation allowance of $386,000 at March 31, 2011. Impaired commercial real estate loans had a principal balance of $1.4 million, with a valuation allowance of $98,000 at December 31, 2010. The increase in the specific allowance resulted in the increase in provisions for loan losses in the current year of $288,000. Estimates of fair value used for other collateral supporting commercial loans generally is not observable in the marketplace and therefore, such valuations have been classified as Level 3. Impaired commercial loans had a principal balance of $2.0 million with a valuation allowance of $2.0 million as of March 31, 2011. Impaired commercial loans had a principal balance of $2.0 million with a valuation allowance of $2.0 million as of December 31, 2010.

Loans Servicing Rights: Fair value is based on market prices for comparable mortgage servicing contracts, when available, or alternatively, based on a valuation model that calculates the present value of estimated future net servicing income.

Loans Held for Sale: Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding loan commitments from third party investors.

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

			Fair Value Measurements at March 31, 2011 Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Assets:	March 31, 2011		(Level 1)		(Level 2)		(Level 3)
			(In thousands)
Trading securities
Common and preferred equities	$	7,252		-	$	5,366	$	1,886

Available-for- sale securities
U.S. Agency		66,656		-		66,656		-
Corporate		24,438		-		24,438		-
Trust preferred securities		3,569		-		-		3,569
State and municipal		51,737		-		51,737		-
Small Business Administration		2,908		-		2,908		-
Residential mortgage-backed securities		84,085		-		84,085		-
Collateralized mortgage obligations		2,555		-		2,555		-
Total	$	243,200	$	-	$	237,745	$	5,455

Page 23 of 42

Index

Note H – Fair Value (Continued)

			Fair Value Measurements at December 31, 2010 Using
					Significant
			Quoted Prices in		Other		Significant
			Active Markets for		Observable		Unobservable
			Identical Assets		Inputs		Inputs
Assets:	December 31, 2010		(Level 1)		(Level 2)		(Level 3)
			(In thousands)
Trading securities
Common and preferred equities	$	7,691		-	$	5,790	$	1,901
Available-for- sale securities
U.S. Agency		69,145		-		69,145		-
Corporate		24,253		-		24,253		-
Trust preferred securities		3,404		-		-		3,404
State and municipal		49,070		-		49,070		-
Small Business Administration		2,936		-		2,936		-
Residential mortgage-backed securities		75,192		-		75,192		-
Collateralized mortgage obligations		3,478		-		3,478		-
Total	$	235,169	$	-	$	229,864	$	5,305

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
	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		-			(6	)		(6	)
Included in other comprehensive income		-			375			375

Ending balance March 31, 2011	$	1,886		$	3,569		$	5,455

	Fair Value Measurements Using Significant
	Unobservable Inputs
	(Level 3)
	Trading						Trust
	Securities			Corporate			Preferreds			Total
	(In thousands)
Beginning balance January 1, 2010	$	2,059		$	2,250		$	5,921		$	10,230
Total gains or losses (realized/unrealized)
Included in earnings
Interest income on securities		(10	)		-			-			(10	)
Other changes in fair value		(24	)		-			-			(24	)
Net impairment losses recognized in earnings - -		(937	)		(937	)
Interest payments applied to principal		-			-			(252	)		(252	)
Included in other comprehensive income		-			-			299			299

Ending balance March 31, 2010	$	2,025		$	2,250		$	5,031		$	9,306

Page 24 of 42

Index

Note H – Fair Value (Continued)

For items for which the fair value option has been elected, interest income is recorded within the consolidated statements of income 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.

Fair Value of Financial Instruments

Carrying amounts and estimated fair values of financial instruments at March 31, 2011 and December 31, 2010 were as follows:

	March 31, 2011				December 31, 2010
	Carrying		Estimated		Carrying		Estimated
	Amount		Fair Value		Amount		Fair Value
	(In thousands)
Financial assets:
Cash and cash equivalents	$	50,143	$	50,143	$	33,741	$	33,741
Trading securities		7,252		7,252		7,691		7,691
Investment securities, available for sale		235,948		235,948		227,478		227,478
Investment securities, held to maturity		22,176		23,063		24,143		25,070
Loans held for sale		848		900		857		865
Loans receivable, net		282,482		298,097		282,574		297,342
Federal Home Loan Bank stock		2,137		N/A		2,109		N/A
Accrued interest receivable		2,717		2,717		2,455		2,455

Financial liabilities:
Deposits	$	576,136	$	579,507	$	552,164	$	560,226
Federal Home Loan Bank advances		12,000		12,194		12,000		17,437
Accrued interest payable		53		53		53		53

Our fair value estimates are based on our existing on and off balance sheet financial instruments without attempting to estimate the value of any anticipated future business. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on our fair value estimates and have not been considered in these.

Our fair value estimates are made as of the dates indicated, based on relevant market information and information about the financial instruments, including our judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in our assumptions could significantly affect the estimates. Our fair value estimates, methods, and assumptions are set forth below for each type of financial instrument.

Cash and Cash Equivalents

The carrying value of our cash and cash equivalents approximates fair value because these instruments have original maturities of three months or less.

Investment Securities

We carry our investment securities held to maturity at cost and we carry our investment securities available for sale at fair value. The fair value estimates of these securities are based on quoted market prices of identical assets or liabilities, where

Page 25 of 42

Index

Note H – Fair Value (Continued)

available. Where sufficient data is not available to produce a fair valuation, fair value is based on broker quotes of similar assets or liabilities. Broker quotes may be adjusted to ensure that financial instruments are recorded at fair value. Adjustments

may include amounts to reflect counterparty credit quality and our creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. If quoted prices are not available, fair value is based upon valuation models that use cash flow, security structure, and other observable information.

Loans Held for Sale

Loans held for sale are carried at the lower of cost or fair value, as determined by outstanding commitments, from third party investors.

Loans and Leases

Variable-rate loans reprice as the associated rate index changes. Therefore, the carrying value of these loans approximate fair value. The fair value of our fixed-rate loans were calculated by discounting scheduled cash flows through the estimated maturity using credit adjusted quarter-end origination rates. Our estimate of maturity is based on the contractual cash flows adjusted for prepayment estimates based on current economic and lending conditions.

FHLB Stock

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

Accrued Interest Receivable

The carrying value of accrued interest receivable approximates fair value.

Deposits

The fair value of our deposits with no stated maturity, such as savings and checking, as well as mortgagors’ payments held in escrow, is equal to the amount payable on demand. The fair value of time deposits was estimated by discounting expected maturities at interest rates approximating those currently being offered. The fair value of accrued interest approximates fair value.

Borrowings

The fair value of borrowings is estimated using discounted cash flows analysis to maturity.

Note I – Accounting Pronouncements

In January 2010, the FASB issued guidance for improving disclosures about fair value measurements. This guidance requires new disclosures to show significant transfers in and out of Level 1 and Level 2 fair value measurements as well as discussions regarding the reasons for the transfers. It also clarifies existing disclosures requiring fair value measurement disclosures for each class of assets and liabilities. The guidance describes a class as being a subset of assets and liabilities within a line item on the statement of financial condition which will require management judgment to designate. Use of the terminology “classes of assets and liabilities” represents an amendment from the previous terminology “major categories of assets and liabilities.” Clarification is also provided for disclosures of Level 2 and Level 3 recurring and nonrecurring fair value measurements requiring discussion about the valuation techniques and inputs used. These provisions of the guidance were effective January 1, 2010. Another new disclosure requires an expanded reconciliation of activity in Level 3 fair value measurements to present information about purchases, sales, issuances and settlements on a gross basis rather than netting the amounts in one number. This requirement is effective for the Company January 1, 2011. The adoption of this guidance did not have a material impact on the Company’s financial position or results of operations.

In July 2010, the FASB issued guidance requiring expanded disclosure to help financial statement users understand the nature of credit risk inherent in a creditor’s portfolio of financing receivables; how that risk is analyzed and assessed in arriving at the allowance for credit losses; and the changes, and reasons for those changes, in both the receivables and the allowance for credit losses. The disclosure should be prepared on a disaggregated basis and provided a roll-forward schedule of the allowance for credit losses and detailed information on financing receivables including, among other things, recorded balances, nonaccrual status, impairments, credit quality indicators, details for troubled debt restructurings and an aging of past due financing receivables. Disclosures required as of the end of the reporting period were effective for the Company December 31, 2010, and did not have a material impact on the Company’s financial position or results of operations. Disclosures required for activity occurring during a reporting period were effective for the Company January 1, 2011. This portion of the guidance did not have a material impact on the Company’s financial position or results of operations.

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Note I – Accounting Pronouncements (Continued)

In January 2011, the FASB issued guidance that temporarily delays the effective date of the disclosures about troubled debt restructurings as outlined in the expanded disclosures issued in July 2010 for public companies. Accordingly, management has not included such disclosures in Note F.

In April 2011, the FASB issued additional guidance to assist creditors in determining whether a restructuring of a receivable meets the criteria to be considered a troubled debt restructuring. The disclosures and guidance will be required to be included with the Company’s September 30, 2011 interim financial statement. The Company does not feel that the adoption of this guidance will have a material impact on the Company’s financial position or results of operations.

Note J – Stock Offering and Conversion

On July 7, 2010, the second step conversion of Oneida Financial MHC into a stock holding company structure and related stock offering of this new stock holding company was completed. As a result of the second step conversion, Oneida Financial Corp. a Maryland corporation (“Oneida Financial-New”) became the holding company for the Bank. As part of the second step conversion, Oneida Financial Corp., a Federal corporation, was merged into Oneida Financial-New, with Oneida Financial-New as the surviving entity. Oneida Financial -New issued 3,937,500 shares of common stock at a price of $8.00 per share in the related stock offering and exchanged 3,532,959 shares of common stock of the now predecessor Oneida Financial Corp, into 3,227,294 shares of common stock of the newly formed Oneida Financial-New pursuant to an exchange ratio of 0.9136, cashing out fractional shares. The reorganization was accounted for as a change in corporate form with no resulting change in the historical basis of the Company’s assets, liabilities and equity. Direct offering costs totaling $3.7 million were deducted from the proceeds of the shares sold in the offering. As a result of the exchange and stock offering, as of July 7, 2010, the Company had 7,164,794 shares of common stock issued and outstanding. Net proceeds of $27.7 million were raised in the stock offering, excluding $1.26 million which was loaned by the Company to a trust for the Employee Stock Ownership Plan (ESOP) enabling it to purchase 157,500 shares of common stock in the stock offering for allocation under such plan. In addition, as part of the conversion and dissolution of Oneida Financial MHC, the Bank received $36,000 of cash previously held by Oneida Financial MHC. As a result of the second-step conversion, all share and per share amounts have been restated giving retrospective recognition to the second-step conversion ratio of 0.9136. Restricted stock granted under the Recognition and Retention Plan prior to the conversion was also exchanged using the conversion ratio of 0.9136.

Note K – 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.

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ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results

Of Operations

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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 as of March 22, 2011 of $0.12 per share which was paid to its shareholders on April 5, 2011.

On March 10, 2011, the Company completed an asset purchase of the 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.

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RECENT LEGISLATION

Congress has recently enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act which will significantly change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act will eliminate our current primary federal regulator, the Office of Thrift Supervision. The Dodd-Frank Act also authorizes 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. As a result, the Federal Reserve Board’s current regulations applicable to bank holding companies, including holding company capital requirements, will apply to savings and loan holding companies like the Company. These capital requirements are substantially similar to the capital requirements currently applicable to the Bank. The Dodd-Frank Act also requires the Federal Reserve Board to set minimum capital levels for bank 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 are 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 establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs 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 creates 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 will be examined by their applicable bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations, and gives state attorneys general the ability to enforce applicable federal consumer protection laws.

The legislation also broadens the base for Federal Deposit Insurance Corporation insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013. Lastly, the Dodd-Frank Act will increase 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 directs 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.

The legislation will require many regulations to be created and the impact on the Company is not known and may not be known for some time.

FINANCIAL CONDITION

ASSETS. Total assets at March 31, 2011 were $683.2 million, an increase of $21.6 million, or 3.3%, from $661.6 million at December 31, 2010. 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 $7.0 million, or 7.8%, to $96.9 million at March 31, 2011 as compared with $89.9 million at December 31, 2010. Investment securities decreased $521,000 or 0.3%, to $161.2 million at March 31, 2011 as compared to $161.7 million at December 31, 2010. The increase in mortgage-backed securities was due to an increase in municipal deposits which require full collateralization with treasury, agency and municipal securities. The decrease in investment securities was due to timing of the reinvestment of calls and maturities of securities.

Cash and cash equivalents increased $16.4 million, or 48.6%, to $50.1 million at March 31, 2011 from $33.7 million at December 31, 2010. The increase in cash and cash equivalents was due to the increase in both retail and municipal deposits and the timing of the investment of the cash on hand.

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Trading securities decreased $439,000, or 5.7%, to $7.3 million at March 31, 2011 as compared with $7.7 million at December 31, 2010 and represent common and preferred equity securities that we have elected to adjust to fair value. The decrease in trading securities represents the sale of certain preferred securities during the quarter offset by the increase in fair value during 2011 that was reflected through the income statement.

Loans receivable, including loans held for sale, increased $264,000, or 0.1%, to $288.0 million at March 31, 2011 as compared with $287.7 million at December 31, 2010. We continue to maintain a diversified loan portfolio mix. We sold $3.7 million in fixed rate residential loans during the three months ended March 31, 2011. While overall loan demand is slightly higher than a year ago, we have continued to maintain balanced loan originations during the first three months of 2011: residential mortgage loan originations were $5.2 million, consumer loan originations were $4.8 million and commercial loan originations were $8.8 million.

LIABILITIES. Total liabilities increased by $20.7 million, or 3.6%, to $596.4 million at March 31, 2011 from $575.7 million at December 31, 2010. The increase was primarily the result of an increase in deposits of $23.9 million, partially offset by a decrease in other liabilities of $3.2 million.

Deposit accounts increased $23.9 million, or 4.3%, to $576.1 million at March 31, 2011 from $552.2 million at December 31, 2010. Interest-bearing deposit accounts increased by $21.2 million, or 4.4%, to $508.2 million at March 31, 2011 from $487.0 million at December 31, 2010. Non-interest bearing deposit accounts increased $2.7 million, or 4.1%, to $67.9 million at March 31, 2011 from $65.2 million at December 31, 2010. 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 $24.8 million to $142.1 million at March 31, 2011 from $117.3 million at December 31, 2010. This increase was concurrent with local tax collections by various municipalities combined with the addition of new account relationships.

Borrowings remained stable at $12.0 million at both March 31, 2011 and December 31, 2010.

Other liabilities decreased $3.2 million, or 27.8%, to $8.3 million at March 31, 2011 from $11.5 million at December 31, 2010. 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, 2011 from December 31, 2010.

STOCKHOLDERS’ EQUITY. Total stockholders’ equity at March 31, 2011 was $86.8 million, an increase of $874,000, or 1.0%, from $85.9 million at December 31, 2010. The increase in stockholders’ equity was a result of net income of $1.4 million for the three months ended March 31, 2011. In addition, there was a decrease in accumulated other comprehensive loss of $320,000 at March 31, 2011 resulting from an increase in the market value of mortgage-backed and investment securities and the change in the unrealized loss on pension benefits. The recognition of other-than-temporary impairment through current quarter earnings on certain investment securities resulted in a decrease in the net unrealized loss on our available for sale securities.

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 2011 of $0.12 per share resulting in a reduction in stockholders’ equity of $859,000.

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, 2011 and 2010 and for the year ended December 31, 2010. 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.

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TABLE 1. Average Balance Sheet.

	Three Months Ended March 31,																Twelve Months Ended Dec. 31,
			2011								2010								2010
	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	$	286,686	$	3,931			5.48	%	$	298,892	$	4,318			5.78	%	$	293,711	$	16,791			5.72	%
Investment and Mortgage-Backed
Securities		260,616		1,998			3.07	%		167,730		1,438			3.43	%		202,742		6,648			3.28	%
Federal Funds		26,899		8			0.12	%		31,249		7			0.09	%		31,919		39			0.12	%
Equity Securities		7,434		62			3.34	%		7,625		74			3.88	%		7,385		302			4.09	%
Total Interest-earning Assets		581,635		5,999			4.13	%		505,496		5,837			4.62	%		535,757		23,780			4.44	%
Non interest-earning Assets:
Cash and due from banks		11,737								11,905								11,108
Other assets		74,266								78,283								77,013
Total assets	$	667,638							$	595,684							$	623,878
Liabilities and Stockholders’ Equity
Interest-bearing Liabilities:
Money Market Deposits	$	180,262	$	331			0.74	%	$	146,238	$	378			1.05	%	$	158,842	$	1,465			0.92	%
Savings Accounts		92,412		104			0.46	%		86,022		125			0.59	%		87,483		508			0.58	%
Interest-bearing Checking		69,478		23			0.13	%		51,599		27			0.21	%		55,853		106			0.19	%
Time Deposits		151,336		570			1.53	%		154,596		697			1.83	%		152,734		2,606			1.71	%
Borrowings		12,000		131			4.43	%		27,403		329			4.87	%		21,072		996			4.73	%
Notes Payable		4		1			N/M			-		-			-			-		-			-
Total Interest-bearing Liabilities		505,492		1,160			0.91	%		465,858		1,556			1.35	%		475,984		5,681			1.19	%
Non-interest-bearing Liabilities:
Demand deposits		63,488								59,996								63,798
Other liabilities		11,912								10,315								10,928
Total liabilities	$	580,892							$	536,169							$	550,710
Stockholders’ equity		86,746								59,515								73,168
Total liabilities and stockholders’ equity	$	667,638							$	595,684							$	623,878

Net Interest Income			$	4,839							$	4,281							$	18,099

Net Interest Spread							3.22	%							3.26	%							3.25	%
	$	76,143							$	39,638							$	59,773
Net yield on average
Interest-earning assets				3.33	%							3.39	%							3.38	%
Average interest-earning
assets to average
Interest-bearing liabilities				115.06	%							108.51	%							112.56	%

RESULTS OF OPERATIONS

General. Net income for the three months ended March 31, 2011 was $1.4 million compared to $627,000 for the three months ended March 31, 2010. For the three months ended March 31, 2011, basic net income per share was $0.20 as compared with basic net income per share of $0.09 for the three months ended March 31, 2010. The increase in net income is primarily the result of an increase in net interest income, an increase in net investment gains and an increase in non-interest income. 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, 2011 as compared with the three months ended March 31, 2010.

Net income from operations, excluding noncash investment securities charges of $226,000, net of $50,000 income taxes, was $1.2 million. Non-cash investment securities charges consisted of impairment charges of $204,000 incurred on eight trust preferred securities offset by the non-cash increase to earnings of $430,000 recognized in connection with the increase in market value of our trading securities, net of $50,000 in income taxes, for a net non-cash reduction of $176,000.

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This compares to net income from operations for the same period in 2010 of $1.3 million. Net income excluding the non-cash charges and benefits to earnings decreased due primarily to a decrease in investment gains and an increase in non-interest expense partially offset by an increase in net interest income, an increase in non-interest income and a decrease in 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,
	2011			2010
Net interest income	$	4,839		$	4,281
Provision for loan losses		400			400
Investment (losses)		(224	)		(681	)
Change in fair value of investments		430			139
Non-interest income		6,037			5,828
Non-interest expense		8,805			8,279
Income tax provision		400			196
Net income		1,477			692
Income attributable to noncontrolling interest		(64	)		(65	)
Net income attributable to Oneida
Financial Corp.	$	1,413		$	627

Net income per diluted share	$	0.20		$	0.09

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,
	2011			2010
Net interest income	$	4,839		$	4,281
Provision for loan losses		400			400
Investment (losses) gains		(20	)		309
Non-interest income		6,037			5,828
Non-interest expense		8,805			8,279
Income tax provision		350			398
Net income		1,301			1,341
Income attributable to noncontrolling interest		(64	)		(65	)
Net income attributable to Oneida
Financial Corp.	$	1,237		$	1,276

Net income per diluted share	$	0.18		$	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 increased by $162,000, or 2.8%, to $6.0 million for the three months ended March 31, 2011 from $5.8 million for the three months ended March 31, 2010. Interest and fees on loans decreased by $387,000 for the three months ended March 31, 2011 as compared with the same period in 2010. Interest and dividend income on mortgage-backed and other investment securities increased $560,000 to $2.0 million for the three months ended March 31, 2011 from $1.4 million for the three months ended March 31, 2010. Interest income earned on federal funds sold increased $1,000 during the three months ended March 31, 2011 as compared with the three months ended March 31, 2010.

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The decrease in income on loans resulted from a decrease of 30 basis points in the average yield on loans to 5.48% from 5.78% and a decrease of $12.2 million in the average balance of loans to $286.7 million in the first quarter of 2011 from $298.9 million in the first quarter of 2010. At March 31, 2011, net loans receivable were $283.3 million as compared with $293.0 million at March 31, 2010, a decrease of 3.3%. The decrease in the yield on loans is a result of the continued low market interest rates resulting in lower interest rates earned on new loans and variable rate loans.

The increase in interest income from investment and mortgage-backed securities was the result of an increase of $92.9 million in the average balance of investment and mortgage-backed securities to $260.6 million during the first quarter of 2011 from $167.7 million during the first quarter of 2010 partially offset by a decrease of 36 basis points in the average yield earned to 3.07% from 3.43%. The decrease in average yield is the result of lower market interest rates. The increase in the average balance of investment and mortgage-backed securities is the result of purchases of securities required to collateralize the increased balances of municipal deposits as well as the investment of proceeds received as part of our second step conversion that took place in July 2010.

Interest income on federal funds sold increased as a result of an increase in the average yield partially offset by a decrease of $4.3 million in the average balance of federal funds sold to $26.9 million during the first quarter of 2011 as compared with $31.2 million during the three months ended March 31, 2010.

Income from equity securities decreased $12,000 due to a decrease in the average yield of 54 basis points as well as a decrease of $191,000 in the average balance from $7.6 million for the three months ended March 31, 2010 to $7.4 million for the three months ended March 31, 2011. 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 $396,000, or 25.4%, to $1.2 million for the three months ended March 31, 2011 from $1.6 million for the three months ended March 31, 2010. The decrease in interest expense was primarily due to a decrease in interest paid on deposit accounts during the first quarter of 2011 of $199,000, decreasing to $1.0 million from $1.2 million during the first quarter of 2010. In addition, borrowing expense decreased to $131,000 for the three months ended March 31, 2011 compared with $329,000 for the three months ended March 31, 2010.

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 $58.3 million, or 20.5%, to $342.2 million at an average cost of 0.54% during the first quarter of 2011 from $283.9 million at an average cost of 0.76% during the first quarter of 2010. During the same period the average balance of time deposits decreased $3.3 million, or 2.1%, to $151.3 million in the first quarter of 2011 from $154.6 million during the first quarter of 2010 and the average rate paid on time deposits decreased 30 basis points.

The decrease in borrowing expense for the first quarter 2011 as compared to the first quarter 2010 was due to a decrease in the average balance of borrowings outstanding in the March 31, 2011 period to $12.0 million as compared with $27.4 million during the March 31, 2010 period as well as a 44 basis point decrease in the average rate paid on borrowed funds to 4.43% for the 2011 period. The decrease in borrowings was due to our decision not to renew the FHLB advances that matured during 2010.

Provision for Loan Losses. The total provision for loan losses was $400,000 for both the three months ended March 31, 2011 and 2010. 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 2011 is primarily the result of a specific reserve established on a previously identified problem loan relationship. Loans individually evaluated for impairment totaled $3.4 million at March 31, 2011 and had an allocated allowance for loan loss reserve of $2.4 million. Loans individually evaluated for impairment at December 31, 2010 totaled $3.4 million and had an allocated allowance for loan loss of $2.1 million.

Nonperforming loans totaled $4.1 million or 1.41% of total loans at March 31, 2011 compared with $317,000 or 0.11% of total loans at March 31, 2010. The increase in nonperforming loans from March 31, 2010 to March 31, 2011 was

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primarily attributable to the two impaired lending relationships. Net charge-off activity for the three months ended March 31, 2011 was $35,000 as compared with $1,000 in net charge-offs during the three months ended March 31, 2010. The balance of the allowance for loan losses was $4.6 million or 1.64% of loans receivable at March 31, 2011 compared with $3.3 million or 1.13% of loans receivable at March 31, 2010.

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, 2011 the market value of our trading securities increased $430,000 as compared with an increase of $139,000 in the 2010 period. The increase in market value of the Company’s trading securities in the 2011 period is reflective of the increase in broader equity markets during the period.

Net impairment losses for the three months ended March 31, 2011 were $204,000 as compared with net impairment losses of $990,000 during three months ended March 31, 2010. 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 E Investment Securities in the consolidated financial statements for more detailed information on other-than-temporary impairment review.

During the first quarter of 2011 the Company realized $20,000 of investment losses, this compares with realized gains of $309,000 during the three months ended March 31, 2010.

Non-Interest Income. Non-interest income increased by $209,000, or 3.6%, to $6.0 million for the three months ended March 31, 2011 from $5.8 million for the three months ended March 31, 2010.

Revenue derived from Oneida Savings Bank’s non-banking subsidiaries increased $283,000, or 6.1%, to $4.9 million during the three months ended March 31, 2011 as compared with $4.7 million during the three months ended March 31, 2010. Insurance subsidiary revenue of Bailey & Haskell Associates was $3.2 million for the three months ended March 31, 2011 as compared with $3.0 million during the three months March 31, 2010. 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 $1.4 million for the three months ended March 31, 2011 as compared with $1.4 million during the first quarter of 2010. Risk management activities of Workplace Health Solutions generated $302,000 of revenue for the three months ended March 31, 2011 as compared with $201,000 in revenue during the same period of 2010. 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 decreased slightly to $601,000 during the three months ended March 31, 2011 from $622,000 during the three months ended March 31, 2010. The combination of fee reductions and the higher account balances currently maintained resulted in the decrease in deposit service fee revenue.

We also experienced a decrease in income from the sale and servicing of fixed-rate residential real estate loans. The decrease is primarily the result of a decrease in the volume of loan sale activity in the first quarter of 2011 as compared with higher level of activity in the first quarter of 2010. Income from the sale and servicing of fixed-rate residential real estate loans was $121,000 during the three months ended March 31, 2011 compared with $143,000 during the three months ended March 31, 2010.

Non-Interest Expense. Non-interest expense increased by $526,000, or 6.4%, to $8.8 million for the three months ended March 31, 2011 from $8.3 million for the three months ended March 31, 2010. 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, 2011 was $5.6 million, an increase of $350,000, or 6.7%, as compared with compensation expense of $5.2 million during the first quarter of 2010. 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.

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Building occupancy and equipment expense decreased $60,000, or 4.7%, to $1.2 million for the three months ended March 31, 2011 as compared to $1.3 million during the three months ended March 31, 2010.

Other operating expenses increased $236,000, or 13.3%, to $2,0 million for the three months ended March 31, 2011 as compared to $1.8 million during the three months ended March 31, 2010.

Provision for Income Taxes. Provision for income taxes was $400,000 for the three months ended March 31, 2011, an increase of $204,000 from the first quarter 2010 income tax provision recorded of $196,000. The increase in income tax provision reflects the increase in net income for the three months ended March 31, 2011. The effective tax rate was 21.3% during the first three months of 2011 as compared with an effective tax rate of 22.1% for the same time period in 2010.

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 2011, loan originations totaled $18.8 million compared to $18.4 million during the first quarter of 2010. The purchases of securities available for sale totaled $24.0 million during the first quarter of 2011 as compared to $31.4 million during the first quarter of 2010. 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, 2011 the Company had outstanding commitments to originate loans of approximately $6.9 million, which generally have an expiration period of less than 120 days. Commitments to sell residential mortgages amounted to $2.0 million at March 31, 2011.

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 $49.3 million at March 31, 2011 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, 2011 the total of cash, interest-earnings demand accounts and federal funds sold was $50.1 million.

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At March 31, 2011, 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, 2011:
Total Capital
(to Risk Weighted Assets)	$	63,084		15.44	%	$	32,696		8	%	$	40,870		10	%
Tier I Capital
(to Risk Weighted Assets)	$	58,444		14.30	%	$	16,348		4	%	$	24,522		6	%
Tier I Capital
(to Average Assets)	$	58,444		9.12	%	$	25,637		4	%	$	32,046		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, 2010:
Total Capital
(to Risk Weighted Assets)	$	61,964		15.15	%	$	32,714		8	%	$	40,893		10	%
Tier I Capital
(to Risk Weighted Assets)	$	57,687		14.11	%	$	16,357		4	%	$	24,536		6	%
Tier I Capital
(to Average Assets)	$	57,687		9.17	%	$	25,155		4	%	$	31,444		5	%

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ONEIDA FINANCIAL CORP.

SELECTED FINANCIAL RATIOS

At and for the Three Months Ended March 31, 2011 and 2010 (unaudited)

(Annualized where appropriate)	Three Months Ending
	March 31,
	2011			2010
Performance Ratios:
Return on average assets		0.85	%		0.42	%
Return on average equity		6.52	%		4.21	%
Return on average tangible equity		9.08	%		7.22	%
Interest rate spread		3.22	%		3.26	%
Net interest margin		3.33	%		3.39	%
Efficiency Ratio		80.01	%		82.54	%
Non-interest income to average total assets		3.62	%		3.91	%
Non-interest expense to average total assets		5.28	%		5.60	%
Average interest-earning assets as a ratio to average interest-bearing liabilities		115.06	%		108.51	%

Asset Quality Ratios:
Non-performing assets to total assets		1.16	%		0.90	%
Non-performing loans to total loans		1.41	%		0.11	%
Net charge-offs to average loans		0.01	%		0.00	%
Allowance for loan losses to non-performing loans		114.45	%		1,041.01	%
Allowance for loan losses to loans receivable		1.64	%		1.13	%

Capital Ratios:
Average equity to average total assets		12.99	%		9.99	%
Equity to total assets (end of period)		12.70	%		10.01	%
Tangible equity to tangible assets (end of period)		9.36	%		6.10	%

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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, 2011, 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 2010 Annual Report to Stockholders. There has been no material change in the Company’s interest rate risk profile since December 31, 2010.

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.

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Index

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 2010 Form 10-K for the fiscal year ended December 31, 2010.

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable

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Item 3

Defaults upon Senior Securities

Not applicable.

Item 4

[ Reserved]

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

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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 16, 2011	By:	/s/ Michael R. Kallet
		Michael R. Kallet
		President and Chief Executive Officer

Date: May 16, 2011	By:	/s/ Eric E. Stickels
		Eric E. Stickels
		Executive Vice President and Chief
		Financial Officer

Page 42 of 42

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