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

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

For the quarterly period ended June 30, 2011

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

For the transition period from __________________________ to ____________________________________

Securities Exchange Act Number 001-34813

ONEIDA FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Maryland		80-0632920

(State or other jurisdiction of		(IRS Employer)
incorporation or organization)		Identification Number)

182 Main Street, Oneida, New York 13421

(Address of Principal Executive Offices)

(315) 363-2000

Registrant’s telephone number, including area code

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

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

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

£ Large accelerated filer £ Accelerated filer £ Non-accelerated filer 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 o No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: There were 7,162,273 shares of the Registrant’s common stock outstanding as of August 1, 2011.

ONEIDA FINANCIAL CORP.

INDEX

		Page

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	1

	Consolidated Statements of Condition (unaudited)	2
	As of June 30, 2011 and December 31, 2010

	Consolidated Statements of Operations (unaudited)	3
	For the three and six months ended June 30, 2011 and 2010

	Consolidated Statements of Comprehensive Income (unaudited)	4
	For the three and six months ended June 30, 2011 and 2010

	Consolidated Statements of Changes in Stockholders’ Equity (unaudited)	5
	For the six months ended June 30, 2011

	Consolidated Statements of Cash Flows (unaudited)	6
	For the six months ended June 30, 2011 and 2010

	Notes to Consolidated Financial Statements (unaudited)	8

Item 2.	Management’s Discussion and Analysis of Financial Condition	30
	And Results of Operations

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	43

Item 4.	Controls and Procedures	43

PART II.	OTHER INFORMATION	44

Item 1.	Legal Proceedings	44

Item 1a.	Risk Factors	45

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3.	Defaults Upon Senior Securities	45

Item 4.	[Reserved]	45

Item 5.	Other Information	45

Item 6.	Exhibits	45

Index

PART I. FINANCIAL INFORMATION

Item I. Financial Statements

Page 1 of 45

Index

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

At June 30, 2011 (unaudited) and December 31, 2010 (unaudited)

	At June 30,			At December 31,
	2011			2010
ASSETS	(in thousands, except share data)
Cash and due from banks	$	11,069		$	15,608
Federal funds sold		9,358			18,133

TOTAL CASH AND CASH EQUIVALENTS		20,427			33,741
Trading securities		7,635			7,691
Securities, available for sale		207,962			227,478
Securities, held to maturity (fair value $57,814
and $25,070 respectively)		56,325			24,143

Mortgage loans held for sale		283			857

Loans receivable		283,964			286,850
Allowance for loan losses		(3,070	)		(4,276	)

LOANS RECEIVABLE, NET		280,894			282,574

Federal Home Loan Bank stock		2,168			2,109
Bank premises and equipment, net		20,055			19,903
Accrued interest receivable		2,488			2,455
Bank owned life insurance		16,609			16,332
Other assets		18,166			19,777
Goodwill		23,983			23,301
Other intangible assets		1,156			1,218
TOTAL ASSETS	$	658,151		$	661,579

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Interest bearing deposits	$	478,360		$	486,985
Non-interest bearing deposits		67,340			65,179
Borrowings		12,000			12,000
Other liabilities		9,703			11,495
TOTAL LIABILITIES		567,403			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		45,642			45,636
Retained earnings		46,206			44,816
Accumulated other comprehensive loss		(2,841	)		(6,198	)
Treasury stock (at cost, 2,521 and 2,521 shares)		(20	)		(20	)
Unallocated ESOP		(870	)		(946	)

Total Oneida Financial Corp stockholders’ equity		88,189			83,360
Noncontrolling interest		2,559			2,560

TOTAL STOCKHOLDERS’ EQUITY		90,748			85,920
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	658,151		$	661,579

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

Page 2 of 45

Index

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2011 (unaudited) and 2010 (unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
	(in thousands, except share and per share data)

INTEREST INCOME:
Interest and fees on loans	$	3,852		$	4,183		$	7,783		$	8,501
Interest on investment securities		2,117			1,654			4,115			3,092
Dividends on equity securities		60			78			122			152
Interest on federal funds sold and
interest-earning deposits		5			9			13			17
Total interest and dividend income		6,034			5,924			12,033			11,762
INTEREST EXPENSE:
Core deposits		349			538			806			1,069
Time deposits		537			659			1,108			1,357
Borrowings		133			279			263			607
Note payable		2			-			4			-
Total interest expense		1,021			1,476			2,181			3,033
NET INTEREST INCOME		5,013			4,448			9,852			8,729
Less: Provision for loan losses		550			300			950			700
Net interest income after provision for loan losses		4,463			4,148			8,902			8,029
INVESTMENT GAINS (LOSSES):
Total other-than-temporary impairment losses		(108	)		(61	)		(286	)		(1,051	)
Portion of loss recognized in OCI (before taxes)		27			-			-			-
Net impairment losses		(81	)		(61	)		(286	)		(1,051)
Net gains on sale of securities, net		97			442			78			751
Changes in fair value of trading securities		393			(863	)		823			(724	)
Total investment gains (losses)		409			(482	)		615			(1,024	)
NON-INTEREST INCOME:
Commissions and fees on sales of
non-banking products		5,084			4,435			10,029			9,097
Other operating income		1,222			1,271			2,314			2,438
Total non-interest income		6,306			5,706			12,343			11,535
NON-INTEREST EXPENSES:
Compensation and employee benefits		5,793			5,196			11,380			10,433
Occupancy expenses, net		1,204			1,251			2,418			2,525
Other operating expense		1,784			1,815			3,788			3,583
Total non-interest expenses		8,781			8,262			17,586			16,541
INCOME BEFORE INCOME TAXES		2,397			1,110			4,274			1,999
Provision for income taxes		637			233			1,037			429
NET INCOME		1,760			877			3,237			1,570
Less: net income attributable to noncontrolling interest		64			63			128			128
NET INCOME attributable
to Oneida Financial Corp.	$	1,696		$	814		$	3,109		$	1,442
EARNINGS PER SHARE – BASIC	$	0.24		$	0.11		$	0.44		$	0.20
EARNINGS PER SHARE – DILUTED	$	0.24		$	0.11		$	0.44		$	0.20

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

Page 3 of 45

Index

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Six Months Ended June 30, 2011 (unaudited) and 2010 (unaudited)

		Three Months Ended						Six Months Ended
		June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
		(In thousands)
Net income	$	1,760		$	877		$	3,237		$	1,570

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		(75	)		56			(103	)		350
Reclassification adjustment for
losses included in net income		81			61			286			1,051
Net unrealized gains (losses)		6			117			183			1,401
Income tax effect		(2	)		(47	)		(73	)		(560	)
		4			70			110			841
Securities available for sale:
Unrealized gains on securities
arising during period		5,120			1,279			5,430			1,446
Reclassification adjustment for
losses (gains) included in net income		(97	)		(442	)		(78	)		(751	)
Net unrealized gains		5,023			837			5,352			695
Income tax effect		(2,009	)		(334	)		(2,141	)		(278	)
		3,014			503			3,211			417
Unrealized holding gains on securities.
net of tax		3,018			573			3,321			1,258

Change in unrealized loss on pension benefits		31			32			61			64
Income tax effect		(13	)		(13	)		(24	)		(26	)
		18			19			36			38

Other comprehensive gain , net of tax		3,036			592			3,357			1,296

Comprehensive Income		4,796			1,469			6,594			2,866
Comprehensive income attributable to the
Noncontrolling interest		(64	)		(63	)		(128	)		(128	)

Comprehensive income attributable to
Oneida Financial Corp.	$	4,732		$	1,406		$	6,466		$	2,738

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

Page 4 of 45

Index

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Six Months Ended June 30, 2011 (unaudited)

					Additional					Accumulated Other						Common Stock Employee			Total Equity Attributable To Oneida
	Common Stock				Paid-In		Retained			Comprehensive			Treasury			Stock Plans			Financial			Non-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		-		-		-		3,109			-			-			-			3,109			128			3,237
Distributions to non-controlling interest		-		-		-		-			-			-			-			-			(128	)		(128	)
Other comprehensive income,
net of tax		-		-		-		-			3,357			-			-			3,357			-			3,357
Common stock dividends: $0.24 per share		-		-		-		(1,719	)		-			-			-			(1,719	)		-			(1,719	)
Shares issued under ESOP plans		-		-		6		-			-			-			76			82			-			82
Stock issued		-		-		-		-			-			-			-			-			(1	)		(1	)

Balance as of June 30, 2011		7,164,794	$	72	$	45,642	$	46,206		$	(2,841	)	$	(20	)	$	(870	)	$	88,189		$	2,559		$	90,748

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

Page 5 of 45

Index

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

For the Six Months Ended June 30, 2011 (unaudited) and 2010 (unaudited)

	Six Months Ended June 30,
	2011			2010
Operating Activities:	(in thousands)
Net income	$	3,237		$	1,570
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization		893			995
Amortization of premiums/discounts on securities, net		364			170
Net change in fair value of trading securities		(823	)		724
Provision for loan losses		950			700
Loss on disposal of premises and equipment		-			15
Loss on sale of foreclosed property		80			4
Stock compensation earned		-			103
Loss on impairment of securities		286			1,051
ESOP share earned		82			-
Gain on sale of securities, net		(78	)		(751	)
Gain on sale of loans, net		(127	)		(153	)
Income tax payable		(430	)		(633	)
Accrued interest receivable		(33	)		180
Other assets		7			437
Other liabilities		(2,091	)		(3,645	)
Earnings on bank owned life insurance		(277	)		(291	)
Origination of loans held for sale		(6,811	)		(13,824	)
Proceeds from sales of loans		7,512			13,078

Net cash provided by (used in) operating activities		2,741			(270	)

Investing Activities:
Purchase of securities available for sale		(27,512	)		(97,163	)
Proceeds from sale of securities available for sale		27,403			18,988
Maturities and calls of securities available for sale		18,412			16,242
Principal collected on securities available for sale		6,264			11,483
Purchase of securities held to maturity		(35,025	)		-
Maturities and call of securities held to maturity		1,027			14,016
Principal collected on securities held to maturity		1,760			2,136
Proceeds from sale of trading securities		845			-
Purchase of FHLB stock		(384	)		(146	)
Redemption of FHLB stock		325			429
Net decrease in loans		243			4,531
Purchase of bank premises and equipment		(847	)		(986	)
Proceeds from the sale of foreclosed property		202			38
Purchase of employee benefits company		(94	)		(117	)
Purchase of insurance company		(362	)		-

Net cash used in investing activities		(7,743	)		(30,549	)

Financing Activities:
Net (decrease) increase in demand deposit, savings,
money market, super now and escrow		(1,037	)		35,835
Net decrease in time deposits		(5,427	)		(3,881	)
Dividends on preferred stock of subsidiary held by minority interest		(128	)		(128	)
Proceeds from borrowings		-			110
Repayment of borrowings		-			(7,610	)
Cash dividends		(1,719	)		(844	)
Stock issued/repurchase – noncontrolling interest		(1	)		1
Exercise of stock options (using treasury stock)		-			170
Purchase of treasury stock		-			(136	)

Net cash (used in) provided by financing activities		(8,312	)		23,517
Decrease in cash and cash equivalents		(13,314	)		(7,302	)
Cash and cash equivalents at beginning of period		33,741			39,537
Cash and cash equivalents at end of period	$	20,427		$	32,235

Supplemental disclosures of cash flow information:
Cash paid for interest		2,188			3,053
Cash paid for income taxes		1,465			1,060

Supplemental noncash disclosures:
Transfer of loans to other real estate		487			241
Dividends declared and unpaid		860			423
Notes payable issued in connection with acquisition		362			-

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

Page 6 of 45

Index

ONEIDA FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

JUNE 30, 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 June 30, 2011 and December 31, 2010 and for the three and six month periods ended June 30, 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 and six months ended June 30, 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 H 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.

Earnings per common share have been computed based on the following for the three months and six months ended June 30, 2011 and 2010:

	Three Months Ended					Six Months Ended
	June 30, 2011		June 30, 2010			June 30, 2011		June 30, 2010
Net income attributable to Oneida Financial Corp.	$	1,696,050	$	814,452		$	3,109,037	$	1,441,537
Net earnings allocated to participating securities		-		(2,613	)		-		(6,267	)
Net earnings allocated to common stock	$	1,696,050	$	811,839		$	3,109,037	$	1,435,270
Note B – Earnings per Share (Continued)

Basic
Distributed earnings allocated to common stock	$	859,775	$	422,158		$	1,719,248	$	1,261,908
Undistributed earnings allocated
to common stock		836,275		389,681			1,389,789		173,362
Net earnings allocated to common stock	$	1,696,050	$	811,839		$	3,109,037	$	1,435,270

Weighted average common shares outstanding
including shares considered participating securities		7,048,950		7,164,682			7,046,616		7,158,104
Less: Average participating securities		-		(14,973	)		-		(14,973	)
Weighted average shares		7,048,950		7,149,709			7,046,616		7,143,131

Basic earnings per share	$	0.24	$	0.11		$	0.44	$	0.20

Diluted
Net earnings allocated to common stock	$	1,696,050	$	811,839		$	3,109,037	$	1,435,270

Weighted average common shares outstanding
for basic earnings per common share		7,048,950		7,149,709			7,046,616		7,143,131
Add: Dilutive effects of assumed
exercise of stock options		-		-			-		-
Weighted average shares and dilutive
potential common shares		7,048,950		7,149,709			7,046,616		7,143,131

Diluted earnings per common share	$	0.24	$	0.11		$	0.44	$	0.20

Page 7 of 45

Index

There were no stock options considered in computing diluted earnings per common share for 2011 and 2010 as all options expired April 25, 2010. Dividends of $5,904 as of June 30, 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 – Investment Securities and Mortgage-Backed Securities

Investment securities and mortgage-backed securities consist of the following at June 30, 2011 and December 31, 2010:

	June 30, 2011
	Amortized		Gross Unrealized					Fair
Available-for-sale portfolio:	Cost		Gains		Losses			Value
Investment Securities	(In thousands)
Debt securities:
U. S. Agencies	$	53,118	$	206	$	(60	)	$	53,264
Corporate		25,119		454		(920	)		24,653
Trust preferred securities		6,613		-		(3,006	)		3,607
State and municipal		43,277		885		(276	)		43,886
Small business administration		2,888		9		(28	)		2,869
	$	131,015	$	1,554	$	(4,290	)	$	128,279
Mortgage-Backed Securities
Fannie Mae	$	37,981	$	699	$	(71	)	$	38,609
Freddie Mac		12,695		266		(1	)		12,960
Government National Mortgage Assoc.		25,432		453		(112	)		25,773
Collateralized Mortgage Obligations		2,442		20		(121	)		2,341
	$	78,550	$	1,438	$	(305	)	$	79,683
Total available-for-sale	$	209,565	$	2,992	$	(4,595	)	$	207,962

Page 8 of 45

Index

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

Held-to-maturity portfolio
Investment Securities
Debt securities:
U. S. Agencies	$	19,623	$	224	$	-	$	19,847
State and municipal		8,211		705		-		8,916
Small business administration		621		-		-		621
	$	28,455	$	929	$	-	$	29,384
Mortgage-Backed Securities
Fannie Mae	$	16,066	$	320	$	-	$	16,386
Freddie Mac		5,300		99		-		5,399
Government National Mortgage Assoc.		6,504		141		-		6,645
	$	27,870	$	560	$	-	$	28,430
Total held-to-maturity	$	56,325	$	1,489	$	-	$	57,814

	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

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 June 30, 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 Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)

Within one year	$	8,652	$	8,662	$	7	$	7
After one year through five years		15,042		15,303		5,096		5,322
After five years through ten years		56,126		57,045		11,706		12,080
After ten years		51,195		47,269		11,646		11,975
Total	$	131,015	$	128,279	$	28,455	$	29,384

Page 9 of 45

Index

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

Sales of securities were as follows:

	Three Months Ended					Six Months Ended
	June 30, 2011			June 30, 2010		June 30, 2011			June 30, 2010
	(In thousands)
Proceeds	$	21,724		$	10,648	$	27,403		$	18,988
Gross Gains	$	376		$	442	$	382		$	751
Gross Losses	$	(279	)	$	-	$	(304	)	$	-

Securities with unrealized losses at June 30, 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:

	Less than 12 Months					More than 12 Months					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
	(In thousands)
U.S. Agency	$	11,940	$	(60	)	$	- $		-		$	11,940	$	(60	)
Corporate		8,461		(38	)		1,609		(882	)		10,070		(920	)
Trust preferred securities		-		-			3,607		(3,006	)		3,607		(3,006	)
State and municipal		12,278		(276	)		-		-			12,278		(276	)
Small business administration		1,878		(28	)		-		-			1,878		(28	)
Fannie Mae		5,575		(71	)		-		-			5,575		(71	)
Freddie Mac		2,466		(1	)		-		-			2,466		(1	)
Government National Mortgage Assoc.		5,913		(112	)		-		-			5,913		(112	)
Collateralized mortgage obligations		-		-			1,697		(121	)		1,697		(121	)

Total securities available-for-sale in
an unrealized loss position	$	48,511	$	(586	)	$	6,913	$	(4,009	)	$	55,424	$	(4,595	)

	Less than 12 Months					More than 12 Months					Total
	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Value

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	)		-		-			2,930		(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	)	$	10,193	$	(4,632	)	$	149,180	$	(8,702	)

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

Page 10 of 45

Index

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

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 June 30, 2011, the Company’s security portfolio consisted of 368 securities, 66 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 June 30, 2011, of the twenty-six 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, there were no securities that were in a continuous unrealized loss position for 12 months or more. The unrealized losses at June 30, 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 June 30, 2011.

Non-Agency Collateralized Mortgage Obligations.

All of our non-agency collateralized mortgage obligations carry various amounts of credit enhancement and none are 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 June 30, 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. Both are currently rated below investment grade. We have assessed these securities in an unrealized loss position at June 30, 2011 and determined that the decline in fair value was other than temporary. The Bank currently has two obligations totaling $1.8 million that based on expected cash flows, delinquencies and credit support the Company has considered impaired. The unrealized losses at June 30, 2011 and December 31, 2010 were $70,000 and $144,000 respectively. The securities were in a gross loss position of $121,000 of which $51,000 was recorded as expense for the three and six months ended June 30, 2011. These securities remain available for sale at June 30, 2011.

Corporate Debt and Municipal Securities

At June 30, 2011, of the twenty-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 1.39%. The unrealized loss at June 30, 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.

Page 11 of 45

Index

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

Trust Preferred Securities

The Company currently has $6.6 million invested in nine trust preferred securities as of June 30, 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 $6.6 million, $3.1 million have variable rates of interest. All of the securities are on nonaccrual as of June 30, 2011. The unrealized losses at June 30, 2011 and December 31, 2010 on the nine securities totaled $3.0 million and $3.5 million respectively.

The following table provides detailed information related to the trust preferred securities held as of June 30, 2011:

Description	Class	Book Value (2)		Fair Value		Unrealized Loss			Realized Loss (2) (3)			Lowest Rating (1)	Number of Banks and Insurance Companies Currently Performing		Actual Deferrals and Defaults as % of Original Collateral			Expected Additional Deferrals and Defaults as % of Performing Collateral			Excess Subordination Defaults as % of Performing Collateral
(Dollars In thousands)
Preferred Term Ltd.	Mezz	$	819	$	616	$	(203	)	$	(337	)	Ca		14		42.76	%		28.21	%		-43.97	%
Preferred Term Ltd.	Mezz		1,638		1,182		(456	)		(683	)	Ca		14		42.76	%		28.21	%		-43.97	%
Preferred Term Ltd.	Mezz		1,092		789		(303	)		(456	)	Ca		14		42.76	%		28.21	%		-43.97	%
Preferred Term X	B-3		813		390		(423	)		(1,163	)	C		33		46.56	%		10.42	%		-69.31	%
Preferred Term XV	B-2		634		189		(445	)		(366	)	C		51		35.38	%		20.01	%		-41.17	%
Preferred Term XV	B-3		641		191		(450	)		(359	)	C		51		35.38	%		20.01	%		-41.17	%
Preferred Term XXVI	C-1		673		183		(490	)		(312	)	C		49		27.74	%		14.48	%		-20.78	%
Preferred Term XXVI	D-1		-		-		-			(497	)	N/R		49		27.74	%		14.48	%		-30.33	%
MMCF IX	B-2		303		67		(236	)		(653	)	Caa3		19		42.32	%		23.49	%		-60.80	%
		$	6,613	$	3,607	$	(3,006	)	$	(4,826	)

(1) The table represents ratings information as of June 30, 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.

(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 June 30, 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).

Page 12 of 45

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

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 June 30, 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	4.87% - 9.91%
Present value discount rates for fair value	15%

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

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

The Company reviews each issuer individually for projected future deferrals and defaults. The purpose of the individual issuer review is to determine if an individual issuer demonstrates a significant likelihood of potential deferral/default so as to require a further addition to the projected additional default percentages as outlined in the table above. This review includes obtaining quarterly financial information and monitoring new releases and pertinent information relative to those issuers. The Company specifically reviews certain financial ratios including Fitch Score and “Texas Ratio” as well as capital adequacy and participation in the Troubled Asset Relief Program of each issuer. The Company believes the “Texas Ratio (“TR”)” is a prominent indicator of the stress a financial institution is experiencing. The TR is calculated by dividing nonperforming assets and loans, including past due 90 days or more, by the sum of tangible equity and loan loss reserves. Management judgmentally establishes various credit criteria, and combinations of credit criteria and those issuers meeting some combination of such criteria are considered additional deferrals as of the reporting date. Based on the results of this analysis, the Company ensures that actual deferrals/defaults as well as forecasted deferrals/defaults of specific institutions are appropriately factored into the cash flow projections for each security. The default and recovery probabilities for each piece of collateral were formed based on the evaluation of collateral credit and a review of historical default data and current/near term operating conditions. There is no recovery estimated for actual defaulted issuers. Projected deferrals are modeled in a consistent manner with actual deferrals. One of these securities was fully impaired in 2009. Upon completion of the June 30, 2011 analysis, our model indicated other-than temporary impairment on two of these securities for the quarter ended June 30, 2011, which resulted from management projecting additional defaults and deferrals during the period.

Page 13 of 45

Index

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

Two of the eight securities had OTTI losses of $235,000 during 2011 of which $30,000 was recorded as expense during the three months ended June 30, 2011. These eight securities remain classified as available-for-sale at June 30, 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 six months ended June 30, 2011 and 2010 (in thousands):

	June 30, 2011		June 30, 2010
Beginning Balance	$	5,740	$	3,317
Credit loss for which other-than-temporary impairment
was not previously recognized		51
Additional credit loss for which other-than-temporary impairment
was previously recognized		235		1,051
Ending Balance	$	6,026	$	4,368

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

Note D – Loans Receivable

The components of loans receivable at June 30, 2011 and December 31, 2010 are as follows:

	June 30, 2011			December 31, 2010
	(In thousands)
Residential mortgages	$	87,825		$	90,033
Home equity loans		42,868			42,122
Consumer loans		34,994			35,879
Commercial real estate		80,890			77,851
Commercial loans		37,387			40,965
		283,964			286,850
Allowance for loan losses		(3,070	)		(4,276	)
Net loans	$	280,894		$	282,574

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.

Page 14 of 45

Index

Note D – Loans Receivable (Continued)

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.

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:

Page 15 of 45

Index

Note D – Loans Receivable (Continued)

For the Three Months Ended	Commercial			Commercial			Consumer			Home			Residential
June 30, 2011	Loans			Real Estate			Loans			Equity			Mortgages			Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	2,649 $			930		$	330		$	259		$	473		$	4,641
Charge-offs		(2,019	)		(80	)		(48	)		(4	)		-			(2,151	)
Recoveries		3			-			26			1			-			30
Provision for loan losses		25			477			48			9			(9	)		550
Ending balance	$	658		$	1,327		$	356		$	265		$	464		$	3,070

For the Six Months Ended	Commercial			Commercial			Consumer			Home			Residential
June 30, 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		(2,038	)		(80	)		(88	)		(4	)		-			(2,210	)
Recoveries		5			2			45			2			-			54
Provision for loan losses		23			829			62			3			33			950
Ending balance	$	658		$	1,327		$	356		$	265		$	464		$	3,070

Ending balance attributable to loans:
Individually evaluated
for impairment	$	109		$	773		$	-		$	-		$	-		$	882
Collectively evaluated
for impairment		549			554			356			265			464			2,188
Total	$	658		$	1,327		$	356		$	265		$	464		$	3,070
Loans:
Individually evaluated
for impairment	$	212		$	1,383		$	-		$	-		$	-		$	1,595
Collectively evaluated
for impairment		37,175			79,507			34,994			42,868			87,825			282,369
Total	$	37,387		$	80,890		$	34,994		$	42,868		$	87,825		$	283,964

For the Three Months Ended	Commercial			Commercial			Consumer			Home			Residential
June 30, 2010	Loans			Real Estate			Loans			Equity			Mortgages			Total
	(In thousands)
Allowance for credit losses:
Beginning balance	$	1,770		$	573		$	402		$	191		$	364		$	3,300
Charge-offs		(57	)		-			(66	)		(88	)		(4	)		(215	)
Recoveries		52			1			14			-			-			67
Provision for loan losses		206			(46	)		22			62			56			300
Ending balance	$	1,971		$	528		$	372		$	165		$	416		$	3,452

For the Six Months Ended
June 30, 2010

Beginning balance	$	1,259		$	635		$	431		$	191		$	385		$	2,901
Charge-offs		(57	)		-			(101	)		(134	)		(4	)		(296	)
Recoveries		68			2			77			-			-			147
Provision for loan losses		701			(109	)		(35	)		108			35			700
Ending balance	$	1,971		$	528		$	372		$	165		$	416		$	3,452

Ending balance attributable to loans:
Individually evaluated
for impairment	$	1,323		$	-		$	-		$	-		$	-		$	1,323
Collectively evaluated
for impairment		648			528			372			165			416			2,129
Total	$	1,971		$	528		$	372		$	165		$	416		$	3,452

Note D– 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

Page 16 of 45

Index

The following table presents loans individually evaluated for impairment by segment of loans as of June 30, 2011 and December 31, 2010:

	June 30, 2011
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
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		773
Commercial loans		212		212		109
Consumer loans		-		-		-
Home equity		-		-		-
Residential mortgages		-		-		-
Total	$	1,595	$	1,595	$	882

	December 31, 2010
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
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
Commercial loans		2,043		2,043		2,043
Consumer loans		-		-		-
Home equity		-		-		-
Residential mortgages		-		-		-
Total	$	3,426	$	3,426	$	2,141

Page 17 of 45

Index

Note D – Loans Receivable (Continued)

The following table presents the average recorded investment and cash basis interest income recognized by segment of loans for loans individually evaluated for impairment for the three and six months ended June 30, 2011 and 2010:

	Three Months Ended
	June 30, 2011				June 30, 2010
	Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized
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		-		-		-
Commercial loans		1,446		-		2,171		-
Consumer loans		-		-		-		-
Home equity		-		-		-		-
Residential mortgages		-		-		-		-
Total	$	2,829	$	-	$	2,171		-

	Six Months Ended
	June 30, 2011				June 30, 2010
	Average Recorded Investment		Cash Basis Interest Income Recognized		Average Recorded Investment		Cash Basis Interest Income Recognized
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		-		-		-
Commercial loans		1,964		9		2,164		35
Consumer loans		-		-		-		-
Home equity		-		-		-		-
Residential mortgages		-		-		-		-
Total	$	3,347	$	9	$	2,164		35

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 June 30, 2011 and December 31, 2010:

Page 18 of 45

Index

Note D – Loans Receivable (Continued)

	June 30, 2011
	Nonaccrual		Loans Past Due Over 90 days still Accruing
	(In thousands)
Commercial real estate	$	1,383	$	-
Commercial loans		286		-
Consumer loans		16		-
Home equity		13		-
Residential mortgages		61		-
Total	$	1,759	$	-

	December 31, 2010
	Nonaccrual		Loans Past Due Over 90 days still 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 June 30, 2011 and December 31, 2010 by class of loans.

	June 30, 2011
	Total		30-59Days Past Due		60-89Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due
	(In thousands)
Commercial real estate	$	80,890	$	-	$	-	$	1,383	$	1,383	$	79,507
Commercial loans		37,387		-		244		212		456		36,931
Consumer loans		34,994		125		-		16		141		34,853
Home equity		42,868		12		5		13		30		42,838
Residential mortgages		87,825		-		86		61		147		87,678
Total	$	283,964	$	137	$	335	$	1,685	$	2,157	$	281,807

	June 30, 2011
	Total		30-59Days Past Due		60-89Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not 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

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:

Page 19 of 45

Index

Note D – Loans Receivable (Continued)

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 June 30, 2011 and December 31, 2010, and based on the most recent analysis performed (all loans graded within past 12 months), the risk category:

	June 30, 2011
	Not Rated		Pass		Special Mention		Substandard		Doubtful
	(In thousands)
Commercial real estate	$	16,991	$	62,484	$	-	$	610	$	805
Commercial loans		17,934		18,817		246		72		318
Total	$	34,925	$	81,301	$	246	$	682	$	1,123

	December 31, 2010
	Not Rated		Pass		Special 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 E – Segment Information

The Bank has determined that it has four primary business segments, its banking franchise, its insurance activities, its employee benefit consulting activities and risk management activities. For the three months and six months ended June 30, 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 45

Index

Note E – Segment Information (Continued)

	Three Months Ended June 30, 2011
	Banking Activities		Insurance Activities		Benefit Consulting Activities		Risk Management Activities		Total
	(In thousands)
Net interest income	$	5,013	$	-	$	-	$	-	$	$5,013
Provision for loan losses		550		-		-		-		550

Net interest income after provision for loan losses		4,463		-		-		-		4,463

Investment gains, net		409		-		-		-		409
Non-interest income		1,222		2,993		1,770		321		6,306
Non-interest expenses		4,126		2,601		1,295		320		8,342
Depreciation and amortization		373		42		24		-		439

Income before income taxes		1,595		350		451		1		2,397
Income tax expense		301		150		186		-		637

Net income		1,294		200		265		1		1,760
Less: net income attributable to
noncontrolling interest		64		-		-		-		64

Net income attributable to Oneida
Financial Corp.	$	1,230	$	200	$	265	$	1	$	1,696

Total Assets	$	638,577	$	18,592	$	4,957	$	217	$	662,343

	Three Months Ended June 30, 2010
	Banking Activities			Insurance Activities		Benefit Consulting Activities		Risk Management Activities			Total
	(In thousands)

Net interest income	$	4,448		$	-	$	-	$	-		$	4,448
Provision for loan losses		300			-		-		-			300

Net interest income after provision for loan losses		4,148			-		-		-			4,148
Investment losses, net		(482	)		-		-		-			(482	)
Non-interest income		1,271			2,591		1,590		254			5,706
Non-interest expenses		4,038			2,312		1,159		268			7,777
Depreciation and amortization		410			44		31		-			485

Income (loss) before income taxes		489			235		400		(14	)		1,110
Income tax (benefit) expense		(30	)		103		166		(6	)		233

Net income (loss)		519			132		234		(8	)		877
Less: net income attributable to
noncontrolling interest		63			-		-		-			63

Net income (loss) attributable to Oneida
Financial Corp.	$	456		$	132	$	234	$	( 8	)	$	814
Total Assets	$	595,476		$	17,219	$	5,029	$	142		$	617,866

Page 21 of 45

Index

Note E – Segment Information (Continued)

	Six Months Ended June 30, 2011
	Banking Activities		Insurance Activities		Benefit Consulting Activities		Risk Management Activities			Total
	(In thousands)
Net interest income	$	9,852	$	-	$	-	$	-		$	9,852
Provision for loan losses		950		-		-		-			950
Net interest income after provision for loan losses		8,902		-		-		-			8,902
Investment gains, net		615		-		-		-			615
Non-interest income		2,314		6,225		3,181		623			12,343
Non-interest expenses		8,343		5,161		2,562		627			16,693
Depreciation and amortization		755		87		50		1			893
Income (loss) before income taxes		2,733		977		569		(5	)		4,274
Income tax expense (benefit)		382		422		235		(2	)		1,037
Net income (loss)		2,351		555		334		(3	)		3,237
Less: net income attributable to
noncontrolling interest		128		-		-		-			128
Net income (loss) attributable to Oneida
Financial Corp.	$	2,223	$	555	$	334	$	(3	)	$	3,109

Total Assets	$	638,577	$	18,592	$	4,957	$	217		$	662,343

	Six Months Ended June 30, 2010
	Banking Activities			Insurance Activities		Benefit Consulting Activities			Risk Management Activities			Total
	(In thousands)
Net interest income	$	8,729		$	-	$	-		$	-		$	8,729
Provision for loan losses		700			-		-			-			700
Net interest income after provision for loan losses		8,029			-		-			-			8,029
Investment losses, net		(1,024	)		-		-			-			(1,024	)
Non-interest income		2,438			5,612		3,030			455			11,535
Non-interest expenses		8,213			4,556		2,300			477			15,546
Depreciation and amortization		842			90		62			1			995
Income (loss) before income taxes		388			966		668			(23	)		1,999
Income tax (benefit) expense		(259	)		421		276			(9	)		429
Net income (loss)		647			545		392	(14)		1,570
Less: net income attributable to
noncontrolling interest		128			-		-			-			128
Net income (loss) attributable to Oneida
Financial Corp.	$	519		$	545	$	392		$	(14	)	$	1,442

Total Assets	$	595,476		$	17,219	$	5,029		$	142		$	617,866

The following represents a reconciliation of the Company’s reported segment assets to consolidated assets as of June 30:

Assets	2011			2010
	(In thousands)
Total assets for reportable segments	$	662,343		$	617,866
Elimination of intercompany cash balances		(4,192	)		(4,556	)
Consolidated Total	$	658,151		$	613,310

Page 22 of 45

Index

Note F – 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 six months ended June 30:

Changes in Fair Values for the six months ended June 30, 2010, for items

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

Other

Gains and

(Losses)

Interest

Income

Interest

Expense

Total Changes

In Fair Values

Included in

Current Period

Earnings

(In thousands)

Assets:

Trading securities

803

823

		Changes in Fair Values for the six months ended June 30, 2011, for items Measured at Fair Value Pursuant to Election of the Fair Value Option
		Other Gains and (Losses)			Interest Income		Interest Expense		Total Changes In Fair Values Included in Current Period Earnings
	(In thousands)
Assets:
Trading securities		$	(744	)		20		-	$	(724	)

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:

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.

Page 23 of 45

Index

Note F – Fair Value (Continued)

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.

For the three and six months ended June 30, 2011, corporate securities are priced using Level 2 inputs. For the three and six months ended June 30, 2010, there was one corporate security that was priced using Level 3 inputs due to the lack of market of similar type investments. The Company obtained broker quotes on this investment based on trading desk information in which the prices were heavily influenced by unobservable market inputs. The security is still owned by the Company but is currently being priced under Level 2 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 $773,000 at June 30, 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 $675,000. 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 $212,000 with a valuation allowance of $109,000 as of June 30, 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. This loan was charged off in April 2011.

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, are summarized below:

	Fair Value Measurements at June 30, 2011 Using
Assets:	June 30, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Trading securities	(In thousands)
Common and preferred equities	$	7,635		-	$	5,736	$	1,899
Available-for- sale securities
U.S. Agency		53,264		-		53,264		-
Corporate		24,653		-		24,653		-
Trust preferred securities		3,607		-		-		3,607
State and municipal		43,886		-		43,886		-
Small Business Administration		2,869		-		2,869		-
Residential mortgage-backed securities		77,342		-		77,342		-
Collateralized mortgage obligations		2,341		-		2,341		-
Total	$	215,597	$	-	$	210,091	$	5,506

Page 24 of 45

Index

Note F – Fair Value (Continued)

	Fair Value Measurements at December 31, 2010 Using
Assets:	December 31, 2010		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (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 and six months ended June 30:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Trading Securities			Trust 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		-			(205	)		(205	)
Interest payments applied to principal		-			(6	)		(6	)
Included in other comprehensive income		-			376			376

Ending balance March 31, 2011	$	1,886		$	3,569		$	5,455
Total gains or losses (realized/unrealized)
Included in earnings
Interest income on securities		(10	)		-			(10	)
Other changes in fair value		23			-			23
Net impairment losses recognized in earnings		-			(30	)		(30	)
Interest payments applied to principal		-			(5	)		(5	)
Included in other comprehensive income		-			73			73

Ending balance June 30, 2011	$	1,899		$	3,607		$	5,506

Page 25 of 45

Index

Note F – Fair Value (Continued)

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Trading Securities			Corporate			Trust 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
Included in earnings
Interest income on securities		(10	)		-			-			(10	)
Other changes in fair value		(256	)		-			-			(256	)
Net impairment losses recognized in earnings		-			-			(58	)		(58	)
Included in other comprehensive income		-			(850	)		960			110

Ending balance June 30, 2010	$	1,759		$	1,400		$	5,933		$	9,092

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 June 30, 2011 and December 31, 2010 were as follows:

	June 30, 2011				December 31, 2010
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:	(In thousands)
Cash and cash equivalents	$	20,427	$	20,427	$	33,741	$	33,741
Trading securities		7,635		7,635		7,691		7,691
Investment securities, available for sale		207,962		207,962		227,478		227,478
Investment securities, held to maturity		56,325		57,814		24,143		25,070
Loans held for sale		283		306		857		865
Loans receivable, net		280,894		294,084		282,574		297,342
Federal Home Loan Bank stock		2,168		N/A		2,109		N/A
Accrued interest receivable		2,488		2,488		2,455		2,455

Financial liabilities:
Deposits	$	545,700	$	548,780	$	552,164	$	560,226
Federal Home Loan Bank advances		12,000		12,256		12,000		12,308
Accrued interest payable		46		46		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

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assumptions could significantly affect the estimates. Our fair value estimates, methods, and assumptions are set forth below for each type of financial instrument.

Note F – Fair Value (Continued)

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 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 G – Accounting Pronouncements

In April 2011, the FASB issued additional guidance to improve financial reporting by creating greater consistency in the way GAAP is applied for various types of debt restructurings. The guidance clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude that both of the following exist: (a) the restructuring constitutes a concession; and (b) the debtor is experiencing financial difficulties. The amendments clarify the guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. The new guidance is effective for interim and annual periods beginning on or after June 15, 2011 and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. 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.

In May 2011, the FASB issued amended fair value measurement and discourse requirements. This guidance represents converged guidance of the FASB and IASB (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term “fair value.” The Boards have concluded the common

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Note G – Accounting Pronouncements (Continued)

requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and IFRSs. The amendments are to be applied prospectively. The amendments are effective during interim and annual periods beginning after December 15, 2011. 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.

In June 2011, the FASB issued guidance on the presentation of comprehensive income. The guidance amends the FASB Accounting Standards Codification (Codification) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments to the Codification in the ASU do not change the items that must be reporting in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This guidance should be applied retrospectively. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. 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 H – 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 I – 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 $586,000 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 June 28, 2011 of $0.12 per share which was paid to its shareholders on July 12, 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 $586,000 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 enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, which significantly changed the bank regulatory structure and will affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act eliminated, as of July 21, 2011, the Office of Thrift Supervision, which regulated savings and loan holding companies. The Dodd-Frank Act 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. The Dodd-Frank Actrequires the Federal Reserve Board to set minimum capital levels for depository institution 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. Any depository institution holding company that was not regulated by the Federal Reserve Board as of May 19, 2010 has a five year period until the Dodd-Frank Act capital requirements apply. 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 created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as the Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will continue to be examined by their applicable bank regulators. The 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 are now based on the average consolidated total assets less tangible equity capital of a financial institution. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2009, and non-interest bearing transaction accounts have unlimited deposit insurance through December 31, 2013. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also 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 June 30, 2011 were $658.2 million, a decrease of $3.4 million, or 0.5%, from $661.6 million at December 31, 2010. The decrease in total assets was primarily attributable to a decrease in cash and cash equivalents.

Mortgage-backed securities increased $17.7 million, or 19.7%, to $107.6 million at June 30, 2011 as compared with $89.9 million at December 31, 2010. Investment securities decreased $5.0 million or 3.1%, to $156.7 million at June 30, 2011 as compared to $161.7 million at December 31, 2010. The increase in mortgage-backed securities was due to purchases of securities to reduce the cash and cash equivalent balance. In addition, proceeds from calls and maturities of investment securities were used to purchase mortgage–backed securities.

Cash and cash equivalents decreased $13.3 million, or 39.5%, to $20.4 million at June 30, 2011 from $33.7 million at December 31, 2010. The decrease in cash and cash equivalents was due to the investment of excess cash on hand and a decrease in both retail and municipal deposits.

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Trading securities decreased $56,000, or 0.7%, to $7.6 million at June 30, 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, decreased $3.5 million, or 1.2%, to $284.2 million at June 30, 2011 as compared with $287.7 million at December 31, 2010. We continue to maintain a diversified loan portfolio mix. We sold $7.4 million in fixed rate residential loans during the six months ended June 30, 2011. While overall loan demand is slightly higher than a year ago, we have continued to maintain balanced loan originations during the first six months of 2011: residential mortgage loan originations were $10.7 million, consumer loan originations were $14.4 million and commercial loan originations were $16.9 million.

LIABILITIES. Total liabilities decreased by $8.3 million, or 1.4%, to $567.4 million at June 30, 2011 from $575.7 million at December 31, 2010. The decrease was primarily the result of a decrease in deposits of $6.5 million and a decrease in other liabilities of $1.8 million.

Deposit accounts decreased $6.5 million, or 1.2%, to $545.7 million at June 30, 2011 from $552.2 million at December 31, 2010. Interest-bearing deposit accounts decreased by $8.6 million, or 1.8%, to $478.4 million at June 30, 2011 from $487.0 million at December 31, 2010. Non-interest bearing deposit accounts increased $2.1 million, or 3.2%, to $67.3 million at June 30, 2011 from $65.2 million at December 31, 2010. The decrease in deposit accounts was primarily a result of a decrease in retail accounts due to the general management of overall deposit balances. Municipal deposits increased $9.9 million to $127.2 million at June 30, 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 June 30, 2011 and December 31, 2010.

Other liabilities decreased $1.8 million, or 15.6%, to $9.7 million at June 30, 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 June 30, 2011 from December 31, 2010.

STOCKHOLDERS’ EQUITY. Total stockholders’ equity at June 30, 2011 was $90.7 million, an increase of $4.8 million, or 5.6%, from $85.9 million at December 31, 2010. The increase in stockholders’ equity was a result of net income of $3.1 million for the six months ended June 30, 2011. In addition, there was a decrease in accumulated other comprehensive loss of $3.4 million at June 30, 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. Quarterly dividends declared during the first six months of 2011 were $0.24 per share resulting in a reduction in stockholders’ equity of $1.7 million.

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 and six months ended June 30, 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 June 30,																Twelve Months Ended Dec. 31,
			2011								2010								2010
Assets	Average Outstanding Balance		Interest Earned/ Paid			Yield/ Rate			Average Outstanding Balance		Interest Earned/ Paid			Yield/ Rate			Average Outstanding Balance		Interest Earned/ Paid			Yield/ Rate
Interest-earning Assets:	(Dollars in Thousands)
Loans Receivable	$	284,601	$	3,852			5.41	%	$	294,956	$	4,183			5.67	%	$	293,711	$	16,791			5.72	%
Investment and Mortgage-Backed Securities		270,826		2,117			3.13	%		189,668		1,654			3.49	%		202,742		6,648			3.28	%
Federal Funds		30,916		5			0.06	%		30,240		9			0.12	%		31,919		39			0.12	%
Equity Securities		7,253		60			3.31	%		7,744		78			4.03	%		7,385		302			4.09	%
Total Interest-earning Assets		593,596		6,034			4.07	%		522,608		5,924			4.53	%		535,757		23,780			4.44	%
Non interest-earning Assets:
Cash and due from banks		10,459								11,005								11,108
Other assets		74,302								78,151								77,013
Total assets	$	678,357							$	611,764							$	623,878
Liabilities and Stockholders’ Equity
Interest-bearing Liabilities:
Money Market Deposits	$	185,103	$	242			0.52	%	$	156,385	$	375			0.96	%	$	158,842	$	1,465			0.92	%
Savings Accounts		98,605		93			0.38	%		89,231		136			0.61	%		87,483		508			0.58	%
Interest-bearing Checking		68,524		14			0.08	%		55,141		27			0.20	%		55,853		106			0.19	%
Time Deposits		150,439		537			1.43	%		153,965		659			1.72	%		152,734		2,606			1.71	%
Borrowings		12,088		133			4.41	%		23,500		279			4.76	%		21,072		996			4.73	%
Notes Payable		317		2			N/M			-		-			-			-		-			-
Total Interest-bearing Liabilities		515,076		1,021			0.80	%		478,222		1,476			1.24	%		475,984		5,681			1.19	%
Non-interest-bearing Liabilities:
Demand deposits		67,655								64,243								63,798
Other liabilities		8,146								9,096								10,928
Total liabilities	$	590,877							$	551,561							$	550,710
Stockholders’ equity		87,480								60,203								73,168
Total liabilities and stockholders’ equity	$	678,357							$	611,764							$	623,878

Net Interest Income			$	5,013							$	4,448							$	18,099
Net Interest Spread							3.27	%							3.30	%							3.25	%
Net Earning Assets	$	78,520							$	44,386							$	59,773
Net yield on average
Interest-earning assets				3.38	%							3.40	%							3.38	%
Average interest-earning
assets to average
Interest-bearing liabilities				115.24	%							109.28	%							112.56	%

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	Six Months Ended June 30,																Twelve Months Ended Dec. 31,
			2011								2010								2010
Assets	Average Outstanding Balance		Interest Earned/ Paid			Yield/ Rate			Average Outstanding Balance		Interest Earned/ Paid			Yield/ Rate			Average Outstanding Balance		Interest Earned/ Paid			Yield/ Rate
Interest-earning Assets:									( Dollars in		Thousands)
Loans Receivable	$	285,645	$	7,783			5.45	%	$	296,925	$	8,501			5.73	%	$	293,711	$	16,791			5.72	%
Investment and Mortgage-Backed Securities		265,721		4,115			3.10	%		178,699		3,092			3.46	%		202,742		6,648			3.28	%
Federal Funds		28,908		13			0.09	%		30,745		17			0.11	%		31,919		39			0.12	%
Equity Securities		7,344		122			3.32	%		7,685		152			3.96	%		7,385		302			4.09	%
Total Interest-earning Assets		587,618		12,033			4.10	%		514,054		11,762			4.58	%		535,757		23,780			4.44	%
Non interest-earning Assets:
Cash and due from banks		11,098								11,455								11,108
Other assets		74,282								78,216								77,013
Total assets	$	672,998							$	603,725							$	623,878
Liabilities and Stockholders’ Equity
Interest-bearing Liabilities:
Money Market Deposits	$	182,683	$	572			0.63	%	$	151,312	$	753			1.00	%	$	158,842	$	1,465			0.92	%
Savings Accounts		95,509		197			0.42	%		87,627		261			0.60	%		87,483		508			0.58	%
Interest-bearing Checking		69,001		37			0.11	%		53,370		55			0.21	%		55,853		106			0.19	%
Time Deposits		150,888		1,108			1.48	%		154,281		1,357			1.77	%		152,734		2,606			1.71	%
Borrowings		12,044		263			4.40	%		25,452		607			4.81	%		21,072		996			4.73	%
Notes Payable		161		4			N/M			-		-			-			-		-			-
Total Interest-bearing Liabilities		510,286		2,181			0.86	%		472,042		3,033			1.30	%		475,984		5,681			1.19	%
Non-interest-bearing Liabilities:
Demand deposits		65,571								62,119								63,798
Other liabilities		10,028								9,705								10,928
Total liabilities	$	585,885							$	543,866							$	550,710
Stockholders’ equity		87,113								59,859								73,168
Total liabilities and stockholders’ equity	$	672,998							$	603,725							$	623,878

Net Interest Income			$	9,852							$	8,729							$	18,099
Net Interest Spread							3.23	%							3.28	%							3.25	%
Net Earning Assets	$	77,332							$	42,012							$	59,773
Net yield on average
Interest-earning assets				3.35	%							3.40	%							3.38	%
Average interest-earning
assets to average
Interest-bearing liabilities				115.15	%							108.90	%							112.56	%

RESULTS OF OPERATIONS

General. Net income for the three months ended June 30, 2011 was $1.7 million compared to $814,000 for the three months ended June 30, 2010. For the three months ended June 30, 2011, basic net income per share was $0.24 as compared with basic net income per share of $0.11 for the three months ended June 30, 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 June 30, 2011 as compared with the three months ended June 30, 2010.

Net income for the six months ended June 30, 2011 was $3.1 million compared to $1.4 million for the six months ended June 30, 2010. Net income from operations, excluding noncash investment securities charges of $537,000, net of $135,000 income taxes, was $2.7 million. Non-cash investment securities charges consisted of impairment charges of $286,000 incurred on eight trust preferred securities and two privately issued collateralized mortgage obligations offset by the

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non-cash increase to earnings of $823,000 recognized in connection with the increase in market value of our trading securities, net of $135,000 in income taxes, for a net non-cash reduction of $402,000. This compares to net income from operations for the same period in 2010 of $2.8 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 and an increase in the provision for income taxes partially offset by an increase in net interest income and an increase in non-interest income. 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)

	Six Months Ending June 30, 2011			Six Months Ending June 30, 2010
Net interest income	$	9,852		$	8,729
Provision for loan losses		950			700
Investment (losses)		(208	)		(300	)
Change in fair value of investments		823			(724	)
Non-interest income		12,343			11,535
Non-interest expense		17,586			16,541
Income tax provision		1,037			429
Net income		3,237			1,570
Income attributable to noncontrolling interest		(128	)		(128	)
Net income attributable to Oneida
Financial Corp.	$	3,109		$	1,442

Net income per diluted share	$	0.44		$	0.20

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

	Six Months Ending June 30, 2011			Six Months Ending June 30, 2010
Net interest income	$	9,852		$	8,729
Provision for loan losses		950			700
Investment gains		78			751
Non-interest income		12,343			11,535
Non-interest expense		17,586			16,541
Income tax provision		902			835
Net income		2,835			2,939
Income attributable to noncontrolling interest		(128	)		(128	)
Net income attributable to Oneida
Financial Corp.	$	2,707		$	2,811

Net income per diluted share	$	0.38		$	0.39

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 $110,000, or 1.9%, to $6.0 million for the three months ended June 30, 2011 from $5.9 million for the three months ended June 30, 2010. Interest and fees on loans decreased by $331,000 for the three months ended June 30, 2011 as compared with the same period in 2010. Interest and dividend income on mortgage-backed and other investment securities increased $463,000 to $2.1 million for the three months ended June 30, 2011 from $1.7 million for the three months ended June 30, 2010. Interest income earned on federal funds sold decreased $4,000 during the three months ended June 30, 2011 as compared with the three months ended June 30, 2010.

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For the six months ended June 30, 2011, interest and dividend income increased by $271,000, or 2.3% to $12.0 million from $11.8 million for the six months ended June 30, 2010. Interest and fees on loans decreased by $718,000 for the six months ended June 30, 2011 as compared with the same period in 2010. Interest and dividend income on mortgage-backed and other investment securities increased $1.0 million for the six months ended June 30, 2011 as compared with the six months ended June 30, 2010.

The decrease in income on loans resulted from a decrease of 26 basis points in the average yield on loans to 5.41% from 5.67% and a decrease of $10.4 million in the average balance of loans to $284.6 million in the second quarter of 2011 from $295.0 million in the second quarter of 2010. At June 30, 2011, net loans receivable were $281.2 million as compared with $291.3 million at June 30, 2010, a decrease of 3.5%. 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. For the six months ended June 30, 2011, the decrease in income on loans resulted from a decrease of 28 basis points in the average yield on loans to 5.45% from 5.73% and a decrease of $11.3 million in the average balance of loans to $285.6 million from $296.9 million for the six months ended June 30, 2010.

The increase in interest income from investment and mortgage-backed securities was the result of an increase of $81.1 million in the average balance of investment and mortgage-backed securities to $270.8 million during the second quarter of 2011 from $189.7 million during the second quarter of 2010 partially offset by a decrease of 36 basis points in the average yield earned to 3.13% from 3.49%. For the six months ended June 30, 2011, interest on investment and mortgage-backed securities increased $1.0 million as compared with the same period in 2010 due to an increase in the average balance of $87.0 million offset by a decrease in the average yield of 36 basis points. 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 decreased as a result of a decrease in the average yield partially offset by an increase of $676,000 in the average balance of federal funds sold to $30.9 million during the second quarter of 2011 as compared with $30.2 million during the three months ended June 30, 2010. For the six months ended June 30, 2011, interest income on federal funds sold decreased $4,000 due to a decrease in both the average yield and average balance. The decrease in the yield is due to decreases in interest rates paid on federal funds during the period. The decrease in the average balance is due to the investment of excess liquidity into investment and mortgage-backed securities.

Income from equity securities decreased $18,000 due to a decrease in the average yield of 72 basis points as well as a decrease of $491,000 in the average balance from $7.7 million for the three months ended June 30, 2010 to $7.3 million for the three months ended June 30, 2011. For the six months ended June 30, 2011, interest income on equity securities decreased $30,000 as a result of a decrease in the average yield and average balance as compared with the same period in 2010. The decrease in the average balance was the result of sales of certain preferred equity securities during the six months ended June 30, 2011.

Interest Expense. Interest expense decreased $455,000, or 30.8%, to $1.0 million for the three months ended June 30, 2011 from $1.5 million for the three months ended June 30, 2010. The decrease in interest expense was primarily due to a decrease in interest paid on deposit accounts during the second quarter of 2011 of $311,000, decreasing to $886,000 from $1.2 million during the second quarter of 2010. In addition, borrowing expense decreased to $133,000 for the three months ended June 30, 2011 compared with $279,000 for the three months ended June 30, 2010. Interest expense decreased $852,000, or 28.1% to $2.2 million for the six months ended June 30, 2011 from $3.0 million for the six months ended June 30, 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 $51.5 million, or 17.1%, to $352.2 million at an average cost of 0.40% during the second quarter of 2011 from $300.8 million at an average cost of 0.72% during the second quarter of 2010. During the same period the average balance of time deposits decreased $3.5 million, or 2.3%, to $150.4 million in the second quarter of 2011 from $154.0 million during the second quarter of 2010 and the average rate paid on time deposits decreased 29 basis points. For the six months ended June 30, 2011, the average cost of deposits was 0.77% as compared with 1.10% for the six month period in 2010. In addition, the average balance of deposit accounts increased $51.5 million for the six months ended June 30, 2011 as compared with the six months ended June 30, 2010.

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The decrease in borrowing expense for the second quarter 2011 as compared to the second quarter 2010 was due to a decrease in the average balance of borrowings outstanding in the June 30, 2011 period to $12.0 million as compared with $23.5 million during the June 30, 2010 period as well as a 35 basis point decrease in the average rate paid on borrowed funds to 4.41% for the 2011 period. For the six months ended June 30, 2011, interest expense on borrowings decreased $344,000 due to a decrease in the average balance outstanding of borrowings to $12.0 million as compared to $25.5 million for the six month period 2010. 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 for the three and six months ended June 30, 2011 was $550,000 and $950,000, respectively. The total provision for loan losses for the three and six months ended June 30, 2010 was $300,000 and $700,000, respectively. 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 second quarter 2011 is primarily the result of a specific reserve established on a previously identified problem loan relationship. Continued deterioration of the credit gave rise to the additional specific reserve this quarter. Loans individually evaluated for impairment totaled $1.6 million at June 30, 2011 and had an allocated allowance for loan loss reserve of $882,000. 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 $1.8 million, or 0.62% of total loans at June 30, 2011 compared with $3.0 million or 1.01% of total loans at June 30, 2010. The decrease in nonperforming loans from June 30, 2010 to June 30, 2011 was primarily attributable to the charge-off of a fully reserved, impaired, unsecured commercial loan with a principal balance of $2.0 million. Net charge-off activity for the six months ended June 30, 2011 was $2.2 million as compared with $149,000 in net charge-offs during the six months ended June 30, 2010. The balance of the allowance for loan losses was $3.1 million or 1.09% of loans receivable at June 30, 2011 compared with $3.5 million or 1.19% of loans receivable at June 30, 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 June 30, 2011 the market value of our trading securities increased $393,000 as compared with a decrease of $863,000 in the 2010 period. For the six months ended June 30, 2011, the market value of our trading securities increased $823,000 as compared with a decrease of $724,000 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 June 30, 2011 were $81,000 as compared with net impairment losses of $61,000 during three months ended June 30, 2010. The net investment losses were the result of non-cash impairment charges recorded for eight trust preferred securities and two privately-issued collateralized mortgage obligations 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. For the six months ended June 30, 2011, net impairment charges totaled $286,000 as compared with $1.1 million for the same period in 2010. See Footnote C Investment Securities in the consolidated financial statements for more detailed information on other-than-temporary impairment review.

During the second quarter of 2011 the Company realized $97,000 of investment gains, this compares with realized gains of $442,000 during the three months ended June 30, 2010. For the six months ended June 30, 2011, net gains on sales of securities totaled $78,000 as compared with $751,000 for the same period in 2010.

Non-Interest Income. Non-interest income increased by $600,000, or 10.5%, to $6.3 million for the three months ended June 30, 2011 from $5.7 million for the three months ended June 30, 2010. For the six months ended June 30, 2011, non-interest income increased by $808,000 or 7.0%, to $12.3 million from $11.5 million for the six months ended June 30, 2010.

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Revenue derived from Oneida Savings Bank’s non-banking subsidiaries increased $649,000, or 14.6%, to $5.1 million during the three months ended June 30, 2011 as compared with $4.4 million during the three months ended June 30, 2010. Insurance subsidiary revenue of Bailey & Haskell Associates was $3.0 million for the three months ended June 30, 2011 as compared with $2.6 million during the three months June 30, 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 $1.8 million for the three months ended June 30, 2011 as compared with $1.6 million during the second quarter of 2010. Risk management activities of Workplace Health Solutions generated $321,000 of revenue for the three months ended June 30, 2011 as compared with $254,000 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. Revenue derived from non-banking subsidiaries increased $932,000 or 10.2% to $10.0 million for the six months ended June 30, 2011 as compared with $9.1 million for the six months ended June 30, 2010.

Deposit account service fees decreased slightly to $676,000 during the three months ended June 30, 2011 from $712,000 during the three months ended June 30, 2010. The combination of fee reductions and the higher account balances currently maintained resulted in the decrease in deposit service fee revenue. For the six months ended June 30, 2011, deposit account service fees decreased $57,000 as compared with the same period in 2010.

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 second quarter of 2011 as compared with higher level of activity in the second quarter of 2010. Income from the sale and servicing of fixed-rate residential real estate loans was $170,000 during the three months ended June 30, 2011 compared with $221,000 during the three months ended June 30, 2010. For the six months ended June 30, 2011, income from the sale and servicing of fixed-rate residential real estate was $288,000 as compared with $362,000 for the six months ended June 30, 2010.

Non-Interest Expense. Non-interest expense increased by $519,000, or 6.3%, to $8.8 million for the three months ended June 30, 2011 from $8.3 million for the three months ended June 30, 2010. For the six months ended June 30, 2011, non-interest expense increased by $1.0 million, or 6.3%, to $17.6 million as compared with $16.5 million for the same period in 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 June 30, 2011 was $5.8 million, an increase of $597,000, or 11.5%, as compared with compensation expense of $5.2 million during the second quarter of 2010. Compensation for the six months ended June 30, 2011 was $11.4 million, an increase of $947,000, or 9.1%, as compared with compensation expense of $10.4 million for the same period in 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.

Building occupancy and equipment expense decreased $47,000, or 3.8%, to $1.2 million for the three months ended June 30, 2011 as compared to $1.3 million during the three months ended June 30, 2010. For the six months ended June 30, 2011, building occupancy and equipment expense decreased $107,000, or 4.2%, to $2.4 million as compared to $2.5 million for the same period in 2010.

Other operating expenses decreased $31,000, or 1.7%, to $1.8 million for the three months ended June 30, 2011 as compared to $1.8 million during the three months ended June 30, 2010. For the six months ended June 30, 2011, other operating expense increased $205,000, or 5.7%, to $3.8 million as compared to $3.6 million for the same period in 2010.

Provision for Income Taxes. Provision for income taxes was $637,000 for the three months ended June 30, 2011, an increase of $404,000 from the second quarter 2010 income tax provision recorded of $233,000. The increase in income tax provision reflects the increase in net income for the three months ended June 30, 2011. For the six months ended June 30, 2011, the provision for income taxes was $1.0 million, an increase of $608,000 from $429,000 for the same period in 2010. The effective tax rate was 24.3% during the first six months of 2011 as compared with an effective tax rate of 21.5% for the same time period in 2010. The higher effective tax rate was due to changes in the bank’s tax exempt and tax preferred investment income and the overall tax rate in effect of the year.

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

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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 second quarter of 2011, loan originations totaled $23.2 million compared to $28.2 million during the second quarter of 2010. The purchases of securities available for sale totaled $27.5 million during the second quarter of 2011 as compared to $97.2 million during the second 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 June 30, 2011 the Company had outstanding commitments to originate loans of approximately $6.1 million, which generally have an expiration period of less than 120 days. Commitments to sell residential mortgages amounted to $4.3 million at June 30, 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 $50.7 million at June 30, 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 June 30, 2011 the total of cash, interest-earnings demand accounts and federal funds sold was $20.4 million.

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At June 30, 2011, the Bank exceeded all regulatory capital requirements. The current requirements and the actual levels for the Bank are detailed in the following table.

						For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Actual
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of June 30, 2011:
Total Capital
(to Risk Weighted Assets)	$	63,500		15.97	%	$	31,803		8	%	$	39,754		10	%
Tier I Capital
(to Risk Weighted Assets)	$	60,431		15.20	%	$	15,902		4	%	$	23,852		6	%
Tier I Capital
(to Average Assets)	$	60,431		9.27	%	$	26,070		4	%	$	32,587		5	%

	Actual					For Capital Adequacy Purposes					Capitalized Under Prompt Corrective 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 RATIOSAt and for the Three and Six Months Ended June 30, 2011 and 2010 (unaudited)

	Three Months Ending June 30,						Six Months Ending June 30,
	2011			2010			2011			2010
Performance Ratios:
Return on average assets		1.00	%		0.53	%		0.92	%		0.48	%
Return on average equity		7.75	%		5.41	%		7.14	%		4.82	%
Return on average tangible equity		10.89	%		9.19	%		9.99	%		8.22	%
Interest rate spread		3.27	%		3.30	%		3.23	%		3.28	%
Net interest margin		3.38	%		3.40	%		3.35	%		3.40	%
Efficiency Ratio		77.29	%		81.99	%		78.34	%		81.08	%
Non-interest income to average total assets		3.72	%		3.73	%		3.67	%		3.82	%
Non-interest expense to average total assets		5.22	%		5.44	%		5.23	%		5.52	%
Average interest-earning assets as a ratio
to average interest-bearing liabilities		115.24	%		109.28	%		115.15	%		108.90	%

Asset Quality Ratios:
Non-performing assets to total assets		0.88	%		1.45	%		0.88	%		1.45	%
Non-performing loans to total loans		0.62	%		1.01	%		0.62	%		1.01	%
Net charge-offs to average loans		0.76	%		0.05	%		0.76	%		0.05	%
Allowance for loan losses
to non-performing loans		174.43	%		115.57	%		174.43	%		115.57	%
Allowance for loan losses
to loans receivable		1.09	%		1.19	%		1.09	%		1.19	%

Capital Ratios:
Average equity to average total assets		12.90	%		9.84	%		12.93	%		9.91	%
Equity to total assets (end of period)		13.79	%		9.90	%		13.79	%		9.90	%
Tangible equity to tangible assets (end of period)		10.36	%		6.11	%		10.36	%		6.11	%

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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 June 30, 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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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.

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Index

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 except as follows:

The Standard & Poor’s downgrade in the U.S. government’s sovereign credit ration, and in the credit ratings of instruments issued, insured or guaranteed by certain related institutions, agencies and instrumentalities, could resustl in risks to the company and general economic conditions that we were not able to predict.

On August 5, 2011, Standard & Poor’s downgraded the United States long-term debt rating from its AAA rating to AA+. On August 8, 2011, Standard & Poor’s downgraded the credit rations of certain long-term debt instruments issued by Fannie Mae and Freddie Mac and other U.S. government agencies linked to the long-term U.S. debt. Insturments of this nature are key assets on the balance sheets of financial institutions, including the Bank. These downgrades could adversely affect the market value of such instruments, and could adversely impact our ability to obtain funding that is collateralized by affected instruments, as well as affecting the pricing of that funding when it is available. We cannot predict if, when or how these changes to the credit ratins will affect economic conditions. These ratings downgrades could result in a significant adverse impact to the Company, and could exacerbate the other risks to which the Company is subject.

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable

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

Interactive date as required by Regulation S-K will be filed by amendment to this quarterly reporton Form 10Q

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Index

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: August 15, 2011	By:	/s/ Michael R. Kallet
		Michael R. Kallet
		President and Chief Executive Officer


Date: August 15, 2011	By:	/s/ Eric E. Stickels
		Eric E. Stickels
		Executive Vice President and Chief
		Financial Officer

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