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EXCEL - IDEA: XBRL DOCUMENT - Oneida Financial Corp.Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Oneida Financial Corp.exhibit3219-30x2014.htm
EX-31.1 - EXHIBIT 31.1 - Oneida Financial Corp.exhibit3119-30x2014.htm
EX-31.2 - EXHIBIT 31.2 - Oneida Financial Corp.exhibit3129-30x2014.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 September 30, 2014
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES         EXCHANGE ACT OF 1934
 
For the transition period from                       to                 
 
Securities Exchange Act Number 001-34813
 ONEIDA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
Maryland
80-0632920
(State or other jurisdiction of
(IRS Employer)
incorporation or organization)
Identification Number)
 
182 Main Street, Oneida, New York 13421
(Address of Principal Executive Offices)
 
(315) 363-2000
Registrant’s telephone number, including area code
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No o
 
Indicate by check mark whether the Registrant is a large accelerated file, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x
 
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 7,022,444 shares of the Registrant’s common stock outstanding as of November 1, 2014.
 





ONEIDA FINANCIAL CORP.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I. FINANCIAL INFORMATION
 Item I.    Financial Statements

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
At September 30, 2014 (unaudited) and December 31, 2013
 
September 30,
2014
 
December 31,
2013
 
(In thousands, except share data)
ASSETS
 

 
 

Cash and due from banks
$
27,014

 
$
27,940

Federal funds sold
17,327

 
14,243

TOTAL CASH AND CASH EQUIVALENTS
44,341

 
42,183

Trading securities
4,379

 
5,063

Securities, available-for-sale
163,583

 
131,069

Securities, held-to-maturity (fair value $133,870 and $135,468 respectively)
131,001

 
136,937

 
 
 
 
Mortgage loans held for sale
347

 
61

Loans receivable
357,555

 
337,785

Deferred fees
1,274

 
965

Allowance for loan losses
(3,491
)
 
(3,110
)
LOANS RECEIVABLE, NET
355,338

 
335,640

Federal Home Loan Bank stock
1,419

 
1,588

Bank premises and equipment, net
19,954

 
19,780

Assets held for sale
63

 

Accrued interest receivable
2,491

 
2,222

Bank owned life insurance
17,654

 
18,160

Other assets
19,838

 
23,199

Goodwill
25,480

 
25,480

Other intangible assets
880

 
1,102

TOTAL ASSETS
$
786,768

 
$
742,484

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Liabilities:
 

 
 

Interest bearing deposits
$
586,191

 
$
551,603

Non-interest bearing deposits
93,077

 
85,647

Borrowings

 
1,000

Other liabilities
12,643

 
13,590

TOTAL LIABILITIES
691,911

 
651,840

Oneida Financial Corp. Stockholders’ equity:
 

 
 

Preferred stock, 10,000,000 shares authorized; 0 issued and outstanding

 

Common stock ($.01 par value; 30,000,000 shares authorized; 7,022,444 issued at September 30, 2014; 7,027,230 issued at December 31, 2013)
70

 
70

Additional paid-in capital
44,024

 
43,449

Retained earnings
54,725

 
52,411

Accumulated other comprehensive loss
(3,930
)
 
(5,142
)
Unallocated ESOP (18,023 and 18,023 shares)
(32
)
 
(144
)
TOTAL STOCKHOLDERS’ EQUITY
94,857

 
90,644

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
786,768

 
$
742,484

 






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


1


ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2014 (unaudited) and 2013 (unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
 
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Interest and fees on loans
$
3,767

 
$
3,793

 
$
11,117

 
$
11,275

Interest on investment securities
1,886

 
1,781

 
5,624

 
5,276

Dividends on equity securities
23

 
23

 
71

 
69

Interest on federal funds sold and interest-earning deposits
4

 
1

 
16

 
11

            Total interest and dividend income
5,680

 
5,598

 
16,828

 
16,631

INTEREST EXPENSE:
 

 
 

 
 

 
 

Core deposits
300

 
235

 
907

 
723

Time deposits
345

 
374

 
1,045

 
1,128

Borrowings
9

 
22

 
35

 
64

Note payable
1

 
5

 
8

 
19

Total interest expense
655

 
636

 
1,995

 
1,934

NET INTEREST INCOME
5,025

 
4,962

 
14,833

 
14,697

Less: Provision for loan losses
270

 
180

 
470

 
380

Net interest income after provision for loan losses
4,755

 
4,782

 
14,363

 
14,317

INVESTMENT GAINS:
 

 
 

 
 

 
 

Net gains on sales of securities
2,044

 
275

 
2,116

 
542

Changes in fair value of trading securities
(1,507
)
 
127

 
(684
)
 
1,251

             Total investment gains
537

 
402

 
1,432

 
1,793

NON-INTEREST INCOME:
 

 
 

 
 

 
 

Commissions and fees on sales of non-banking products
6,375

 
5,866

 
19,766

 
17,834

Other operating income
1,183

 
1,249

 
4,126

 
3,747

             Total non-interest income
7,558

 
7,115

 
23,892

 
21,581

NON-INTEREST EXPENSES:
 

 
 

 
 

 
 

Compensation and employee benefits
7,364

 
7,075

 
21,864

 
20,488

Occupancy expenses, net
1,364

 
1,296

 
4,094

 
3,918

Other operating expense
2,297

 
2,537

 
7,303

 
7,259

            Total non-interest expenses
11,025

 
10,908

 
33,261

 
31,665

INCOME BEFORE INCOME TAXES
1,825

 
1,391

 
6,426

 
6,026

Provision for income taxes
365

 
370

 
1,593

 
1,562

NET INCOME
$
1,460

 
$
1,021

 
$
4,833

 
$
4,464

EARNINGS PER SHARE — BASIC
$
0.21

 
$
0.15

 
$
0.69

 
$
0.64

EARNINGS PER SHARE — DILUTED
$
0.21

 
$
0.15

 
$
0.69

 
$
0.64








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

2


ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Months Ended September 30, 2014 (unaudited) and 2013 (unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
 
 
 
(In thousands)
 
Net income
$
1,460

 
$
1,021

 
$
4,833

 
$
4,464

 
Other comprehensive income (loss), net of tax:
 

 
 

 
 

 
 

 
 
 
 
 
 
 
 
 
 
Net change in unrealized gains (losses):
 

 
 

 
 

 
 

 
Securities transferred from available-for-sale to held-to-maturity:
 

 
 

 
 

 
 

 
Amortization of unrealized gains on securities arising during period
142

 

 
417

 

 
Reclassification adjustment for gains realized included in income

 

 

 

 
Net unrealized gains
142

 

 
417

 

 
Income tax effect
(57
)
 

 
(167
)
 

 
Net change in securities transferred to held-to-maturity
85

 

 
250

 

 
Securities available-for-sale:
 

 
 

 
 

 
 

 
Unrealized holding gains (losses) on securities arising during period
698

 
(3,108
)
 
3,697

 
(9,635
)
 
Reclassification adjustment for gains realized in income
(2,044
)
 
(275
)
 
(2,116
)
 
(542
)
 
Net unrealized (losses) gains
(1,346
)
 
(3,383
)
 
1,581

 
(10,177
)
 
Income tax effect
538

 
1,353

 
(633
)
 
4,071

 
Net change in securities available-for-sale
(808
)
 
(2,030
)
 
948

 
(6,106
)
 
Unrealized holding (losses) gains on securities, net of tax
(723
)
 
(2,030
)
 
1,198

 
(6,106
)
 
 
 
 
 
 
 
 
 
 
Defined benefit pension plans:
 
 
 
 
 
 
 
 
Change in unrealized loss on pension benefits

 
30

 
24

 
91

 
Income tax effect

 
(12
)
 
(10
)
 
(36
)
 
Net change in pension benefits

 
18

 
14

 
55

 
Other comprehensive (loss) income, net of tax
(723
)
 
(2,012
)
 
1,212

 
(6,051
)
 
Comprehensive income (loss)
$
737

 
$
(991
)
 
$
6,045

 
$
(1,587
)
 














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


3



ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2014 (unaudited)
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Unallocated Employee Stock Ownership Plans
 
Total
 
 
Shares
 
Amount
 
(In thousands, except number of shares)
Balance as of January 1, 2014
7,027,230

 
$
70

 
$
43,449

 
$
52,411

 
$
(5,142
)
 
$
(144
)
 
$
90,644

Net income

 

 

 
4,833

 

 

 
4,833

Other comprehensive income, net of tax

 

 

 

 
1,212

 

 
1,212

Common stock dividends: $0.36 per share

 

 

 
(2,519
)
 

 

 
(2,519
)
Tax benefit from stock plan

 

 
34

 

 

 

 
34

Shares repurchased and retired
(5,153
)
 

 
(70
)
 

 

 

 
(70
)
Shares issued under stock plan
18,367

 

 
103

 

 

 

 
103

Shares earned under stock plan

 

 
444

 

 

 

 
444

Shares canceled under stock plan
(18,000
)
 

 

 

 

 

 

Shares committed to be released under ESOP plan

 

 
64

 

 

 
112

 
176

Balance as of September 30, 2014
7,022,444

 
$
70

 
$
44,024

 
$
54,725

 
$
(3,930
)
 
$
(32
)
 
$
94,857

 

 

























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

4


ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2014 (unaudited) and 2013 (unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
 
(In thousands)
Operating Activities:
 

 
 

Net income
$
4,833

 
$
4,464

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
1,265

 
1,461

Amortization of premiums/discounts on securities, net
300

 
288

Net change in fair value of trading securities
684

 
(1,251
)
Provision for loan losses
470

 
380

ESOP shares earned
176

 
184

Stock compensation earned
444

 
449

Loss on write down or sale of foreclosed assets
17

 
46

Gain on securities, net
(2,116
)
 
(542
)
Gain on sale of loans, net
(137
)
 
(247
)
Income tax payable
1,590

 
(145
)
Accrued interest receivable
(269
)
 
(366
)
Other assets
1,790

 
998

Other liabilities
(1,529
)
 
381

Earnings on bank owned life insurance
(917
)
 
(421
)
Origination of loans held for sale
(5,522
)
 
(8,430
)
Proceeds from sales of loans
5,373

 
9,706

Proceeds on the sale of trading securities

 
2,502

     Net cash provided by operating activities
6,452

 
9,457

Investing Activities:
 

 
 

Purchase of securities available-for-sale
(49,470
)
 
(68,301
)
Proceeds from sale of securities available-for-sale
5,600

 
47,854

Maturities and calls of securities available-for-sale
6,910

 
15,070

Principal collected on securities available-for-sale
7,992

 
16,113

Purchase of securities held-to-maturity
(2,357
)
 
(20,786
)
Maturities and call of securities held-to-maturity
1,379

 
292

Principal collected on securities held-to-maturity
7,182

 
5,951

Purchase of FHLB stock
(786
)
 
(4,039
)
Redemption of FHLB stock
955

 
4,359

Net increase in loans
(20,462
)
 
(23,997
)
Purchase of bank premises and equipment
(1,280
)
 
(415
)
Proceeds from the sale of foreclosed property
87

 
97

Settlement of bank owned life insurance
1,423

 

Purchase of insurance agency

 
(17
)
Net cash used in investing activities
(42,827
)
 
(27,819
)
Financing Activities:
 

 
 

Net increase in demand deposit, savings, money market, super now and escrow
41,792

 
37,066

Net increase in time deposits
226

 
3,273


5


Repayment of borrowings
(1,000
)
 
(5,000
)
Shares issued under stock plan
103

 
36

Repurchase and retirement of common shares
(70
)
 
(40
)
Cash dividends
(2,518
)
 
(2,529
)
Net cash provided by financing activities
38,533

 
32,806

Increase in cash and cash equivalents
2,158

 
14,444

Cash and cash equivalents at beginning of period
42,183

 
19,803

Cash and cash equivalents at end of period
$
44,341

 
$
34,247

Supplemental disclosures of cash flow information:
 

 
 

Cash paid for interest
$
1,998

 
$
1,975

Cash paid for income taxes
3

 
1,706

Supplemental noncash disclosures:
 

 
 

Transfer of loans to other real estate
294

 
229

Dividends declared and unpaid at period end
844

 
843

 



































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


6


ONEIDA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2014
 
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 September 30, 2014 and December 31, 2013 and for the three month and nine month periods ended September 30, 2014 and 2013.  All inter-company accounts and transactions have been eliminated in consolidation.  The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available through the date of the filing of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.  Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.  Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, the fair value of trading securities and investment securities and the evaluation of other-than-temporary impairment on securities whose fair value is less than amortized cost to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.  Actual results could differ from those estimates.  In the opinion of management, the unaudited consolidated financial statements include all necessary adjustments, consisting of normal recurring accruals, necessary for a fair presentation for the periods presented.  The results of operations for the three and nine months ended September 30, 2014 are not necessarily indicative of the results to be achieved for the remainder of 2014
 
The data in the consolidated statements of condition for December 31, 2013 was derived from the audited financial statements included in the Company’s 2013 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 2013 consolidated financial statements, including the notes thereto included in the Company’s Annual Report on Form 10-K.

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

Note B — Earnings per Share
 
Basic earnings per share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period excluding participating securities. ESOP shares are considered outstanding for the calculation unless unearned.  Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable under stock plans. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities and are included in the computation of earnings per share pursuant to the two-class method. The Company has determined that 78,000 of its 153,000 outstanding non-vested stock awards are participating securities. Earnings and dividends per share are restated for all stock splits and stock dividends through the date of issuance of the financial statements.
 
Earnings per common share have been computed based on the following for the three months and nine months ended September 30, 2014 and 2013:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
(In thousands, except share and per share data)
Net income
$
1,460

 
$
1,021

 
$
4,833

 
$
4,464

Net earnings allocated to participating securities
(16
)
 
(15
)
 
(60
)
 
(75
)
Net earnings allocated to common stock
$
1,444

 
$
1,006

 
$
4,773

 
$
4,389


7



 
Three Months Ended
 
Nine Months Ended
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
Basic
(In thousands, except share and per share data)
Distributed earnings allocated to common stock
$
833

 
$
831

 
$
2,487

 
$
2,485

Undistributed earnings allocated to common stock
611

 
175

 
2,286

 
1,904

Net earnings allocated to common stock
$
1,444

 
$
1,006

 
$
4,773

 
$
4,389

 
 
 
 
 
 
 
 
Weighted average common shares outstanding including shares considered participating securities
6,997

 
6,969

 
6,987

 
6,962

Less: Average unallocated ESOP shares
(9
)
 
(35
)
 
(13
)
 
(40
)
Less: Average participating securities
(77
)
 
(103
)
 
(80
)
 
(110
)
Weighted average shares
6,911

 
6,831

 
6,894

 
6,812

Basic earnings per share
$
0.21

 
$
0.15

 
$
0.69

 
$
0.64

 
 
 
 
 
 
 
 
Diluted
 

 
 

 
 

 
 

Net earnings allocated to common stock
$
1,444

 
$
1,006

 
$
4,773

 
$
4,389

 
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic earnings per common share
6,911

 
6,831

 
6,894

 
6,812

Add: Dilutive effects of assumed exercise of stock options and nonparticipating shares
76

 
68

 
67

 
53

Weighted average shares and dilutive potential common shares
6,987

 
6,899

 
6,961

 
6,865

Diluted earnings per common share
$
0.21

 
$
0.15

 
$
0.69

 
$
0.64


Stock options for 8,160 and 9,348 shares of common stock were not considered in computing diluted earnings per share for the three months and nine months ended September 30, 2014, respectively, because they were anti-dilutive.   Stock options for 1,027 shares of common stock were not considered in computing diluted earnings per share for the three months and nine months ended September 30, 2013 because they were anti-dilutive.

8


Note C — Investment Securities and Mortgage-Backed Securities
 
Investment securities and mortgage-backed securities classified as available-for-sale and held-to-maturity consist of the following at September 30, 2014 and December 31, 2013:
Available-for-sale portfolio:
 
September 30, 2014
Amortized
 Cost
 
Unrealized
 
Fair
 Value
Gains
 
Losses
 
 
(In thousands)
Investment Securities
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

U.S. Agencies
 
$
25,238

 
$
64

 
$
(534
)
 
$
24,768

Corporate
 
33,158

 
283

 
(1,654
)
 
31,787

Agency asset backed securities
 
8,876

 
145

 
(3
)
 
9,018

State and municipal
 
32,219

 
1,240

 
(7
)
 
33,452

Small Business Administration
 
7,007

 
101

 

 
7,108

 
 
$
106,498

 
$
1,833

 
$
(2,198
)
 
$
106,133

Mortgage-Backed Securities
 
 

 
 

 
 

 
 

Fannie Mae
 
$
22,700

 
$
197

 
$
(61
)
 
$
22,836

Freddie Mac
 
21,600

 
94

 
(139
)
 
21,555

Government National Mortgage Assoc.
 
11,460

 
210

 
(64
)
 
11,606

Private placement mortgage obligation
 
1,424

 
29

 

 
1,453

 
 
$
57,184

 
$
530

 
$
(264
)
 
$
57,450

Total available-for-sale
 
$
163,682

 
$
2,363

 
$
(2,462
)
 
$
163,583


Held-to-maturity portfolio:
 
September 30, 2014
Amortized
 Cost
 
Unrecognized
 
Fair
 Value
Gains
 
Losses
 
 
(In thousands)
Investment Securities
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

U.S. Agencies
 
$
41,573

 
$
1,451

 
$

 
$
43,024

State and municipal
 
26,929

 
1,271

 
(16
)
 
28,184

Small Business Administration
 
9,487

 
130

 
(3
)
 
9,614

 
 
$
77,989

 
$
2,852

 
$
(19
)
 
$
80,822

Mortgage-Backed Securities
 
 

 
 

 
 

 
 

Fannie Mae
 
$
27,500

 
$
418

 
$
(452
)
 
$
27,466

Freddie Mac
 
15,890

 
188

 
(73
)
 
16,005

Government National Mortgage Assoc.
 
9,622

 
72

 
(117
)
 
9,577

 
 
$
53,012

 
$
678

 
$
(642
)
 
$
53,048

Total held-to-maturity
 
$
131,001

 
$
3,530

 
$
(661
)
 
$
133,870

 

9


Available-for-sale portfolio:
 
December 31, 2013
Amortized
Cost
 
Unrealized
 
Fair
Value
Gains
 
Losses
 
 
(In thousands)
Investment Securities
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

U.S. Agencies
 
$
19,284

 
$
21

 
$
(1,570
)
 
$
17,735

Corporate
 
31,136

 
99

 
(2,445
)
 
28,790

Agency asset backed securities
 
5,501

 
13

 
(112
)
 
5,402

Trust preferred securities
 
1,000

 
1,518

 

 
2,518

State and municipal
 
32,608

 
760

 
(60
)
 
33,308

Small Business Administration
 
3,349

 
10

 

 
3,359

 
 
$
92,878

 
$
2,421

 
$
(4,187
)
 
$
91,112

Mortgage-Backed Securities
 
 

 
 

 
 

 
 

Fannie Mae
 
$
19,795

 
$
113

 
$
(222
)
 
$
19,686

Freddie Mac
 
6,790

 
64

 
(13
)
 
6,841

Government National Mortgage Assoc.
 
10,749

 
217

 
(89
)
 
10,877

Collateralized mortgage obligations
 
1,120

 
62

 
(3
)
 
1,179

Private placement mortgage obligation
 
1,416

 

 
(42
)
 
1,374

 
 
$
39,870

 
$
456

 
$
(369
)
 
$
39,957

Total available-for-sale
 
$
132,748

 
$
2,877

 
$
(4,556
)
 
$
131,069


Held-to-maturity portfolio:
 
December 31, 2013
Amortized
Cost
 
Unrecognized
 
Fair
Value
Gains
 
Losses
 
 
(In thousands)
Investment Securities
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

U.S. Agencies
 
$
42,185

 
$
12

 
$
(761
)
 
$
41,436

State and municipal
 
25,584

 
549

 
(259
)
 
25,874

Small Business Administration
 
10,131

 
1

 
(100
)
 
10,032

 
 
$
77,900

 
$
562

 
$
(1,120
)
 
$
77,342

Mortgage-Backed Securities
 
 

 
 

 
 

 
 

Fannie Mae
 
$
30,130

 
$
205

 
$
(828
)
 
$
29,507

Freddie Mac
 
17,729

 
60

 
(187
)
 
17,602

Government National Mortgage Assoc.
 
11,178

 
62

 
(223
)
 
11,017

 
 
$
59,037

 
$
327

 
$
(1,238
)
 
$
58,126

Total held-to-maturity
 
$
136,937

 
$
889

 
$
(2,358
)
 
$
135,468


As of November 30, 2013, the Company transferred securities totaling $98.9 million with unrealized losses of $4.3 million from available-for-sale to the held-to-maturity portfolio. These securities were transferred to help mitigate interest rate risk on the most price sensitive securities. As a result, the securities are carried at fair value at the time of transfer, which established a new amortized cost basis for book, and the difference between par value of the securities and fair value at the date of transfer will be accreted as an adjustment of yield.

The amortized cost and fair value of the investment securities portfolio at September 30, 2014 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. Securities not due at a single maturity date are shown separately.


10


 
 
Available-for-sale
 
Held-to-maturity
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
 
(In thousands)
 
Within one year
$
2,218

 
$
2,240

 
$
1,607

 
$
1,610

 
After one year through five years
9,992

 
10,359

 
6,884

 
7,207

 
After five years through ten years
63,256

 
64,002

 
39,225

 
40,458

 
After ten years
31,032

 
29,532

 
30,273

 
31,547

 
Mortgage-backed securities
57,184

 
57,450

 
53,012

 
53,048

 
Total
$
163,682

 
$
163,583

 
$
131,001

 
$
133,870


 Sales of available-for-sale securities were as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Proceeds
$
2,951

 
$
28,855

 
$
5,600

 
$
47,854

Gross gains
$
2,044

 
$
578

 
$
2,169

 
$
942

Gross losses
$

 
$
(303
)
 
$
(53
)
 
$
(400
)
 
Securities with unrealized losses at September 30, 2014 and December 31, 2013, 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
September 30, 2014
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Description of Securities
Available-for-sale
 
(In thousands)
U.S. Agencies
 
$
4,983

 
$
(22
)
 
$
13,487

 
$
(512
)
 
$
18,470

 
$
(534
)
Corporate
 
9,046

 
(61
)
 
11,431

 
(1,593
)
 
20,477

 
(1,654
)
Agency asset backed securities
 
953

 
(3
)
 

 

 
953

 
(3
)
State and municipal
 
560

 
(7
)
 

 

 
560

 
(7
)
Small Business Administration
 

 

 
4

 

 
4

 

Fannie Mae
 
7,250

 
(33
)
 
2,000

 
(28
)
 
9,250

 
(61
)
Freddie Mac
 
15,310

 
(139
)
 

 

 
15,310

 
(139
)
Government National Mortgage Assoc.
 
2,194

 
(10
)
 
3,471

 
(54
)
 
5,665

 
(64
)
Total securities available-for-sale in an unrealized loss position
 
$
40,296

 
$
(275
)
 
$
30,393

 
$
(2,187
)
 
$
70,689

 
$
(2,462
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal
 
$
392

 
$

 
$
1,211

 
$
(16
)
 
$
1,603

 
$
(16
)
Small Business Administration
 

 

 
1,166

 
(3
)
 
1,166

 
(3
)
Fannie Mae
 
315

 
(1
)
 
9,569

 
(451
)
 
9,884

 
(452
)
Freddie Mac
 

 

 
3,987

 
(73
)
 
3,987

 
(73
)
Government National Mortgage Assoc.
 
3,735

 
(117
)
 

 

 
3,735

 
(117
)
Total securities held-to-maturity in an unrecognized loss position
 
$
4,442

 
$
(118
)
 
$
15,933

 
$
(543
)
 
$
20,375

 
$
(661
)
 

11


 
 
Less than 12 Months
 
More than 12 Months
 
Total
December 31, 2013
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Description of Securities
Available-for-sale
 
(In thousands)
U.S. Agencies
 
$
16,496

 
$
(1,502
)
 
$
932

 
$
(68
)
 
$
17,428

 
$
(1,570
)
Corporate
 
14,954

 
(707
)
 
9,100

 
(1,738
)
 
24,054

 
(2,445
)
Agency asset backed securities
 
3,836

 
(112
)
 

 

 
3,836

 
(112
)
State and municipal
 
4,233

 
(60
)
 

 

 
4,233

 
(60
)
Small Business Administration
 
725

 

 
4

 

 
729

 

Fannie Mae
 
10,624

 
(222
)
 

 

 
10,624

 
(222
)
Freddie Mac
 
4,636

 
(13
)
 

 

 
4,636

 
(13
)
Government National Mortgage Assoc.
 
1,913

 
(39
)
 
2,235

 
(50
)
 
4,148

 
(89
)
Collateralized mortgage obligations
 
335

 
(3
)
 

 

 
335

 
(3
)
Private placement mortgage obligation
 
1,375

 
(42
)
 

 

 
1,375

 
(42
)
Total securities available-for-sale in an unrealized loss position
 
$
59,127

 
$
(2,700
)
 
$
12,271

 
$
(1,856
)
 
$
71,398

 
$
(4,556
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Agencies
 
$
36,271

 
$
(706
)
 
$
4,153

 
$
(55
)
 
$
40,424

 
$
(761
)
State and municipal
 
16,895

 
(259
)
 

 

 
16,895

 
(259
)
Small Business Administration
 
9,738

 
(100
)
 

 

 
9,738

 
(100
)
Fannie Mae
 
23,041

 
(828
)
 

 

 
23,041

 
(828
)
Freddie Mac
 
15,534

 
(187
)
 

 

 
15,534

 
(187
)
Government National Mortgage Assoc.
 
8,401

 
(223
)
 

 

 
8,401

 
(223
)
Total securities held-to-maturity in an unrecognized loss position
 
$
109,880

 
$
(2,303
)
 
$
4,153

 
$
(55
)
 
$
114,033

 
$
(2,358
)

Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses.  The Company evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis.  If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.  For debt securities that do not meet the aforementioned criteria, the amount of the impairment is split into two components as follows:  1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows expected 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 has been an adverse change in the remaining expected future cash flows.
 
As of September 30, 2014, the Company’s security portfolio consisted of 374 securities, 75 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 municipal, and corporate securities as discussed below.
 








12


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 September 30, 2014, of the 51 U.S. Government sponsored enterprise agency and mortgage-backed securities in an unrealized loss position, twenty-five were in a continuous unrealized loss position for 12 months or more.  The unrealized losses at September 30, 2014 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 September 30, 2014.
 
Corporate Debt, Agency Asset Backed and Municipal Securities
 
At September 30, 2014, of the 24 corporate debt and municipal securities in an unrealized loss position, thirteen were in a continuous unrealized loss position of 12 months or more.  We have assessed these securities and determined that the decline in fair value was temporary. In making this determination, we considered the period of time the securities were in a loss position, the percentage decline in comparison with the securities’ amortized cost, the financial condition of the issuer, and the delinquency or default rates based on the applicable bond ratings.  In addition, we do not have the intent to sell these securities and it is likely that we will not be required to sell these securities before the recovery of their amortized cost basis, which may be at maturity.  Included in the thirteen 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 1.33%.  The unrealized loss was $1,041,000 and $1,116,000 at September 30, 2014 and December 31, 2013, 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 Strats-Goldman Sachs Corporation obligation is paying as agreed.  The other twelve securities in a continuous unrealized loss position were finance sector corporate debt securities and municipal securities all rated above investment grade at September 30, 2014, that have maturities ranging from 2021 to 2034.  The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2014.

Trust Preferred Securities
 
The Company had $1.0 million invested in two trust preferred securities which had unrealized gains of $1.9 million as of June 30, 2014. The two trust preferred securities ,which had a principal balance of $906,000 were sold and a gain of $2,043,000 was recorded during the three months ended September 30, 2014. The Company had no investments in trust preferred securities as of September 30, 2014. The Company had $1.0 million invested in two trust preferred securities as of December 31, 2013 which had unrealized gains of $1.5 million.

Payments received on these trust preferred securities totaling $147,000 and $1.4 million for the nine months ended September 30, 2014 and 2013 respectively, were applied to principal. The Company realized $158,000 and $273,000 of interest income on these securities for the nine months ended September 30, 2014 and 2013 respectively and realized a $2,043,000 gain on sale for the three and nine months ended September 30, 2014.  The interest income realized was based on estimated cash flows. Both of the trust preferred securities were pooled issuances. Prior to December 2013, the company had owned nine trust preferred securities of which seven were sold/liquidated during the year resulting in a net gain of $92,000 on the sales. Six of the securities were considered nonaccrual during 2013.

The table below presents a roll-forward of the credit losses recognized in earnings for the nine months ended September 30, 2014 and 2013
 
September 30, 2014
 
September 30, 2013
 
(In thousands)
Beginning balance
$
5,348

 
$
5,879

Reductions for previous credit losses realized on securities sold during the year
(2,043
)
 
(208
)
Reductions for previous credit losses due to an increase in cash flows expected to be collected
(158
)
 
(358
)
Ending balance
$
3,147

 
$
5,313




13


Note D — Loans Receivable
 
The components of loans receivable at September 30, 2014 and December 31, 2013 are as follows:
 
September 30, 2014
 
December 31, 2013
 
(In thousands)
Commercial loans
$
55,374

 
$
50,877

Commercial real estate
90,923

 
90,251

Consumer loans
39,524

 
28,831

Home equity
51,904

 
49,424

Residential mortgages
119,830

 
118,402

 
357,555

 
337,785

Deferred fees
1,274

 
965

Allowance for loan losses
(3,491
)
 
(3,110
)
Net loans
$
355,338

 
$
335,640

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

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
 
If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if repayment is expected solely from collateral.  Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
 
Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan's effective rate at inception.  If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net at the fair value of the collateral.  For the troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.
 
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors.  The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent three 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 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 loans, commercial real estate loans, consumer loans, home equity loans and residential mortgages.
 

14


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.

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.
 
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 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 lower than that of the other segments.

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

The following table sets forth the activity in the allowance for loan losses by portfolio segment:
For the Three Months Ended
 
Commercial
Loans
 
Commercial
Real Estate
 
Consumer
Loans
 
Home
Equity
 
Residential
Mortgages
 
Total
September 30, 2014
 
 
(In thousands)
Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
1,186

 
$
993

 
$
304

 
$
287

 
$
503

 
$
3,273

Charge-offs
 

 

 
(68
)
 
(21
)
 

 
(89
)
Recoveries
 

 
3

 
33

 

 
1

 
37

Provision for loan losses
 
82

 
62

 
114

 
12

 

 
270

Ending balance
 
$
1,268

 
$
1,058

 
$
383

 
$
278

 
$
504

 
$
3,491


15


For the Nine Months Ended
 
Commercial
Loans
 
Commercial
Real Estate
 
Consumer
Loans
 
Home
Equity
 
Residential
Mortgages
 
Total
September 30, 2014
 
 
(In thousands)
Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
871

 
$
1,000

 
$
261

 
$
300

 
$
678

 
$
3,110

Charge-offs
 

 

 
(109
)
 
(21
)
 
(11
)
 
(141
)
Recoveries
 

 
5

 
44

 

 
3

 
52

Provision for loan losses
 
397

 
53

 
187

 
(1
)
 
(166
)
 
470

Ending balance
 
$
1,268

 
$
1,058

 
$
383

 
$
278

 
$
504

 
$
3,491

For the Three Months Ended
 
Commercial
Loans
 
Commercial
Real Estate
 
Consumer
Loans
 
Home
Equity
 
Residential
Mortgages
 
Total
September 30, 2013
 
 
(In thousands)
Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
995

 
$
884

 
$
220

 
$
228

 
$
615

 
$
2,942

Charge-offs
 

 

 
(55
)
 

 
(28
)
 
(83
)
Recoveries
 

 

 
30

 

 
1

 
31

Provision for loan losses
 
20

 
59

 
30

 
11

 
60

 
180

Ending balance
 
$
1,015

 
$
943

 
$
225

 
$
239

 
$
648

 
$
3,070

For the Nine Months Ended
 
Commercial
Loans
 
Commercial
Real Estate
 
Consumer
Loans
 
Home
Equity
 
Residential
Mortgages
 
Total
September 30, 2013
 
 
(In thousands)
Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
833

 
$
857

 
$
232

 
$
282

 
$
572

 
$
2,776

Charge-offs
 

 

 
(131
)
 
(2
)
 
(46
)
 
(179
)
Recoveries
 

 

 
91

 
1

 
1

 
93

Provision for loan losses
 
182

 
86

 
33

 
(42
)
 
121

 
380

Ending balance
 
$
1,015

 
$
943

 
$
225

 
$
239

 
$
648

 
$
3,070


The following table presents the balances in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method:
 
September 30, 2014
 
Commercial
Loans
 
Commercial
Real Estate
 
Consumer
Loans
 
Home
Equity
 
Residential
Mortgages
 
Total
 
 
 
 
(In thousands)
 
Allowance for loan losses attributable to loans:
 
0

 
 

 
 

 
 

 
 

 
 

 
Individually evaluated for impairment
 
$
88

 
$
21

 
$

 
$

 
$

 
$
109

 
Collectively evaluated for impairment
 
1,180

 
1,037

 
383

 
278

 
504

 
3,382

 
Total
 
$
1,268

 
$
1,058

 
$
383

 
$
278

 
$
504

 
$
3,491

 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
Individually evaluated for impairment
 
$
1,039

 
$
472

 
$

 
$

 
$

 
$
1,511

 
Collectively evaluated for impairment
 
54,335

 
90,451

 
39,524

 
51,904

 
119,830

 
356,044

 
Total
 
$
55,374

 
$
90,923

 
$
39,524

 
$
51,904

 
$
119,830

 
$
357,555



16


 
December 31, 2013
 
Commercial
Loans
 
Commercial
Real Estate
 
Consumer
Loans
 
Home
Equity
 
Residential
Mortgages
 
Total
 
 
 
 
(In thousands)
 
Allowance for loan losses attributable to loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
Individually evaluated for impairment
 
$
58

 
$
24

 
$

 
$

 
$

 
$
82

 
Collectively evaluated for impairment
 
813

 
976

 
261

 
300

 
678

 
3,028

 
Total
 
$
871

 
$
1,000

 
$
261

 
$
300

 
$
678

 
$
3,110

 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
Individually evaluated for impairment
 
$
925

 
$
504

 
$

 
$

 
$

 
$
1,429

 
Collectively evaluated for impairment
 
49,952

 
89,747

 
28,831

 
49,424

 
118,402

 
336,356

 
Total
 
$
50,877

 
$
90,251

 
$
28,831

 
$
49,424

 
$
118,402

 
$
337,785


The following table presents information related to loans individually evaluated for impairment by segment of loans as of September 30, 2014 and December 31, 2013:
 
 
September 30, 2014
 
December 31, 2013
 
 
Unpaid Principal Balance
 
Recorded Investment
 
Allowance for Loan Losses Allocated
 
Unpaid Principal Balance
 
Recorded Investment
 
Allowance for Loan Losses Allocated
 
 
 
(In thousands)
 
With no related allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

 
Commercial loans
$

 
$

 
$

 
$

 
$

 
$

 
Commercial real estate

 

 

 

 

 

 
With an allowance recorded:
 

 
 

 
 

 
 

 
 

 
 

 
Commercial loans
1,039

 
1,039

 
88

 
925

 
925

 
58

 
Commercial real estate
472

 
472

 
21

 
504

 
504

 
24

 
Total
$
1,511

 
$
1,511

 
$
109

 
$
1,429

 
$
1,429

 
$
82


The following table presents the average recorded investment in impaired loans for the periods indicated:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
 
 
(In thousands)
 
With no related allowance recorded:
0

 
0

 
0

 
0

 
Commercial loans
$

 
$

 
$

 
$

 
Commercial real estate

 

 

 

 
With an allowance recorded:
 
 
 
 
 
 
 
 
Commercial loans
1,023

 
1,219

 
1,007

 
1,284

 
Commercial real estate
477

 
520

 
487

 
530

 
Total
$
1,500

 
$
1,739

 
$
1,494

 
$
1,814

 
At September 30, 2014, impaired commercial real estate loans are represented by three loans.  At September 30, 2014, impaired commercial loans are represented by nine loans. Seven of the commercial loans were considered troubled debt restructurings and totaled $818,000 as of September 30, 2014. The remaining two commercial loans and three commercial real estate loans were for customers who had commercial loans considered to be troubled debt restructurings. Cash basis interest income of $22,000 and $66,000 was recognized for the three months and nine months ended September 30, 2014, respectively.  Cash basis interest income of $22,000 and $72,000 was recognized for the three months and nine months ended September 30, 2013, respectively.

At September 30, 2013, impaired commercial real estate loans are represented by three loans. At September 30, 2013, impaired commercial loans are represented by nine loans. Six of the commercial loans were considered trouble debt restructurings and totaled $1.0 million as of September 30, 2013. The three commercial real estate loans were for customers who had commercial

17


loans considered to be troubled debt restructurings. The remaining three commercial loans totaling $174,051 represented one relationship that was considered impaired.
 
The following table presents the recorded investment in nonaccrual and past due loans over 90 days still on accrual by segment as of September 30, 2014 and December 31, 2013:
 
 
September 30, 2014
 
 
Nonaccrual
 
Loans Past Due Over 90 days still Accruing
 
 
 
(In thousands)
 
Commercial loans
$
242

 
$

 
Commercial real estate
98

 

 
Consumer loans

 

 
Home equity

 

 
Residential mortgages
267

 

 
Total
$
607

 
$

 
 
December 31, 2013
 
 
Nonaccrual
 
Loans Past Due Over 90 days still Accruing
 
 
 
 
(In thousands)
 
Commercial loans
$
49

 
$

 
Commercial real estate

 

 
Consumer loans

 

 
Home equity
262

 

 
Residential mortgages
218

 

 
Total
$
529

 
$


The following represents the aging of the recorded investment in past due loans as of September 30, 2014 and December 31, 2013 by class of loans.
 
 
September 30, 2014
 
 
Total
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
Greater than
90 Days
Past Due
 
Total Past Due
 
Loans Not Past Due
 
 
 
(In thousands)
 
Commercial loans
$
55,374

 
$

 
$

 
$
201

 
$
201

 
$
55,173

 
Commercial real estate
90,923

 

 

 
98

 
98

 
90,825

 
Consumer loans
39,524

 
84

 
11

 

 
95

 
39,429

 
Home equity
51,904

 
83

 

 

 
83

 
51,821

 
Residential mortgages
119,830

 
55

 
24

 
267

 
346

 
119,484

 
Total
$
357,555

 
$
222

 
$
35

 
$
566

 
$
823

 
$
356,732


18


 
 
December 31, 2013
 
 
Total
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
Greater than
90 Days
Past Due
 
Total Past Due
 
Loans Not Past Due
 
 
 
 
(In thousands)
 
Commercial loans
$
50,877

 
$

 
$

 
$

 
$

 
$
50,877

 
Commercial real estate
90,251

 

 

 

 

 
90,251

 
Consumer loans
28,831

 
125

 

 

 
125

 
28,706

 
Home equity
49,424

 
67

 

 
262

 
329

 
49,095

 
Residential mortgages
118,402

 
95

 

 
218

 
313

 
118,089

 
Total
$
337,785

 
$
287

 
$

 
$
480

 
$
767

 
$
337,018


Troubled Debt Restructurings
 
The following table presents the summary of the investment in troubled debt restructurings and related allowance for loan losses as of September 30, 2014 and December 31, 2013 by class of loans:
 
 
September 30, 2014
 
December 31, 2013
 
 
Number of Loans
 
Recorded Investment
 
Allowance for Loan Losses Allocated
 
Number of Loans
 
Recorded Investment
 
Allowance for Loan Losses Allocated
 
 
 
(In thousands)
 
 
 

 
 

 
 

 
 

 
 

 
 

 
Commercial loans
7

 
$
818

 
$
56

 
6

 
$
926

 
$
59

 
Commercial real estate

 

 

 

 

 

 
Consumer loans

 

 

 

 

 

 
Home equity

 

 

 

 

 

 
Residential mortgages

 

 

 

 

 

 
Total
7

 
$
818

 
$
56

 
6

 
$
926

 
$
59


There were no new troubled debt restructuring recorded during the three months ended September 30, 2014. There was one new troubled debt restructing recorded during the nine months ended September 30, 2014. There were no new troubled debt restructurings recorded during the three months ended September 30, 2013. There were two new troubled debt restructurings recorded during the nine months ended September 30, 2013. The Company has not committed to lend additional amounts as of September 30, 2014 to customers with outstanding loans that are classified as troubled debt restructurings. During 2013, an additional line of credit of $300,000 was granted to a customer with an outstanding loan classified as a troubled debt resturcturing. This line is partially guaranteed by the Small Business Administration and did not have any disbursements until 2014. As of September 30, 2014, $176,000 was outstanding on this loan and is considered impaired based on the relationship.

The modification of the terms of such loans included one or a combination of the following:  a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan. Certain troubled debt restructurings are classified as nonperforming at the time of the restructuring and may only be returned to performing status after considering the borrower's sustained repayment performance for a reasonable period.

Each of the commercial loans represented a line of credit which was not paid in full at the time of maturity. Each loan maturity date was extended for terms ranging from ten years to twenty years and the reduction in interest rates were to below market rates. The seven loans considered troubled debt restructurings as of September 30, 2014 represented five commercial relationships. Two of the commercial loans representing one relationship with a principal balance of $41,000 and $49,000 as of September 30, 2014 and December 31, 2013, respectively, were considered nonaccrual.

For all such modifications, the pre and post outstanding recorded investment amount remained unchanged. There were no charge-offs or defaults during the three months and nine months ended September 30, 2014 and 2013. All of the troubled debt restructurings were considered impaired as of September 30, 2014 and December 31, 2013. The allocated allowance for loan losses was based on the present value of estimated future cash flows. All of the loans are currently performing in accordance with their modified terms.

19



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-homogeneous loans, such as commercial and commercial real estate with an outstanding relationship greater than $250,000.  Homogeneous loans are reviewed when appropriate given foreclosures, bankruptcies or relationships that include non-homogeneous loans. For homogeneous loan pools, such as residential mortgages, home equity and consumer loans, the Company uses the payment status to identify the credit risk in these loan portfolios.  Payment status is reviewed on at least a monthly basis by the Company’s personnel and on a quarterly basis with respect to determining the adequacy of the allowance for loan losses.  This analysis is performed on at least an annual basis.  The Company uses the following definitions for risk ratings:
 
Special Mention.  Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncovered, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.
 
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 homogeneous loans.
 
Based on the most recent analysis performed (all loans graded within past 12 months), the risk category by class of loan is as follows:
 
 
September 30, 2014
 
 
Not
Rated
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
 
 
(In thousands)
 
Commercial loans
$
13,088

 
$
37,803

 
$
378

 
$
4,105

 
$

 
Commercial real estate
14,099

 
71,826

 
3,853

 
1,145

 

 
Total
$
27,187

 
$
109,629

 
$
4,231

 
$
5,250

 
$

 
 
December 31, 2013
 
 
Not
Rated
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
 
 
(In thousands)
 
Commercial loans
$
14,937

 
$
33,927

 
$
418

 
$
1,546

 
$
49

 
Commercial real estate
14,827

 
74,148

 
427

 
849

 

 
Total
$
29,764

 
$
108,075

 
$
845

 
$
2,395

 
$
49


Note E — Segment Information
 
The Bank has determined that it has three primary business segments; its banking franchise, its insurance, risk management and employee benefits activities and its financial and investment advisory activities. For the three months and nine months ended September 30, 2014 and 2013, the Bank's insurance, risk management and employee benefit activities consisted of those conducted through its wholly owned subsidiary One Group NY, Inc. (formerly Bailey & Haskell Associates, Inc). The Bank's financial and investment advisory activities consisted of those conducted through its wholly owned subsidiary Oneida Wealth Management, Inc., which was approved as a broker-dealer by FINRA in April 2014.


20


Information about the Bank’s segments is presented in the following table for the periods indicated:
 
Three Months Ended September 30, 2014
 
Banking
Activities
 
Insurance, Risk Management and Employee Benefits
Activities
 
Financial/Investment Advisory Activities
 
Total
 
 
 
 
(In thousands)
Net interest income
$
5,025

 
$

 
$

 
$
5,025

Provision for loan losses
270

 

 

 
270

Net interest income after provision for loan losses
4,755

 

 

 
4,755

Investment gains, net
537

 

 

 
537

Commissions and fees on sales of non-banking products
527

 
5,161

 
687

 
6,375

Non-interest income
1,183

 

 

 
1,183

Non-interest expenses
5,101

 
4,654

 
855

 
10,610

Depreciation and amortization
330

 
77

 
8

 
415

Income (loss) before income taxes
1,571

 
430

 
(176
)
 
1,825

Income tax expense (benefit)
325

 
106

 
(66
)
 
365

Net income (loss)
$
1,246

 
$
324

 
$
(110
)
 
$
1,460

Total Assets
$
762,165

 
$
31,357

 
$
4,757

 
$
798,279




 
Three Months Ended September 30, 2013
 
Banking
Activities
 
Insurance, Risk Management and Employee Benefit
Activities
 
Financial/Investment Advisory Activities
 
Total
 
 
 
 
(In thousands)
Net interest income
$
4,962

 
$

 
$

 
$
4,962

Provision for loan losses
180

 

 

 
180

Net interest income after provision for loan losses
4,782

 

 

 
4,782

Investment gains, net
402

 

 

 
402

Commissions and fees on sales of non-banking products
509

 
4,686

 
671

 
5,866

Non-interest income
1,249

 

 

 
1,249

Non-interest expenses
5,171

 
4,523

 
730

 
10,424

Depreciation and amortization
394

 
82

 
8

 
484

Income (loss) before income taxes
1,377

 
81

 
(67
)
 
1,391

Income tax expense (benefit)
367

 
32

 
(29
)
 
370

Net income (loss)
$
1,010

 
$
49

 
$
(38
)
 
$
1,021

Total Assets
$
689,852

 
$
31,896

 
$
2,102

 
$
723,850



21


 
 
Nine Months Ended September 30, 2014
 
 
Banking
Activities
 
Insurance, Risk Management and Employee Benefit
Activities
 
Financial/Investment Advisory Activities
 
Total
 
 
 
(In thousands)
 
Net interest income
$
14,833

 
$

 
$

 
$
14,833

 
Provision for loan losses
470

 

 

 
470

 
Net interest income after provision for loan losses
14,363

 

 

 
14,363

 
Investment gains, net
1,432

 

 

 
1,432

 
Commissions and fees on sales of non banking products
1,552

 
16,045

 
2,169

 
19,766

 
Non-interest income
4,126

 

 

 
4,126

 
Non-interest expenses
15,825

 
13,524

 
2,647

 
31,996

 
Depreciation and amortization
1,017

 
226

 
22

 
1,265

 
Income (loss) before income taxes
4,631

 
2,295

 
(500
)
 
6,426

 
Income tax expense (benefit)
843

 
925

 
(175
)
 
1,593

 
Net income (loss)
$
3,788

 
$
1,370

 
$
(325
)
 
$
4,833

 
Total Assets
$
762,165

 
$
31,357

 
$
4,757

 
$
798,279



 
 
Nine Months Ended September 30, 2013
 
 
Banking
Activities
 
Insurance, Risk Management and Employee Benefit
Activities
 
Financial/Investment Advisory Activities
 
Total
 
 
 
(In thousands)
 
Net interest income
$
14,697

 
$

 
$

 
$
14,697

 
Provision for loan losses
380

 

 

 
380

 
Net interest income after provision for loan losses
14,317

 

 

 
14,317

 
Investment gains, net
1,793

 

 

 
1,793

 
Commissions and fees on sales of non banking products
1,434

 
14,602

 
1,798

 
17,834

 
Non-interest income
3,747

 

 

 
3,747

 
Non-interest expenses
15,270

 
12,830

 
2,104

 
30,204

 
Depreciation and amortization
1,172

 
263

 
26

 
1,461

 
Income (loss) before income taxes
4,849

 
1,509

 
(332
)
 
6,026

 
Income tax expense (benefit)
1,080

 
616

 
(134
)
 
1,562

 
Net income (loss)
$
3,769

 
$
893

 
$
(198
)
 
$
4,464

 
Total Assets
$
689,852

 
$
31,896

 
$
2,102

 
$
723,850



The following represents a reconciliation of the Company’s reported segment assets to consolidated assets as of September 30:
 
2014
 
2013
 
(In thousands)
Total assets for reportable segments
$
798,279

 
$
723,850

Elimination of intercompany cash balances
(11,511
)
 
(10,317
)
Consolidated Total
$
786,768

 
$
713,533


22


Note F — Fair Value
 
Fair Value Measurement
 
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:
 
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can 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 to estimate fair value:
 
Securities:  The fair values of trading securities and investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).  The fair value of level 3 investment securities are determined by the Company’s Finance Department, which reports to the Chief Financial Officer (CFO).  The CFO reviews the values and these are reported to the Investment Committee on a quarterly basis.  Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. Rating agency and industry research reports as well as defaults 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.

Assets and liabilities measured at fair value on a recurring basis, including financial assets for which the Company has elected the fair value option, are summarized below:
 
 
Fair Value Measurements at September 30, 2014 Using
 
Total
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
 
 
 
(In thousands)
Assets:
 

 
 

 
 

 
 

Trading securities
 

 
 

 
 

 
 

Common and preferred equities
$
4,379

 
$
1,120

 
$
3,259

 
$

Available-for-sale securities
 

 
 

 
 

 
 

U.S. Agencies
24,768

 

 
24,768

 

Corporate
31,787

 

 
31,787

 

Agency asset backed securities
9,018

 

 
9,018

 

State and municipal
33,452

 

 
33,383

 
69

Small Business Administration
7,108

 

 
7,108

 

Residential mortgage-backed securities
55,997

 

 
55,997

 

Private placement mortgage obligation
1,453

 

 
1,453

 

Total
$
167,962

 
$
1,120

 
$
166,773

 
$
69

 

23


 
 
Fair Value Measurement at December 31, 2013 Using
 
 
Total
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
 
 
 
 
 
(In thousands)
 
Assets:
 

 
 

 
 

 
 

 
Trading securities
 

 
 

 
 

 
 

 
Common and preferred equities
$
5,063

 
$
1,086

 
$
3,977

 
$

 
Available-for-sale securities
 

 
 

 
 

 
 

 
U.S. Agencies
17,735

 

 
17,735

 

 
Corporate
28,790

 

 
28,790

 

 
Agency asset backed securities
5,402

 

 
5,402

 

 
Trust preferred securities
2,518

 

 
2,518

 

 
State and municipal
33,308

 

 
33,207

 
101

 
Small Business Administration
3,359

 

 
3,359

 

 
Residential mortgage-backed securities
37,404

 

 
37,404

 

 
Collateralized mortgage obligations
1,179

 

 
1,179

 

 
Private placement mortgage obligation
1,374

 

 
1,374

 

 
Total
$
136,132

 
$
1,086

 
$
134,945

 
$
101


There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2014 or 2013

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 nine months ended September 30:

24


 
 
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
 
Municipal
Securities
 
Total
 
 
 
(In thousands)
 
Beginning balance January 1, 2014
$
101

 
$
101

 
Total gains or losses (realized/unrealized)
 

 
 

 
Included in earnings
 

 
 

 
Interest income on securities

 

 
Other changes in fair value

 

 
Net impairment losses recognized in earnings

 

 
Interest payments applied to principal

 

 
Pay downs on securities

 

 
Included in other comprehensive income

 

 
Ending balance March 31, 2014
$
101

 
$
101

 
Total gains or losses (realized/unrealized)
 

 
 

 
Included in earnings
 

 
 

 
Interest income on securities

 

 
Other changes in fair value

 

 
Net impairment losses recognized in earnings

 

 
Interest payments applied to principal

 

 
Pay downs on securities

 

 
Included in other comprehensive income
(1
)
 
(1
)
 
Ending balance June 30, 2014
$
100

 
$
100

 
Total gains or losses (realized/unrealized)
 

 
 

 
Included in earnings
 

 
 

 
Interest income on securities

 

 
Other changes in fair value

 

 
Net impairment losses recognized in earnings

 

 
Interest payments applied to principal

 

 
Pay downs on securities
(28
)
 
(28
)
 
Included in other comprehensive income
(3
)
 
(3
)
 
Ending balance September 30, 2014
$
69

 
$
69


25


 
 
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
 
 
 
Trust Preferred
Securities
 
Municipal Securities
 
Total
 
 
 
(In thousands)
 
Beginning balance January 1, 2013
 
$
5,621

 
$
2,616

 
$
8,237

 
Total gains or losses (realized/unrealized)
 
 

 
 

 
 

 
Included in earnings
 
 

 
 

 
 

 
Interest income on securities
 
127

 

 
127

 
Other changes in fair value
 

 

 

 
Net impairment losses recognized in earnings
 

 

 

 
Interest payments applied to principal
 
(447
)
 

 
(447
)
 
Pay downs on securities
 

 

 

 
Sales and maturities
 

 
(196
)
 
(196
)
 
Included in other comprehensive income
 
52

 
(37
)
 
15

 
Ending balance March 31, 2013
 
$
5,353

 
$
2,383

 
$
7,736

 
Total gains or losses (realized/unrealized)
 
 

 
 

 
 

 
Included in earnings
 
 

 
 

 
 

 
Interest income on securities
 
125

 

 
125

 
Gain on sale of securities
 
208

 

 
208

 
Other changes in fair value
 

 

 

 
Net impairment losses recognized in earnings
 

 

 

 
Interest payments applied to principal
 
(33
)
 

 
(33
)
 
Pay downs on securities
 

 
(94
)
 
(94
)
 
Sale of securities
 
(889
)
 

 
(889
)
 
Included in other comprehensive income
 
155

 
(68
)
 
87

 
Ending balance June 30, 2013
 
$
4,919

 
$
2,221

 
$
7,140

 
Total gains or losses (realized/unrealized)
 
 

 
 

 
 

 
Included in earnings
 
 

 
 

 
 

 
Interest income on securities
 
106

 

 
106

 
Other changes in fair value
 

 

 

 
Net impairment losses recognized in earnings
 

 

 

 
Interest payments applied to principal
 
(1,437
)
 

 
(1,437
)
 
Pay downs on securities
 

 
(79
)
 
(79
)
 
Included in other comprehensive income
 
861

 
(29
)
 
832

 
Ending balance September 30, 2013
 
$
4,449

 
$
2,113

 
$
6,562

 
The fair value of the Company’s trust preferred securities were determined internally by calculating discounted cash flows.  Information such as historical and current performance of the underlying collateral, deferral/default rates, collateral coverage ratios, break in yield calculations, cash flow projections, liquidity and credit premiums required by a market participant, and financial trend analysis with respect to the individual issuing financial institutions and insurance companies, were utilized in determining individual security valuations.  During 2013, seven of the nine trust preferred securities were sold/liquidated. The remaining two trust preferred securities were moved from Level 3 pricing to Level 2 as of December 31, 2013 due to the increased market for them. The two remaining trust preferred securities were sold in the three months ended September 30, 2014.

As of November 30, 2013, the Company transferred state and local municipal securities totaling $2.0 million with unrealized gains of $177,000 from available-for-sale to the held-to-maturity portfolio. These securities were transferred to help mitigate interest rate risk on the most price sensitive securities. As a result, the securities are carried at fair value at the time of transfer, which established a new amortized cost basis for book, and the difference between the par value of the securities and fair value at the date of transfer will be accreted as an adjustment of yield.

26


 
The Company’s Level 3 state and local municipal securities valuations were supported by analysis prepared by an independent third party.  The third party’s approach to determining fair value involves using recently executed transactions for similar securities and market quotations for similar securities.  As these securities are not rated by the rating agencies and are localized to our market area, it was determined that these were valued using Level 3 inputs.  In addition, the Company reviews past history of the contractual payments and financial condition of the municipalities in determining an appropriate market value for this type of security.
 
There were no impaired loans, loans held for sale or other real estate owned, net that were measured at fair value as of September 30, 2014 or December 31, 2013.

Fair Value Option

The Company has elected the fair value option for certain preferred and common equity securities as they do not have stated maturity values and the fair value fluctuates with market changes.  The decision to elect the fair value option is made individually for each instrument and is irrevocable once made.  Changes in fair value for the selected instruments are recorded in earnings. Interest income is recorded based on the contractual amount of interest income earned on financial assets (except any that are in nonaccrual status). Dividend income is recorded based on cash dividends.  Cash flows from the purchase and sale of securities for which the fair value option has been elected are shown as operating activities in the consolidated statement of cash flows.
 
The following table presents the amount of gains and losses from changes in fair value included in income before taxes for financial assets carried at fair value is as follows:
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2014
 
September 30, 2013
 
September 30, 2014
 
September 30, 2013
 
 
 
(In thousands)
 
Interest income
$

 
$

 
$

 
$

 
Change in fair value
(1,507
)
 
127

 
(684
)
 
1,251

 
Total change in fair value
$
(1,507
)
 
$
127

 
$
(684
)
 
$
1,251

 
Fair Value of Financial Instruments
 
Carrying amounts and estimated fair values of financial instruments at September 30, 2014 and December 31, 2013 were as follows:
 
September 30, 2014
 
Carrying
Value
 
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Financial assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
44,341

 
$
44,341

 
$

 
$

 
$
44,341

Trading securities
 
4,379

 
1,120

 
3,259

 

 
4,379

Investment securities, available-for-sale
 
163,583

 

 
163,514

 
69

 
163,583

Investment securities, held-to-maturity
 
131,001

 

 
130,168

 
3,702

 
133,870

Loans held for sale
 
347

 

 
370

 

 
370

Loans receivable, net
 
355,338

 

 

 
366,752

 
366,752

Federal Home Loan Bank stock
 
1,419

 
N/A

 
N/A

 
N/A

 
N/A

Accrued interest receivable
 
2,491

 

 
1,505

 
986

 
2,491

Financial liabilities:
 
0

 
 

 
 

 
 

 
 

Deposits
 
$
679,268

 
$
537,137

 
$
143,397

 
$

 
$
680,534

Borrowings
 

 

 

 

 

Accrued interest payable
 
8

 
4

 
4

 

 
8



27


December 31, 2013
 
Carrying Value
 
Fair Value Measurement Using
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Financial assets:
 
 

 
 
 
 
 
 
 
 

Cash and cash equivalents
 
$
42,183

 
$
42,183

 
$

 
$

 
$
42,183

Trading securities
 
5,063

 
1,086

 
3,977

 

 
5,063

Investment securities, available-for-sale
 
131,069

 

 
130,968

 
101

 
131,069

Investment securities, held-to-maturity
 
136,937

 

 
131,700

 
3,768

 
135,468

Loans held for sale
 
61

 

 
62

 

 
62

Loans receivable, net
 
335,640

 

 

 
346,634

 
346,634

Federal Home Loan Bank stock
 
1,588

 
N/A

 
N/A

 
N/A

 
N/A

Accrued interest receivable
 
2,222

 

 
1,245

 
977

 
2,222

Financial liabilities:
 
 

 
 
 
 
 
 
 
 

Deposits
 
$
637,250

 
$
495,345

 
$
143,638

 
$

 
$
638,983

Borrowings
 
1,000

 

 
1,027

 

 
1,027

Accrued interest payable
 
11

 
4

 
7

 

 
11


The methods and assumptions, not previously presented, used to estimate fair values are describes as follows:
 
(a)         Cash and Cash Equivalents
 
The carrying value of our cash and cash equivalents approximates fair value and is classified as Level 1.
 
(b)         Loans Held for Sale
 
The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.
 
(c) Loans
 
Fair value of loans, excluding loans held for sale, are estimated as follows:  for variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously.  The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.
 
(d)   FHLB Stock
 
It is not practicable to estimate the fair value of FHLB stock due to restrictions placed on its transferability.
 
(e) Deposits
 
The fair value disclosed for non-interest bearing deposits are, by definition, equal to the amount payable on demand at the reporting date resulting in a Level 1 classification. The carrying amounts of variable interest rate deposits approximate their fair values at the reporting date resulting in a Level 1 classification. Fair values for fixed rate certificates of deposits are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits resulting in a Level 2 classification.
 
(f)  Borrowings
 
The fair value of the Company’s borrowings are estimated using discounted cash flow analysis based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.
 

28


(g)  Accrued Interest Receivable/Payable
 
The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification based on the level of the asset or the liability with which the accrual is associated.
 
(h)  Off-balance Sheet Instruments
 
Fair value for off-balance sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings.  The fair value of commitments is not material.

Note G — Stock-Based Compensation
 
The Company has one share based compensation plan as described below.  Total compensation cost that has been charged against income for the plan was $157,381 and $151,280 for the three months ended September 30, 2014 and 2013, respectively.  Total compensation cost for the plan was $443,545 and $448,583 for the nine months ended September 30, 2014 and 2013, respectively. The total income tax benefit was $60,592 and $170,765 for the three months and nine months ended September 30, 2014, respectively. The total income tax benefit was $58,243 and $172,704 for the three months and nine months ended September 30, 2013, respectively.

Stock Options
 
The Company’s 2012 Equity Incentive Plan, which is shareholder approved, permits the granting of share options to its directors, officers and key employees for up to 216,750 shares of common stock.  Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant. All options granted expire by July 2022 and options vest and become exercisable ratably over a one to five year period. There were 25,750 shares available for future grants under the plan described above as of September 30, 2014. Compensation recorded in conjunction with the option awards was $12,013 and $35,845 for the three months and nine months ended September 30, 2014, respectively. Compensation recorded in conjunction with the option awards was $9,830 and $29,136 for the three months and nine months ended September 30, 2013, respectively.

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

The fair value of options granted was determined using the following weighted-average assumptions as of the grant date:
 
2014
2013
Risk-free interest rate
1.52
%
1.00
%
Expected term
3.10 years

4.00 years

Expected stock price volatility
22.86
%
25.34
%
Dividend yield
4.66
%
4.66
%















29


A summary of activity in the stock option plan for 2014 was as follows:
 
Shares
 
Average
Exercise
Price
 
Weighted
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2014
192,215

 
$
10.34

 
8.560

 
$
450,300

Granted
7,133

 
$
12.62

 

 
$
5,880

Exercised
(11,500
)
 
$
10.30

 

 
$
29,210

Forfeited or expired
(12,500
)
 
$
10.30

 

 
$
38,875

Outstanding at September 30, 2014
175,348

 
$
10.41

 
7.299

 
$
522,627

Fully vested and expected to vest
108,000

 
$
10.39

 
6.468

 
$
326,295

Exercisable as of September 30, 2014
67,348

 
$
10.52

 
7.817

 
$
196,332

 
Information related to the stock option plan was as follows:
 
2014
 
2013
Intrinsic value of options exercised
$
29,210

 
$
22,095

Cash received from option exercises
87,566

 
20,614

Tax benefit realized from option exercises
2,870

 
9,226

Weighted average fair value of options granted
1.3259

 
1.8174


As of September 30, 2014, there was $105,637 of total unrecognized compensation cost related to nonvested stock options granted under the plan.  The cost is expected to be recognized over a weighted-average period of 2.81 years.

Stock Awards
 
The 2012 Equity Incentive Plan provides for the issuance of shares of restricted stock ("RRP") to directors, officers and key employees.  Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date.  The fair value of the stock was determined using the grant date fair value of $10.30 for shares awarded in July 2012 and $12.43 for shares awarded in June 2014.  RRP shares vest ratably over the five year vesting period on the anniversary date for shares awarded in July 2012 and over the four year vesting period on the anniversary date for those shares awarded in June 2014.  The shares have voting rights and are eligible to receive nonforfeitable dividends on the unvested shares.  These shares are considered to be participating securities in the earnings per share calculation.  Total shares issuable under the plan are 131,500 at September 30, 2014 and 130,000 shares have been issued.  A summary of changes in the Company’s nonvested shares for the years follows:
 
Nonvested Shares
Shares
 
Weighted Average
Grant Date
Fair Value
 
 
Nonvested at January 1, 2014
104,000

 
$
10.30

 
Granted
8,000

 
$
12.43

 
Vested
(26,000
)
 
10.46

 
Forfeited
(8,000
)
 
$
10.30

 
Nonvested at September 30, 2014
78,000

 
$
10.46

 
As of September 30, 2014, there was $765,515 of total unrecognized compensation cost related to nonvested shares granted under the Plan.  The cost is expected to be recognized over a weighted average period of 2.81 years. Compensation expense recorded in conjunction with the RRP awards was $80,210 and $214,390 for the three months and nine months ended September 30, 2014, respectively. Compensation recorded in conjunction with the RRP awards was $67,475 and $199,861 for the three months and nine months ended September 30, 2013, respectively.
 
Performance Awards
 
The 2012 Equity Incentive Plan provides for the issuance of shares of performance award restricted stock to directors, officers and key employees.  Compensation expense is recognized over the vesting period of the awards based on the fair value of the

30


stock at issue date. The fair value of the stock was determined using the grant date fair value of $10.30.  Performance shares cliff vest as of July 24, 2015 based on the performance results for the three year period ending December 31, 2014. There are two sets of performance criteria based on the individual award: (1) based on a three year cumulative earnings per share, return on average assets and return on tangible equity metrics weighted at 33% and (2) average revenue and profit margin weighted at 50%. Compensation cost is estimated based on the probability that the performance conditions will be achieved.  As of September 30, 2014, the compensation cost is estimated in the range of 75% - 100% payout under the terms of the plan for the different performance sets.  At each reporting period, the Company will reassess the likelihood of achieving the performance criteria and will adjust compensation expense as needed.   The shares have voting rights.  Upon vesting of the performance shares, any dividends declared during the vesting period will be paid based on the shares vested.  Total shares issuable under the plan are 75,000 at September 30, 2014 and all shares were issued in 2012.  A summary of changes in the Company’s nonvested shares for the years follows:
Nonvested Shares
Shares
 
Weighted Average
Grant Date
Fair Value
 
Nonvested at January 1, 2014
85,000

 
$
10.30

Granted

 

Vested

 

Forfeited
(10,000
)
 
$
10.30

Nonvested at September 30, 2014
75,000

 
$
10.30

 
As of September 30, 2014, there was $65,117 of total unrecognized compensation cost related to nonvested shares granted under the Plan.  The cost is expected to be recognized over a weighted average period of 0.25 years. Compensation expense recorded in conjunction with the performance awards totaled $65,158 and $193,310 for the three months and nine months ended September 30, 2014 respectively. Compensation expense recorded in conjunction with the performance awards totaled $73,975 and $219,586 for the three months and nine months ended September 30, 2013 respectively.

Note H - Comprehensive Income

The following table represents the detail of comprehensive income (loss) for the three months and nine months ended:
 
For the Three Months Ended September 30, 2014
 
Pre-tax
 
Tax
 
After-tax
 
(In thousands)
Unrealized holding gains on available-for-sale securities during the period
$
698

 
$
(279
)
 
$
419

Reclassification adjustment for gains included in net income (1)
(2,044
)
 
817

 
(1,227
)
Net unrealized losses on available-for-sale securities
(1,346
)
 
538

 
(808
)
 
 
 
 
 
 
Amortization of unrealized gains on transfer of securities to held-to-maturity
142

 
(57
)
 
85

Net unrealized gains
142

 
(57
)
 
85

 
 
 
 
 
 
Net pension gain (loss) arising during period (2)

 

 

Net unrecognized postretirement benefit obligation

 

 

Other comprehensive loss
$
(1,204
)
 
$
481

 
$
(723
)


31


 
For the Nine Months Ending September 30, 2014
 
Pre-tax
 
Tax
 
After-tax
 
(In thousands)
Unrealized holding gains on available-for-sale securities during the period
$
3,697

 
$
(1,479
)
 
$
2,218

Reclassification adjustment for gains included in net income (1)
(2,116
)
 
846

 
(1,270
)
Net unrealized gains on available-for-sale securities
1,581

 
(633
)
 
948

 
 
 
 
 
 
Amortization of unrealized gains on transfer of securities to held-to-maturity
417

 
(167
)
 
250

Net unrealized gains
417

 
(167
)
 
250

 
 
 
 
 
 
Net pension gain (loss) arising during period (2)
24

 
(10
)
 
14

Net unrecognized postretirement benefit obligation
24

 
(10
)
 
14

Other comprehensive income
$
2,022

 
$
(810
)
 
$
1,212


 
For the Three Months Ended September 30, 2013
 
Pre-tax
 
Tax
 
After-tax
 
(In thousands)
Unrealized holding losses on available-for-sale securities during the period
$
(3,108
)
 
$
1,243

 
$
(1,865
)
Reclassification adjustment for gains included in net income (1)
(275
)
 
110

 
(165
)
Net unrealized losses on available-for-sale securities
(3,383
)
 
1,353

 
(2,030
)
 
 
 
 
 
 
Net pension gain (loss) arising during period (2)
30

 
(12
)
 
18

Net unrecognized postretirement benefit obligation
30

 
(12
)
 
18

Other comprehensive loss
$
(3,353
)
 
$
1,341

 
$
(2,012
)
 
For the Nine Months Ending September 30, 2013
 
Pre-tax
 
Tax
 
After-tax
 
(In thousands)
Unrealized holding losses on available-for-sale securities during the period
$
(9,635
)
 
$
3,854

 
$
(5,781
)
Reclassification adjustment for gains included in net income (1)
(542
)
 
217

 
(325
)
Net unrealized gains on available-for-sale securities
(10,177
)
 
4,071

 
(6,106
)
 
 
 
 
 
 
Net pension gain (loss) arising during period (2)
91

 
(36
)
 
55

Net unrecognized post retirement benefit obligation
91

 
(36
)
 
55

Other comprehensive loss
$
(10,086
)
 
$
4,035

 
$
(6,051
)
___________________________________
(1) Pre-tax reclassification adjustments relating to available-for-sale securities are reported in net gains (losses) on sales of securities on the consolidated statement of operations.
(2) Net gain (loss) arising during period which is comprised of net gain (loss) and amortization of prior gain (loss) is reported in compensation and benefits on the consolidated statements of operations.

The following table represents a summary of the change in accumulated other comprehensive income (loss) by component, net of tax, for the nine months ended September 30, 2014 and 2013:


32


 
Net unrealized gains (losses) on available-for-sale securities
 
Net unrealized gains (losses) on transfer of securities to held-to-maturity
 
Unrecognized postretirement benefit obligation
 
Accumulated other comprehensive income (loss)
 
(In thousands)
Balance at January 1, 2014
$
(1,007
)
 
$
(2,579
)
 
$
(1,556
)
 
$
(5,142
)
Other comprehensive income, during the period, net of adjustments
2,218

 
250

 
14

 
2,482

Amounts reclassified from AOCI
(1,270
)
 

 

 
(1,270
)
Other comprehensive income
948

 
250

 
14

 
1,212

Balance at September 30, 2014
$
(59
)
 
$
(2,329
)
 
$
(1,542
)
 
$
(3,930
)
 
Net unrealized gains (losses) on available-for-sale securities
 
Unrecognized postretirement benefit obligation
 
Accumulated other comprehensive income (loss)
 
(In thousands)
Balance at January 1, 2013
$
2,946

 
$
(2,035
)
 
$
911

Other comprehensive (loss) income, during the period, net of adjustments
(5,781
)
 
55

 
(5,726
)
Amounts reclassified from AOCI
(325
)
 

 
(325
)
Other comprehensive (loss) income
(6,106
)
 
55

 
(6,051
)
Balance at September 30, 2013
$
(3,160
)
 
$
(1,980
)
 
$
(5,140
)


Note I — Accounting Pronouncements
 
In June 2014, the FASB amended existing guidance and created a new Topic 606, Revenue from Contracts with Customers which supercedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. This guidance provides a five-step analysis of transactions to determine when and how revenue is recognized that consists of: 1) identify the contract with the customer; 2) identify the performance obligation in the contract; 3) determine the transaction price; 4) allocate the transaction price to the performance obligations; and 5) recognize revenue when or as each performance obligation is satisfied. The amendments in this guidance are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. Companies can transition to the requirement of this guidance either retrospectively or as a cumulative-effect adjustment as of the date of adoption, which is January 1, 2017 for the Company. The impact of this guidance on the Company's operating results or financial condition is not known at this time.

In January 2014, the FASB amended existing guidance by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan should be derecognized and the real estate recognized. The amendments clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. In addition, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this guidance are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this guidance using either a modified retrospective transition method or a prospective transition method. Early adoption is permitted. The adoption of this guidance is not expected to have a material effect on the Company's operating results or financial condition.

In July 2013, the FASB amended existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendment provides that an unrecognized tax benefit, or a portion thereof, be presented in the financial statements as a reduction to a deferred tax asset for net operating loss carryforward, a similar tax loss, or a tax credit carryforward except to the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law does not require the entity to use, and the entity does not intend to use, the deferred

33


tax asset for such purpose, then the unrecognized tax benefit should be presented as a liability. The amendments in this guidance are effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of this guidance did not have a material effect on the Company's operating results or financial condition.



34


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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
This section presents Management’s Discussion and Analysis of Oneida Financial Corp.'s ("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. The Company conducts no business other than holding the common stock of the Bank and general passive 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 non-interest income, which consists primarily of service charges and fees on loan and deposit products and services, fees from our insurance, risk management and employee benefits and financial investment and advisory subsidiaries and fees from trust services, and net gains and losses on sale of investments.  Interest income and non-interest 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 on September 25, 2014, a quarterly cash dividend of $0.12 per share, which was paid on October 21, 2014 to its shareholders of record on October 7, 2014.

In June 2014, the Board of Directors approved the termination of the Oneida Savings Bank defined benefit plan. Payouts under the termination of the plan were in October 2014.

On April 10, 2014, Oneida Wealth Management, Inc., a wholly owned subsidiary of Oneida Savings Bank, received regulatory approval from Financial Industry Regulatory Authority ("FINRA") to commence business operations as a broker dealer. It is anticipated that current customers of Oneida Wealth Management, Inc., who were previously cleared through an unaffiliated brokerage firm, will be transitioned to the new broker dealer during the third and fourth quarter of 2014.    

A comprehensive state tax reform package became law on March 31, 2014. Most of the new provisions are effective for 2015 and include apportionment and corporate rate reductions. Since the law was enacted, the projected post-2014 impact of the

35


apportionment and rate reductions were required to be applied to our deferred tax inventory during the first quarter of 2014. The changes did not result in a material change to our income tax provision for the first quarter of 2014. However, there are still pending legislative uncertainties and the impact of these is unknown at this time.
 
FINANCIAL CONDITION
 
ASSETS.  Total assets at September 30, 2014 were $786.8 million, an increase of $44.3 million, or 6.0%, from $742.5 million at December 31, 2013. The increase in total assets was primarily attributable to an increase in investment and mortgage-backed securities and loans receivable.

Trading securities decreased $684,000, or 13.7%, to $4.4 million at September 30, 2014 as compared with $5.1 million at December 31, 2013. Trading securities represent common and preferred equity securities that we have elected to adjust to fair value.  The decrease in trading securities reflected the decrease in the fair value of our Freddie Mac preferred stock due to the dismissal of one of many court cases on September 30, 2014 brought by investors trying to receive past dividend payments.

Mortgage-backed securities increased $11.5 million, or 11.6%, to $110.5 million at September 30, 2014 as compared with $99.0 million at December 31, 2013.  Investment securities increased $15.1 million, or 8.9%, to $184.1 million at September 30, 2014 as compared to $169.0 million at December 31, 2013. The increase in investment and mortgage-backed securities was primarily the result of the increase in pledged collateral needed to support the increase in municipal deposit activities.
 
Loans receivable, including loans held for sale, increased $20 million, or 6.0%, to $355.7 million at September 30, 2014 as compared with $335.7 million at December 31, 2013.  We continue to maintain a diversified loan portfolio. The increase in net loan balances reflect the Company's continued loan origination efforts partially offset by loan sales activity. Loan originations during the first nine months of 2014 totaled $79.8 million as compared to total loan originations during the nine months ended September 30, 2013 of $78.9 million. We sold $5.2 million in fixed rate residential loans with terms exceeding 15 years during the nine months ended September 30, 2014 compared to $9.5 million during the same period in 2013.
 
LIABILITIES.  Total liabilities increased by $40.1 million, or 6.2%, to $691.9 million at September 30, 2014 from $651.8 million at December 31, 2013.  The increase was the result of an increase in deposits of $42.1 million partially offset by a decrease in other liabilities of $1.0 million and a decrease in borrowings of $1.0 million.
 
Deposit accounts increased $42.1 million, or 6.6%, to $679.3 million at September 30, 2014 from $637.2 million at December 31, 2013.  Interest-bearing deposit accounts increased by $34.6 million, or 6.3%, to $586.2 million at September 30, 2014 from $551.6 million at December 31, 2013.  Non-interest bearing deposit accounts increased $7.5 million, or 8.8%, to $93.1 million at September 30, 2014 from $85.6 million at December 31, 2013.  The increase in deposit accounts was primarily a result of increases in both our retail deposits and municipal deposits offered through our limited purpose commercial banking subsidiary, State Bank of Chittenango.  Retail deposits increased $6.2 million, or 1.3%, to $498.0 million at September 30, 2014 from $491.8 million at December 31, 2013.  Municipal deposits increased $35.9 million, or 24.7%, to $181.3 million at September 30, 2014 from $145.4 million at December 31, 2013.  The Bank believes the increase in municipal deposits is related to a continuing trend of local towns, villages, cities and school districts seeking a locally-based financial institution partner.
 
We had no borrowings at September 30, 2014 compared to $1.0 million in borrowings at December 31, 2013. At September 30, 2014 we had no overnight line of credit borrowings. Our overnight line of credit is used from time to time for liquidity management.

Other liabilities decreased $1.0 million, or 7.4%, to $12.6 million at September 30, 2014 from $13.6 million at December 31, 2013. 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 September 30, 2014 from December 31, 2013.
 
STOCKHOLDERS’ EQUITY.  Total stockholders’ equity at September 30, 2014 was $94.9 million, an increase of $4.3 million, or 4.7%, from $90.6 million at December 31, 2013.  The increase in stockholders’ equity was a result of an increase in accumulated other comprehensive income of $1.2 million at September 30, 2014 as a result of an increase in the fair value of mortgage-backed and investment securities reflecting the recent changes in interest rates as well as net income of $4.8 million for the nine months ended September 30, 2014. Offsetting these increases in stockholders' equity was a decrease resulting from the payment of quarterly dividends during the first nine months of 2014 totaling $0.36 per share.


36


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 nine months ended September 30, 2014 and 2013 and for the year ended December 31, 2013.  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.
 

37


TABLE 1.  Average Balance Sheet.
 
 
 
Three Months Ended September 30,
 
Twelve Months Ended Dec. 31,
 
 
2014
 
2013
2013
 
Average
Outstanding Balance
 
Interest
Earned/Paid
 
Yield/Rate
 
Average
Outstanding Balance
 
Interest
Earned/Paid
 
Yield/Rate
Average
Outstanding Balance
 
Interest
Earned/Paid
 
Yield/Rate
 
 
 
(Dollars in thousands)
 
Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Interest-earning Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Loans receivable
$
349,920

 
$
3,767

 
4.31
%
 
$
331,522

 
$
3,793

 
4.58
%
 
$
327,131

 
$
15,132

 
4.63
%
 
Investment and mortgage-backed securities
296,819

 
1,886

 
2.54
%
 
264,851

 
1,781

 
2.69
%
 
261,203

 
7,085

 
2.71
%
 
Federal funds
13,998

 
4

 
0.11
%
 
2,610

 
1

 
0.15
%
 
19,701

 
18

 
0.09
%
 
Equity securities
5,870

 
23

 
1.57
%
 
4,253

 
23

 
2.16
%
 
4,442

 
168

 
3.78
%
 
Total interest-earning assets
666,607

 
5,680

 
3.41
%
 
603,236

 
5,598

 
3.71
%
 
612,477

 
22,403

 
3.66
%
 
Non interest-earning Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Cash and due from banks
14,018

 
 

 
 

 
11,780

 
 

 
 

 
11,823

 
 

 
 

 
Other assets
90,688

 
 

 
 

 
84,664

 
 

 
 

 
85,196

 
 

 
 

 
Total assets
$
771,313

 
 

 
 

 
$
699,680

 
 

 
 

 
$
709,496

 
 

 
 

 
Liabilities and Stockholders’ Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Interest-bearing Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Money market deposits
$
207,743

 
$
189

 
0.36
%
 
$
157,674

 
$
129

 
0.32
%
 
$
177,773

 
$
609

 
0.34
%
 
Savings accounts
138,526

 
96

 
0.27
%
 
131,709

 
91

 
0.27
%
 
127,057

 
338

 
0.27
%
 
Interest-bearing checking
77,224

 
15

 
0.08
%
 
73,976

 
15

 
0.08
%
 
74,831

 
59

 
0.08
%
 
Time deposits
141,877

 
345

 
0.96
%
 
142,491

 
374

 
1.04
%
 
141,322

 
1,497

 
1.06
%
 
Borrowings
1,183

 
9

 
3.02
%
 
9,905

 
22

 
0.88
%
 
3,886

 
77

 
1.98
%
 
Notes payable
211

 
1

 
1.88
%
 
713

 
5

 
2.78
%
 
772

 
23

 
2.98
%
 
Total interest-bearing liabilities
566,764

 
655

 
0.46
%
 
516,468

 
636

 
0.49
%
 
525,641

 
2,603

 
0.50
%
 
Non-interest-bearing Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Demand deposits
88,763

 
 

 
 

 
77,263

 
 

 
 

 
78,027

 
 

 
 

 
Other liabilities
19,389

 
 

 
 

 
14,237

 
 

 
 

 
13,384

 
 

 
 

 
Total liabilities
$
674,916

 
 

 
 

 
$
607,968

 
 

 
 

 
$
617,052

 
 

 
 

 
Stockholders’ equity
96,397

 
 

 
 

 
91,712

 
 

 
 

 
92,444

 
 

 
 

 
Total liabilities and stockholders’ equity
$
771,313

 
 

 
 

 
$
699,680

 
 

 
 

 
$
709,496

 
 

 
 

 
Net interest income
 

 
$
5,025

 
 

 
 

 
$
4,962

 
 

 
 

 
$
19,800

 
 

 
Net interest spread
 

 
 

 
2.95
%
 
 

 
 

 
3.22
%
 
 

 
 

 
3.16
%
 
Net earning assets
$
99,843

 
 

 
 

 
$
86,768

 
 

 
 

 
$
86,836

 
 

 
 

 
Net yield on average interest-earning assets
 

 
3.02
%
 
 

 
 

 
3.29
%
 
 

 
 

 
3.23
%
 
 

 
Average interest-earning assets to average interest-bearing liabilities
 

 
117.62
%
 
 

 
 

 
116.80
%
 
 

 
 

 
116.52
%
 
 




38


 
 
Nine Months Ended September 30,
 
Twelve Months Ended Dec. 31,
 
 
2014
 
2013
2013
 
Average
Outstanding Balance
 
Interest
Earned/Paid
 
Yield/Rate
 
Average
Outstanding Balance
 
Interest
Earned/Paid
 
Yield/Rate
Average
Outstanding Balance
 
Interest
Earned/Paid
 
Yield/Rate
 
 
 
(Dollars in thousands)
 
Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Interest-earning Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Loans receivable
$
343,551

 
$
11,117

 
4.31
%
 
$
323,272

 
$
11,275

 
4.65
%
 
$
327,131

 
$
15,132

 
4.63
%
 
Investment and mortgage-backed securities
290,233

 
5,624

 
2.58
%
 
259,133

 
5,276

 
2.71
%
 
261,203

 
7,085

 
2.71
%
 
Federal funds
29,374

 
16

 
0.07
%
 
13,170

 
11

 
0.11
%
 
19,701

 
18

 
0.09
%
 
Equity securities
5,605

 
71

 
1.69
%
 
4,461

 
69

 
2.06
%
 
4,442

 
168

 
3.78
%
 
Total interest-earning assets
668,763

 
16,828

 
3.36
%
 
600,036

 
16,631

 
3.70
%
 
612,477

 
22,403

 
3.66
%
 
Non interest-earning Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Cash and due from banks
15,166

 
 

 
 

 
11,390

 
 

 
 

 
11,823

 
 

 
 

 
Other assets
89,178

 
 

 
 

 
85,341

 
 

 
 

 
85,196

 
 

 
 

 
Total assets
$
773,107

 
 

 
 

 
$
696,767

 
 

 
 

 
$
709,496

 
 

 
 

 
Liabilities and Stockholders’ Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Interest-bearing Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Money market deposits
$
216,942

 
$
589

 
0.36
%
 
$
169,148

 
$
427

 
0.34
%
 
$
177,773

 
$
609

 
0.34
%
 
Savings accounts
137,219

 
272

 
0.27
%
 
125,678

 
252

 
0.27
%
 
127,057

 
338

 
0.27
%
 
Interest-bearing checking
77,938

 
46

 
0.08
%
 
74,589

 
44

 
0.08
%
 
74,831

 
59

 
0.08
%
 
Time deposits
142,237

 
1,045

 
0.98
%
 
141,012

 
1,128

 
1.07
%
 
141,322

 
1,497

 
1.06
%
 
Borrowings
1,061

 
35

 
4.41
%
 
4,848

 
64

 
1.77
%
 
3,886

 
77

 
1.98
%
 
Notes payable
338

 
8

 
3.16
%
 
835

 
19

 
3.04
%
 
772

 
23

 
2.98
%
 
Total interest-bearing liabilities
575,735

 
1,995

 
0.46
%
 
516,110

 
1,934

 
0.50
%
 
525,641

 
2,603

 
0.50
%
 
Non-interest-bearing Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Demand deposits
84,400

 
 

 
 

 
75,280

 
 

 
 

 
78,027

 
 

 
 

 
Other liabilities
19,108

 
 

 
 

 
12,136

 
 

 
 

 
13,384

 
 

 
 

 
Total liabilities
$
679,243

 
 

 
 

 
$
603,526

 
 

 
 

 
$
617,052

 
 

 
 

 
Stockholders’ equity
93,864

 
 

 
 

 
93,241

 
 

 
 

 
92,444

 
 

 
 

 
Total liabilities and stockholders’ equity
$
773,107

 
 

 
 

 
$
696,767

 
 

 
 

 
$
709,496

 
 

 
 

 
Net interest income
 

 
$
14,833

 
 

 
 

 
$
14,697

 
 

 
 

 
$
19,800

 
 

 
Net interest spread
 

 
 

 
2.89
%
 
 

 
 

 
3.19
%
 
 

 
 

 
3.16
%
 
Net interest earning assets
$
93,028

 
 

 
 

 
$
83,926

 
 

 
 

 
$
86,836

 
 

 
 

 
Net yield on average interest-earning assets
 

 
2.96
%
 
 

 
 

 
3.27
%
 
 

 
 

 
3.23
%
 
 

 
Average interest-earning assets to average interest-bearing liabilities
 

 
116.16
%
 
 

 
 

 
116.26
%
 
 

 
 

 
116.52
%
 
 


RESULTS OF OPERATIONS
 
General Net income for the three months ended September 30, 2014 was $1.5 million compared to $1.0 million for the three months ended September 30, 2013.  For the three months ended September 30, 2014, diluted net income per share was $0.21 as compared with diluted net income per share of $0.15 for the three months ended September 30, 2013.  Net income for the nine months ended September 30, 2014 was $4.8 million compared to $4.5 million for the nine months ended September 30, 2013. The increase in net income for both the three month and nine month periods is primarily the result of an increase in net gains on sales of securities, an increase in net interest income, and an increase in non-interest income; partially offset by a decrease in the change in fair value of our equity investments, an increase in provision for loan losses and an increase in non-interest expense.


39


Interest and Dividend Income.  Interest and dividend income increased by $82,000, or 1.5%, to $5.7 million for the three months ended September 30, 2014 from $5.6 million for the three months ended September 30, 2013.  Interest and fees on loans decreased by $26,000 for the three months ended September 30, 2014 as compared with the same period in 2013.  Interest and dividend income on mortgage-backed and investment securities increased $105,000 to $1.9 million for the three months ended September 30, 2014 from $1.8 million for the three months ended September 30, 2013.  Interest income earned on federal funds sold increased slightly to $4,000 for the three months ended September 30, 2014 as compared with $1,000 for the three months ended September 30, 2013.

For the nine months ended September 30, 2014, interest and dividend income increased $197,000, or 1.2%, to $16.8 million from $16.6 million for the nine months ended September 30, 2013. Interest and fees on loans decreased by $158,000 for the nine months ended September 30, 2014 compared with the same period in 2013. Interest and dividend income on mortgage-backed and investment securities increased $350,000 for the nine months ended September 30, 2014 as compared with the nine months ended September 30, 2013.

For the three months ended September 30, 2014, the decrease in income on loans resulted from a decrease of 27 basis points in the average yield on loans to 4.31% from 4.58% partially offset by an increase of $18.4 million in the average balance of loans to $349.9 million in the third quarter of 2014 from $331.5 million in the third quarter of 2013. At September 30, 2014, net loans receivable, including loans held for sale, were $355.7 million as compared with $334.1 million at September 30, 2013, reflecting an increase of 6.5%. For the nine months ended September 30, 2014, the decrease in loan interest income resulted from a decrease of 34 basis points in the average yield on loans to 4.31% from 4.65% partially offset by an increase of $20.3 million in the average balance of loans to $343.6 million from $323.3 million for the nine months ended September 30, 2013. The decrease in the average yield on loans is a result of the continued low market interest rate environment resulting in lower yields earned on new loans and variable rate loans. 
 
The increase in interest income from investment and mortgage-backed securities was the result of an increase of $31.9 million in the average balance of investment and mortgage-backed securities to $296.8 million in the third quarter of 2014 from $264.9 million in the third quarter of 2013 partially offset by a decrease of 15 basis points in the average yield earned to 2.54% from 2.69%. For the nine months ended September 30, 2014, interest on investment and mortgage-backed securities increased $348,000 as compared with the same period in 2013 due to an increase in the average balance of $31.1 million partially offset by a decrease in average yield of 13 basis points. The decrease in the average yield is the result of lower market interest rates.  The increase in the average balance of investment and mortgage-backed securities is primarily the result of the increase in pledged collateral needed to support the increase in municipal deposit activity.
 
Interest income on federal funds sold increased $3,000 as a result of an increase in the average balance of federal funds sold to $14.0 million during the third quarter of 2014 as compared with $2.6 million during the third quarter of 2013 offset by a decrease in average yield of 4 basis points. For the nine months ended September 30, 2014, interest income on federal funds sold increased $5,000 as compared with the same period in 2013 due to an increase in the average balance of $16.2 million partially offset by a decrease in the average yield of 4 basis points.   
 
Income from equity securities remained consistent at 23,000, due to an increase in the average balance to $5.9 million for the three months ended September 30, 2014 from $4.2 million for the three months ended September 30, 2013 offset by a decrease in the average yield of 59 basis points. For the nine months ended September 30, 2014, interest income on equity securities increased $2,000 as compared with the same period in 2013 due to an increase in the average balance of $1.1 million partially offset by a decrease in the average yield of 37 basis points.

Interest Expense.  Interest expense increased $19,000, or 3.0%, to $655,000 for the three months ended September 30, 2014 from $636,000 for the three months ended September 30, 2013.  The increase in interest expense was primarily due to an increase in interest paid on deposit accounts during the third quarter of 2014 of $36,000, increasing to $645,000 from $609,000 during the third quarter of 2013.  Offsetting the increase in interest expense was a decrease in borrowing expense which decreased to $9,000 for the three months ended September 30, 2014 compared with $22,000 for the three months ended September 30, 2013.  Interest expense increased $61,000, or 3.2%, to $2.0 million for the nine months ended September 30, 2014 from $1.9 million for the nine months ended September 30, 2013.
 
The increase in interest expense paid on deposits was primarily due to an increase in the average balance of deposits. Core deposits, consisting of money market accounts, savings accounts and interest-bearing checking accounts, experienced an increase in the average balance of $60.2 million, or 16.6%, to $423.5 million at an average cost of 0.28% during the third quarter of 2014 from $363.3 million at an average cost of 0.26% during the third quarter of 2013.  During the same period the average balance of time deposits decreased $614,000, or 0.4%, to $141.9 million in the third quarter of 2014 from $142.5 million during the third quarter of 2014 and the average rate paid on time deposits decreased 8 basis points. For the nine months ended September

40


30, 2014, the average costs of deposits was 0.45% as compared with 0.48% for the nine month period in 2013. In addition, the average balance of deposits increased $63.9 million for the nine months ended September 30, 2014 as compared with the nine months ended September 30, 2013. Total deposits increased $70.7 million from September 30, 2013, representing an increase in retail deposits of $21.5 million and an increase of $49.2 million in municipal deposits. The increase in municipal deposits is related to a continuing trend of local towns, villages, cities and school districts seeking a locally-based financial institution partner.
 
The decrease in borrowing expense for the third quarter 2014 as compared to the third quarter 2013 was due to a decrease in the average balance of borrowings outstanding in the September 30, 2014 period to $1.2 million as compared with $9.9 million during the September 30, 2013 period partially offset by a 214 basis point increase in the average rate paid on borrowed funds. For the nine months ended September 30, 2014, interest expense on borrowings decreased $29,000 due to a decrease in the average outstanding balance of borrowings to $1.1 million as compared to $4.8 million for the nine month period 2013. The decrease in the average balance of borrowings reflects our decision not to renew the FHLB advances that matured during 2013 and 2014.
 
Provision for Loan Losses.  The total provision for loan losses was $270,000 for three months ended September 30, 2014 compared to $180,000 for the same three months ended in 2013. The total provision for loan losses was $470,000 and $380,000 for the nine months ended September 30, 2014 and 2013, 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 third quarter 2014 reflects the increase in the loan portfolio during the year notwithstanding the improvement in asset quality. In addition, other qualitative factors such as changes in the nature, volume and terms of loans have resulted in the increase in the allowance for loan loss reserve as a percentage of loans receivable compared to the prior year. We have increased our participation lending for commercial real estate and commercial loans over the past year which generally represent larger loan balances in comparison to the rest of our portfolio and in many instances we have to rely on other lending institutions for information although the loans are originated in accordance with the bank's underwriting policies. In addition, we have increased our indirect auto and recreational vehicle lending over the past twelve months resulting in an increase in that portfolio which generally has more charge-offs. Loans individually evaluated for impairment totaled $1.5 million at September 30, 2014 and had an allocated allowance for loan loss reserve of $109,000. Nonperforming loans totaled $607,000 or 0.17% of total loans at September 30, 2014 compared with $829,000 or 0.25% of total loans at September 30, 2013.   Classified loans totaled $8.8 million at September 30, 2014 as compared to $3.1 million as of September 30, 2013. Net charge-off activity for the nine months ended September 30, 2014 was $89,000 as compared with $86,000 in net charge-offs during the nine months ended September 30, 2013. The balance of the allowance for loan losses was $3.5 million or 0.98% of loans receivable at September 30, 2014 compared with $3.1 million or 0.92% of loans receivable at September 30, 2013.
 
Investment Gains (Losses).  Investment gains (losses) consists of changes in fair value of trading securities and net gains on sales of securities.
 
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 September 30, 2014 the market value of our trading securities decreased $1.5 million as compared with an increase of $127,000 in the 2013 period. For the nine months ended September 30, 2014, the market value of our trading securities decreased $684,000 as compared with an increase of $1.3 million for the same period in 2013. The decrease in fair value during 2014 was a result of the price decline in our Freddie Mac preferred stock offset by an increase in the market value of the Bank's other trading securities. The increase in market value of the Company's trading securities in the nine months ending September 30, 2013 was attributable to an increase in the price of our Freddie Mac preferred stock of $1.0 million in addition to $239,000 in gains received upon the sale of $2.5 million in certain trading assets during the period which was reflective of the increase in broader equity markets during that period.  
 
During the third quarter of 2014, the Company realized $2.0 million of investment gains. This compares with realized gains of $275,000 during the three months ended September 30, 2013. For the nine months ended September 30, 2014, realized investment gains totaled $2.1 million as compared with realized gains of $542,000 for the same period in 2013.  During the third quarter of 2014, the remaining two trust preferred securities were sold resulting in a gain on sale of $2.0 million. During the second quarter of 2013, a trust preferred security was sold resulting in an investment gain of $208,000. The investment gains

41


recorded in connection with the sales of trust preferred securities in both periods represents a recapture of impairment charges recognized in prior periods relating to that specific investment.

Non-Interest Income.  Non-interest income increased by $443,000, or 6.2%, to $7.6 million for the three months ended September 30, 2014 from $7.1 million for the three months ended September 30, 2013.  For the nine months ended September 30, 2014, non-interest income increased by $2.3 million, or 10.6%, to $23.9 million from $21.6 million for the nine months ended September 30, 2013.

Revenue derived from commissions and fees on sales of non-banking products increased $509,000, or 8.7%, to $6.4 million during the three months ended September 30, 2014 as compared with $5.9 million during the three months ended September 30, 2013. Revenue derived from non-banking subsidiaries increased $2.0 million, or 11.2%, to $19.8 million for the nine months ended September 30, 2014 as compared with $17.8 million for the nine months ended September 30, 2013. The increase was primarily due to the continued efforts to increase new business as well as maintaining existing account relationships.
 
Deposit account service fees increased $17,000, or 2.4%, to $724,000 for the three months ended September 30, 2014 compared to $707,000 the same three months ended in 2013. For the nine months ended September 30, 2014, deposit account service fees increased $28,000 as compared with the same period in 2013.

Excluding deposit account service fees, other operating income decreased $83,000, or 15.3% to $459,000 for the three months ended September 30, 2014 as compared to $542,000 during the three months ended September 30, 2013. For the nine months ended September 30, 2014, other operating income, excluding deposit account service fees, increased $351,000, or 21.2%, to $2.0 million as compared to $1.7 million for the same period in 2013. The increase for the nine months from the prior year was primarily the result of an increase in income from bank-owned life insurance.

The increases in non-interest income were partially offset by a decrease in loan sale and servicing income, which totaled $365,000 for the nine months ended September 30, 2014 as compared with $518,000 for the nine months ended September 30, 2013. The Bank sells substantially all of its fixed-rate residential mortgage loan originations with maturities exceeding 15 years on a servicing retained basis in the secondary market. These loan sales help the bank provide its customers with a fixed rate loan product while controlling interest rate risk. The volume of fixed-rate residential mortgage loan sales has decreased during 2014 as compared with the 2013 period due to the prevalence of originations by the Bank of fixed rate loans with maturities of 15 years or less.
 
Non-Interest Expense.  Non-interest expense increased by $117,000 or 1.1%, to $11.0 million for the three months ended September 30, 2014 from $10.9 million for the three months ended September 30, 2013. For the nine months ended September 30, 2014, non-interest expense increased $1.6 million, or 5.0%, to $33.3 million as compared with $31.7 million for the same period in 2013. The increase in non-interest expense was primarily due to an increase in compensation and employee benefits combined with operating expenses associated with the increase in sales of insurance and other non-banking products through our subsidiaries. The increase in non-interest expense was also the result of organizational expenses incurred in the first and second quarter of 2014 for the creation of a broker-dealer subsidiary which received FINRA approval in April 2014.
 
Salaries, wages and other compensation paid to the employees of Oneida Financial Corp. during the three months ended September 30, 2014 was $7.4 million, an increase of $289,000 or 4.1%, from the third quarter of 2013. Compensation expense for the nine months ended September 30, 2014 was $21.9 million, an increase of $1.4 million, or 6.7%, as compared with compensation expense of $20.5 million for the same period in 2013. 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 increased $68,000, or 5.2%, to $1.4 million for the three months ended September 30, 2014 as compared to $1.3 million during the three months ended September 30, 2013. For the nine months ended September 30, 2014, building and occupancy expense increased $176,000, or 4.5%, to $4.1 million as compared with $3.9 million for the same period in 2013.
 
Other operating expenses decreased $240,000, or 9.5%, to $2.3 million for the three months ended September 30, 2014 as compared to $2.5 million during the three months ended September 30, 2013. For the nine months ended September 30, 2014, other operating expenses increased $44,000, or 0.6%, to $7.3 million as compared to $7.3 million for the same period in 2013. The increase in other operating expenses was primarily the result of organizational expenses incurred during the first and second quarter of 2014 for the creation of a broker-dealer subsidiary.
 

42


Provision for Income Taxes.  Provision for income taxes was $365,000 for the three months ended September 30, 2014, a decrease of $5,000 from the third quarter 2013 income tax provision of $370,000.  For the nine months ended September 30, 2014, the provision for income taxes was $1.6 million, an increase of $31,000 from $1.6 million for the same period in 2013. The effective tax rate was 24.8% during the first nine months of 2014 as compared with an effective tax rate of 25.9% for the same time period in 2013. The change in the effective tax rates for the specified periods is due to changes in the Bank’s tax exempt and tax preferred investment income and the overall tax rate in effect for the year. A comprehensive state tax reform package became law on March 31, 2014. Most of the new provisions are effective for 2015 and include apportionment and corporate rate reductions. Since the law was enacted, the projected post-2014 impact of the apportionment and rate reductions were required to be applied to our deferred tax inventory during the first quarter of 2014. The changes did not result in a material change to our income tax provision for the nine months ended September 30, 2014. However, there are still pending legislative uncertainties and the impact of these is unknown at this time.
 
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 when and as needed.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, mortgage prepayments, mortgage loan sales and borrowings are greatly influenced by general interest rates, economic conditions and competition.
 
Our primary investing activities are the origination of residential mortgages, commercial loans and consumer loans, as well as the purchase of mortgage-backed and other debt securities. During the third quarter of 2014, loan originations totaled $34.4 million compared to $29.4 million during the third quarter of 2013. The purchases of securities available-for-sale totaled $1.8 million during the third quarter of 2014 as compared to $19.2 million during the third quarter of 2013. The purchases of investment securities were funded with cash and cash equivalents.
 
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 customer’s 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 September 30, 2014, the Company had outstanding commitments to originate loans of approximately $22.3 million, which generally have an expiration period of less than 120 days. Commitments to sell residential mortgages amounted to $1.4 million at September 30, 2014 for loan closings pending and are to be delivered on a best effort basis.
 
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 $52.6 million at September 30, 2014 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 September 30, 2014, the total of cash, interest-earning demand accounts and federal funds sold was $44.3 million.


43


At September 30, 2014, the Bank exceeded all regulatory capital requirements. The current requirements and the actual levels for the Bank at September 30, 2014 and December 31, 2013 are detailed in the following tables.
 
 
Actual
 
For Capital
Adequacy Purposes
 
Capitalized Under
Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
As of September 30, 2014:
 

 
 

 
 

 
 

 
 

 
 

Total Capital
 

 
 

 
 

 
 

 
 

 
 

(to Risk Weighted Assets)
$
74,821

 
16.90
%
 
$
35,425

 
8
%
 
$
44,281

 
10
%
Tier I Capital
 

 
 

 
 

 
 

 
 

 
 

(to Risk Weighted Assets)
$
71,330

 
16.11
%
 
$
17,712

 
4
%
 
$
26,569

 
6
%
Tier I Capital
 

 
 

 
 

 
 

 
 

 
 

(to Average Assets)
$
71,330

 
9.57
%
 
$
29,806

 
4
%
 
$
37,258

 
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, 2013:
 

 
 

 
 

 
 

 
 

 
 

 
Total Capital
 

 
 

 
 

 
 

 
 

 
 

 
(to Risk Weighted Assets)
$
68,269

 
15.97
%
 
$
34,203

 
8
%
 
$
42,754

 
10
%
 
Tier I Capital
 

 
 

 
 

 
 

 
 

 
 

 
(to Risk Weighted Assets)
$
65,159

 
15.25
%
 
$
17,102

 
4
%
 
$
25,652

 
6
%
 
Tier I Capital
 

 
 

 
 

 
 

 
 

 
 

 
(to Average Assets)
$
65,159

 
9.03
%
 
$
28,848

 
4
%
 
$
36,060

 
5
%

On July 2, 2013, the Federal Reserve Board approved final rules that implement changes to the regulatory capital framework for financial institutions. The new rules include, among other things, the following elements:
1) a new regulatory capital component referred to as "Common Equity Tier 1 capital", and threshold ratios for this new component;
2) a "capital conservation buffer" above the minimum required level of Common Equity Tier 1 capital, and restrictions on dividend payments, share buybacks, and certain discretionary bonus payments to executive officers if a capital conservation buffer of at least 2.5% of risk-weighted assets is not achieved;
3) the inclusion of accumulated other comprehensive income (AOCI) in Tier 1 capital, although banks with less than $250 billion in total assets will be allowed a one-time opt-out from this requirement;
4) additional constraints on the inclusion of minority interest, mortgage servicing assets, and deferred tax assets in regulatory capital;
5) increased risk-weightings for certain assets, including equity exposures, certain acquisition/development and construction loans, and certain loans that are more than 90-days past due or are on non-accrual status; and
6) an increase in minimum required risk-based capital ratios over a phase-in period, and an increase in the threshold for a "well-capitalized" classification for the Tier 1 Risk-Based Capital Ratio.

These changes will be phased in beginning January 2015. Our preliminary estimates indicate we are well-positioned to absorb the impact without constraining organic growth plans, although no assurance can be provided in that regard.


44


ONEIDA FINANCIAL CORP. 
SELECTED FINANCIAL RATIOS
At and for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)

(Annualized where appropriate)
 
 
Three Months Ending September 30,
 
Nine Months Ending September 30,
 
2014
 
2013
 
2014
 
2013
Performance Ratios:
 

 
 

 
 

 
 

Return on average assets
0.76
%
 
0.58
%
 
0.83
%
 
0.85
%
Return on average equity
6.06
%
 
4.45
%
 
6.87
%
 
6.38
%
Return on average tangible equity
8.34
%
 
6.29
%
 
9.56
%
 
8.97
%
Interest rate spread
2.95
%
 
3.22
%
 
2.89
%
 
3.19
%
Net interest margin
3.02
%
 
3.29
%
 
2.96
%
 
3.27
%
Efficiency ratio
87.05
%
 
89.37
%
 
85.32
%
 
86.30
%
Non-interest income to average total assets
3.92
%
 
4.07
%
 
4.12
%
 
4.13
%
Non-interest expense to average total assets
5.72
%
 
6.24
%
 
5.74
%
 
6.06
%
Average interest-earning assets as a ratio to average interest-bearing liabilities
117.62
%
 
116.80
%
 
116.16
%
 
116.26
%
Asset Quality Ratios:
 

 
 

 
 

 
 

Non-performing assets to total assets
0.11
%
 
0.29
%
 
0.11
%
 
0.29
%
Non-performing loans to total loans
0.17
%
 
0.25
%
 
0.17
%
 
0.25
%
Net charge-offs to average loans
0.01
%
 
0.02
%
 
0.03
%
 
0.03
%
Allowance for loan losses to non-performing loans
575.12
%
 
370.33
%
 
575.12
%
 
370.33
%
  Allowance for loan losses to loans receivable
0.98
%
 
0.92
%
 
0.98
%
 
0.92
%
Capital Ratios:
 

 
 

 
 

 
 

Average equity to average total assets
12.50
%
 
13.11
%
 
12.14
%
 
13.38
%
Equity to total assets (end of period)
12.06
%
 
12.55
%
 
12.06
%
 
12.55
%
Tangible equity to tangible assets (end of period)
9.01
%
 
9.15
%
 
9.01
%
 
9.15
%

ITEM 3.                                                  Quantitative and Qualitative Disclosures 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 September 30, 2014, 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.  At September 30, 2014, the Bank had $96.2 million in time deposits scheduled to mature within one year. At that date, the average maturity of our investment portfolio was 4.3 years, and fixed rate residential mortgage loans totaled $66.6 million representing 18.7% of our loan portfolio. 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

45


of Operations” in the Company’s 2013 Annual Report to Stockholders.  There has been no material change in the Company’s interest rate risk profile since December 31, 2013.
 
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 Rules 13a-15(e) 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 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.


46


ONEIDA FINANCIAL CORP.
AND SUBSIDIARIES
 
Part II — Other Information
 
Item 1.                                                           Legal Proceedings
 
We and our subsidiaries are subject to various legal actions arising in the normal course of business.  In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on our financial position or results of operations.

Item 1a .                                                   Risk Factors
 
There has not been any material change in the risk factors disclosure from that contained in the Company’s Form 10-K for the fiscal year ended December 31, 2013.

Item 2.                                                           Unregistered Sales of Equity Securities and Use of Proceeds
 
(a)  Not applicable
 
(b)  Not applicable

(c)  There were no shares repurchased by the Company during the three months ended September 30, 2014.
 
Item 3.                                                          Defaults upon Senior Securities
 
Not applicable.
 
Item 4.                                                          Mine Safety Disclosures
 
Not applicable
 
Item 5.                                                          Other Information
 
None

Item 6.                                                          Exhibits
 
(a)                                 All required exhibits are included in Part I under Consolidated Financial Statements, Notes to Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, and are incorporated by reference, herein.
 
Exhibits
 
Exhibit 31.1 — Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Exhibit 31.2 — Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002
 
Exhibit 32.1 — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
Exhibit 101* - The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Condition, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text and in detail.
 _________________________________________________

*Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.





47


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:
November 13, 2014
By:
/s/ Eric E. Stickels
 
 
Eric E. Stickels
 
 
President and Chief Operating Officer
Date:
November 13, 2014
By:
/s/ Deresa F. Durkee
 
 
Deresa F. Durkee
 
 
Senior Vice President and Chief Financial Officer


48