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EX-31.1 - EXHIBIT 31.1 - Oneida Financial Corp.exhibit31109302015.htm
EX-31.2 - EXHIBIT 31.2 - Oneida Financial Corp.exhibit31209302015.htm
EX-32.1 - EXHIBIT 32.1 - Oneida Financial Corp.exhibit32109302015.htm

 
UNITED STATES
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, 2015
 
OR
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES         EXCHANGE ACT OF 1934
For the transition period from                       to      
           
 Commission File 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, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” "accelerated filer" and "smaller reporting company" 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 7,018,636 shares of the Registrant’s common stock outstanding as of November 1, 2015.
 



ONEIDA FINANCIAL CORP.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





PART I. FINANCIAL INFORMATION
Item I. Financial Statements

1




ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
At September 30, 2015 (unaudited) and December 31, 2014
 
September 30,
2015
 
December 31,
2014
 
(In thousands, except share data)
ASSETS
 

 
 

Cash and due from banks
$
44,587

 
$
19,062

Federal funds sold
26,025

 
12,013

TOTAL CASH AND CASH EQUIVALENTS
70,612

 
31,075

Trading securities
2,567

 
3,900

Securities, available-for-sale
134,208

 
176,314

Securities, held-to-maturity (fair value $124,586 and $133,897 respectively)
120,014

 
129,415

 
 
 
 
Mortgage loans held for sale
85

 
839

Loans receivable
398,492

 
369,039

Deferred fees
1,847

 
1,483

Allowance for loan losses
(3,442
)
 
(3,502
)
LOANS RECEIVABLE, NET
396,897

 
367,020

Federal Home Loan Bank stock
1,404

 
1,391

Bank premises and equipment, net
21,808

 
20,382

Assets held for sale
63

 
63

Accrued interest receivable
2,360

 
2,342

Bank owned life insurance
18,207

 
17,842

Other assets
21,434

 
21,298

Goodwill
25,480

 
25,480

Other intangible assets
627

 
808

TOTAL ASSETS
$
815,766

 
$
798,169

LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

Liabilities:
 

 
 

Interest bearing deposits
$
599,847

 
$
603,482

Non-interest bearing deposits
107,695

 
85,688

Other liabilities
11,106

 
13,226

TOTAL LIABILITIES
718,648

 
702,396

Oneida Financial Corp. Stockholders’ equity:
 

 
 

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

 

Common stock ($0.01 par value; 30,000,000 shares authorized; 7,018,636 issued at September 30, 2015; 7,025,444 issued at December 31, 2014)
70

 
70

Additional paid-in capital
44,591

 
44,121

Retained earnings
54,921

 
54,185

Accumulated other comprehensive loss
(2,464
)
 
(2,603
)
TOTAL STOCKHOLDERS’ EQUITY
97,118

 
95,773

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
815,766

 
$
798,169

 









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


2


ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2015 (unaudited) and 2014 (unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
 
(In thousands, except per share data)
INTEREST AND DIVIDEND INCOME:
 
 
 
 
 
 
 
Interest and fees on loans
$
3,993

 
$
3,767

 
$
11,791

 
$
11,117

Interest on investment securities
1,592

 
1,886

 
5,213

 
5,624

Dividends on equity securities
23

 
23

 
70

 
71

Interest on federal funds sold and interest-earning deposits
17

 
4

 
54

 
16

            Total interest and dividend income
5,625

 
5,680

 
17,128

 
16,828

INTEREST EXPENSE:
 

 
 

 
 

 
 

Core deposits
227

 
300

 
764

 
907

Time deposits
312

 
345

 
967

 
1,045

Borrowings

 
9

 
1

 
35

Note payable

 
1

 

 
8

Total interest expense
539

 
655

 
1,732

 
1,995

NET INTEREST INCOME
5,086

 
5,025

 
15,396

 
14,833

Less: Provision for loan losses

 
270

 

 
470

Net interest income after provision for loan losses
5,086

 
4,755

 
15,396

 
14,363

INVESTMENT GAINS:
 

 
 

 
 

 
 

        Net (losses) gains on sales of securities
(84
)
 
2,044

 
138

 
2,116

        Changes in fair value of trading securities
36

 
(1,507
)
 
58

 
(684
)
             Total investment (losses) gains
(48
)
 
537

 
196

 
1,432

NON-INTEREST INCOME:
 

 
 

 
 

 
 

Commissions and fees on sales of non-banking products
6,632

 
6,375

 
20,599

 
19,766

Other operating income
1,144

 
1,183

 
3,801

 
4,126

             Total non-interest income
7,776

 
7,558

 
24,400

 
23,892

NON-INTEREST EXPENSES:
 

 
 

 
 

 
 

Compensation and employee benefits
7,258

 
7,364

 
21,842

 
21,864

Occupancy expenses, net
1,468

 
1,256

 
4,077

 
3,806

Merger related expenses
401

 

 
1,658

 

Other operating expense
2,437

 
2,405

 
7,761

 
7,591

            Total non-interest expenses
11,564

 
11,025

 
35,338

 
33,261

INCOME BEFORE INCOME TAXES
1,250

 
1,825

 
4,654

 
6,426

Provision for income taxes
426

 
365

 
1,387

 
1,593

NET INCOME
$
824

 
$
1,460

 
$
3,267

 
$
4,833

EARNINGS PER SHARE — BASIC
$
0.12

 
$
0.21

 
$
0.47

 
$
0.69

EARNINGS PER SHARE — DILUTED
$
0.12

 
$
0.21

 
$
0.46

 
$
0.69









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

3


ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Nine Months Ended September 30, 2015 (unaudited) and 2014 (unaudited)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
 
 
 
(In thousands)
 
Net income
$
824

 
$
1,460

 
$
3,267

 
$
4,833

 
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
148

 
142

 
468

 
417

 
     Reclassification adjustment for gains realized in income

 

 

 

 
Net unrealized gains
148

 
142

 
468

 
417

 
Income tax effect
(57
)
 
(57
)
 
(177
)
 
(167
)
 
Net change in securities transferred to held-to-maturity
91

 
85

 
291

 
250

 
Securities available-for-sale:
 

 
 

 
 

 
 

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

 
698

 
(107
)
 
3,697

 
Reclassification adjustment for losses (gains) realized in income
84

 
(2,044
)
 
(138
)
 
(2,116
)
 
Net unrealized gains (losses)
782

 
(1,346
)
 
(245
)
 
1,581

 
Income tax effect
(294
)
 
538

 
93

 
(633
)
 
Net change in securities available-for-sale
488

 
(808
)
 
(152
)
 
948

 
Unrealized holding gains (losses) on securities, net of tax
579

 
(723
)
 
139

 
1,198

 
 
 
 
 
 
 
 
 
 
Defined benefit pension plans:
 
 
 
 
 
 
 
 
Change in unrealized loss on pension benefits

 

 

 
24

 
Income tax effect

 

 

 
(10
)
 
Net change in pension benefits

 

 

 
14

 
Other comprehensive income (loss), net of tax
579

 
(723
)
 
139

 
1,212

 
Comprehensive income
$
1,403

 
$
737

 
$
3,406

 
$
6,045

 















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


4



ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Nine Months Ended September 30, 2015 (unaudited)
 
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Total
 
 
Shares
 
Amount
 
(In thousands, except number of shares)
Balance as of January 1, 2015
7,025,444

 
$
70

 
$
44,121

 
$
54,185

 
$
(2,603
)
 
$
95,773

Net income

 

 

 
3,267

 

 
3,267

Other comprehensive loss, net of tax

 

 

 

 
139

 
139

Common stock dividends: $0.36 per share

 

 

 
(2,531
)
 

 
(2,531
)
Tax benefit from stock plan

 

 
364

 

 

 
364

Shares repurchased and retired
(23,111
)
 

 
(482
)
 

 

 
(482
)
Shares issued under stock plan
16,303

 

 
169

 

 

 
169

Shares earned under stock plan

 

 
419

 

 

 
419

Balance as of September 30, 2015
7,018,636

 
$
70

 
$
44,591

 
$
54,921

 
$
(2,464
)
 
$
97,118

 

 






























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

5


ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Nine Months Ended September 30, 2015 (unaudited) and 2014 (unaudited)
 
Nine Months Ended September 30,
 
2015
 
2014
 
(In thousands)
Operating Activities:
 

 
 

Net income
$
3,267

 
$
4,833

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

 
 

Depreciation and amortization
1,361

 
1,265

Amortization of premiums/discounts on securities, net
562

 
300

Net change in fair value of trading securities
(58
)
 
684

Provision for loan losses

 
470

ESOP shares earned

 
176

Stock compensation earned
419

 
444

Loss on sale of foreclosed assets
6

 
17

Gain on securities, net
(138
)
 
(2,116
)
Gain on sale of loans, net
(125
)
 
(137
)
Income tax payable
(265
)
 
1,590

Accrued interest receivable
(18
)
 
(269
)
Other assets
162

 
1,790

Other liabilities
(2,118
)
 
(1,529
)
Earnings on bank owned life insurance
(365
)
 
(917
)
Origination of loans held for sale
(3,983
)
 
(5,522
)
Proceeds from sales of loans
4,862

 
5,373

Proceeds on the sale of trading securities
1,391

 

     Net cash provided by operating activities
4,960

 
6,452

Investing Activities:
 

 
 

Purchase of securities available-for-sale
(26,019
)
 
(49,470
)
Proceeds from sale of securities available-for-sale
39,598

 
5,600

Maturities and calls of securities available-for-sale
19,143

 
6,910

Principal collected on securities available-for-sale
8,870

 
7,992

Purchase of securities held-to-maturity
(427
)
 
(2,357
)
Maturities and call of securities held-to-maturity
2,456

 
1,379

Principal collected on securities held-to-maturity
7,686

 
7,182

Purchase of FHLB stock
(959
)
 
(786
)
Redemption of FHLB stock
946

 
955

Net increase in loans
(29,877
)
 
(20,462
)
Purchase of bank premises and equipment
(2,606
)
 
(1,280
)
Proceeds from the sale of foreclosed property
240

 
87

Settlement of bank owned life insurance

 
1,423

Net cash provided by (used in) investing activities
19,051

 
(42,827
)
Financing Activities:
 

 
 

Net increase in demand deposit, savings, money market, super now and escrow
29,599

 
41,792

Net (decrease) increase in time deposits
(11,227
)
 
226

Repayment of borrowings

 
(1,000
)

6


Shares issued under stock plan
169

 
103

Repurchase and retirement of common shares
(482
)
 
(70
)
Cash dividends
(2,533
)
 
(2,518
)
Net cash provided by financing activities
15,526

 
38,533

Increase in cash and cash equivalents
39,537

 
2,158

Cash and cash equivalents at beginning of period
31,075

 
42,183

Cash and cash equivalents at end of period
$
70,612

 
$
44,341

Supplemental disclosures of cash flow information:
 

 
 

Cash paid for interest
$
1,733

 
$
1,998

Cash paid for income taxes
1,650

 
3

Supplemental noncash disclosures:
 

 
 

Transfer of loans to other real estate

 
294

Dividends declared and unpaid at period end
842

 
844

 







































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


7




8


ONEIDA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
September 30, 2015
 
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, 2015 and December 31, 2014 and for the three month and nine month periods ended September 30, 2015 and 2014.  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.  Actual results could differ from those estimates.  In the opinion of management, the unaudited consolidated financial statements include all necessary adjustments, consisting of normal recurring accruals, necessary for a fair presentation for the periods presented.  The results of operations for the three months and nine months ended September 30, 2015 are not necessarily indicative of the results to be achieved for the remainder of 2015
 
The data in the consolidated statements of condition for December 31, 2014 was derived from the audited financial statements included in the Company’s 2014 Annual Report on Form 10-K.  That data, along with the interim financial information presented in the consolidated statements of condition, statements of operations, comprehensive income, changes in stockholders’ equity and cash flows should be read in conjunction with the 2014 consolidated financial statements, including the notes thereto included in the Company’s Annual Report on Form 10-K.

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 52,000 of its 59,175 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, 2015 and 2014:
 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(In thousands, except per share data)
Net income
$
824

 
$
1,460

 
$
3,267

 
$
4,833

Net earnings allocated to participating securities
(7
)
 
(16
)
 
(31
)
 
(60
)
Net earnings allocated to common stock
$
817

 
$
1,444

 
$
3,236

 
$
4,773

 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Distributed earnings allocated to common stock
$
836

 
$
833

 
$
2,505

 
$
2,487

Undistributed (loss) earnings allocated to common stock
(19
)
 
611

 
731

 
2,286

Net earnings allocated to common stock
$
817

 
$
1,444

 
$
3,236

 
$
4,773


9


 
Three Months Ended
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
(In thousands, except per share data)
Weighted average common shares outstanding including shares considered participating securities
7,013

 
6,997

 
7,009

 
6,987

Less: Average unallocated ESOP shares

 
(9
)
 

 
(13
)
Less: Average participating securities
(51
)
 
(77
)
 
(57
)
 
(80
)
Weighted average shares
6,962

 
6,911

 
6,952

 
6,894

Basic earnings per share
$
0.12

 
$
0.21

 
$
0.47

 
$
0.69

 
 
 
 
 
 
 
 
Diluted
 

 
 

 
 

 
 

Net earnings allocated to common stock
$
817

 
$
1,444

 
$
3,236

 
$
4,773

 
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic earnings per common share
6,962

 
6,911

 
6,952

 
6,894

Add: Dilutive effects of assumed exercise of stock options and nonparticipating shares
85

 
76

 
105

 
67

Weighted average shares and dilutive potential common shares
7,047

 
6,987

 
7,057

 
6,961

Diluted earnings per common share
$
0.12

 
$
0.21

 
$
0.46

 
$
0.69


There were no stock options that were not considered in computing diluted earnings per share for the three months and nine months ended September 30, 2015 because they were anti-dilutive. 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.
 
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, 2015 and December 31, 2014:
Available-for-sale portfolio:
 
September 30, 2015
Amortized
 Cost
 
Unrealized
 
Fair
 Value
Gains
 
Losses
 
 
(In thousands)
Investment Securities
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

U.S. Agencies
 
$
27,415

 
$
112

 
$
(53
)
 
$
27,474

U.S. Treasury
 
1,999

 

 
(2
)
 
1,997

Corporate
 
12,752

 

 
(1,285
)
 
11,467

State and municipal
 
30,783

 
941

 
(11
)
 
31,713

Small Business Administration
 
3,562

 
81

 

 
3,643

 
 
$
76,511

 
$
1,134

 
$
(1,351
)
 
$
76,294

Mortgage-Backed Securities
 
 

 
 

 
 

 
 

Fannie Mae
 
$
24,300

 
$
382

 
$
(29
)
 
$
24,653

Freddie Mac
 
24,377

 
310

 

 
24,687

Government National Mortgage Assoc.
 
8,497

 
91

 
(14
)
 
8,574

 
 
$
57,174

 
$
783

 
$
(43
)
 
$
57,914

Total available-for-sale
 
$
133,685

 
$
1,917

 
$
(1,394
)
 
$
134,208



10


Held-to-maturity portfolio:
 
September 30, 2015
Amortized
 Cost
 
Unrecognized
 
Fair
 Value
Gains
 
Losses
 
 
(In thousands)
Investment Securities
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

U.S. Agencies
 
$
40,136

 
$
2,406

 
$
(11
)
 
$
42,531

State and municipal
 
26,836

 
1,277

 
(40
)
 
28,073

Small Business Administration
 
8,413

 
266

 

 
8,679

 
 
$
75,385

 
$
3,949

 
$
(51
)
 
$
79,283

Mortgage-Backed Securities
 
 

 
 

 
 

 
 

Fannie Mae
 
$
23,906

 
$
540

 
$
(205
)
 
$
24,241

Freddie Mac
 
12,912

 
262

 
(26
)
 
13,148

Government National Mortgage Assoc.
 
7,811

 
127

 
(24
)
 
7,914

 
 
$
44,629

 
$
929

 
$
(255
)
 
$
45,303

Total held-to-maturity
 
$
120,014

 
$
4,878

 
$
(306
)
 
$
124,586

 
Available-for-sale portfolio:
 
December 31, 2014
Amortized
Cost
 
Unrealized
 
Fair
Value
Gains
 
Losses
 
 
(In thousands)
Investment Securities
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

U.S. Agencies
 
$
27,255

 
$
120

 
$
(143
)
 
$
27,232

Corporate
 
35,345

 
260

 
(1,508
)
 
34,097

Agency asset backed securities
 
8,734

 
91

 
(35
)
 
8,790

State and municipal
 
33,004

 
1,215

 
(1
)
 
34,218

Small Business Administration
 
6,835

 
135

 

 
6,970

 
 
$
111,173

 
$
1,821

 
$
(1,687
)
 
$
111,307

Mortgage-Backed Securities
 
 

 


 
 

 
 

Fannie Mae
 
$
24,666

 
$
306

 
$
(39
)
 
$
24,933

Freddie Mac
 
25,659

 
207

 
(33
)
 
25,833

Government National Mortgage Assoc.
 
12,624

 
198

 
(58
)
 
12,764

Private placement mortgage obligation
 
1,426

 
51

 

 
1,477

 
 
$
64,375

 
$
762

 
$
(130
)
 
$
65,007

Total available-for-sale
 
$
175,548

 
$
2,583

 
$
(1,817
)
 
$
176,314



11


Held-to-maturity portfolio:
 
December 31, 2014
Amortized
Cost
 
Unrecognized
 
Fair
Value
Gains
 
Losses
 
 
(In thousands)
Investment Securities
 
 

 
 

 
 

 
 

Debt securities:
 
 

 
 

 
 

 
 

U.S. Agencies
 
$
41,703

 
$
2,274

 
$

 
$
43,977

State and municipal
 
27,506

 
1,504

 
(7
)
 
29,003

Small Business Administration
 
9,302

 
239

 

 
9,541

 
 
$
78,511

 
$
4,017

 
$
(7
)
 
$
82,521

Mortgage-Backed Securities
 
 

 
 

 
 

 
 

Fannie Mae
 
$
26,602

 
$
533

 
$
(271
)
 
$
26,864

Freddie Mac
 
15,192

 
257

 
(53
)
 
15,396

Government National Mortgage Assoc.
 
9,110

 
101

 
(95
)
 
9,116

 
 
$
50,904

 
$
891

 
$
(419
)
 
$
51,376

Total held-to-maturity
 
$
129,415

 
$
4,908

 
$
(426
)
 
$
133,897


The amortized cost and fair value of the investment securities portfolio at September 30, 2015 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.

 
 
Available-for-sale
 
Held-to-maturity
 
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
 
 
(In thousands)
 
Within one year
$
2,459

 
$
2,463

 
$
472

 
$
474

 
After one year through five years
25,154

 
25,558

 
14,798

 
15,382

 
After five years through ten years
38,996

 
39,377

 
33,817

 
35,579

 
After ten years
9,902

 
8,896

 
26,298

 
27,848

 
Mortgage-backed securities
57,174

 
57,914

 
44,629

 
45,303

 
Total
$
133,685

 
$
134,208

 
$
120,014

 
$
124,586


Sales of available-for-sale securities were as follows: 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Proceeds
$
16,230

 
$
2,951

 
$
39,598

 
$
5,600

Gross gains
$
162

 
$
2,044

 
$
506

 
$
2,169

Gross losses
$
(246
)
 
$

 
$
(368
)
 
$
(53
)
 
Securities with unrealized losses at September 30, 2015 and December 31, 2014, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:
 

12


 
 
Less than 12 Months
 
More than 12 Months
 
Total
September 30, 2015
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Description of Securities
Available-for-sale
 
(In thousands)
U.S. Agencies
 
$
6,964

 
$
(37
)
 
$
1,984

 
$
(16
)
 
$
8,948

 
$
(53
)
U.S. Treasury
 
1,997

 
(2
)
 

 

 
1,997

 
(2
)
Corporate
 
1,738

 
(29
)
 
9,729

 
(1,256
)
 
11,467

 
(1,285
)
State and municipal
 
1,020

 
(11
)
 

 

 
1,020

 
(11
)
Small Business Administration
 

 

 
3

 

 
3

 

Fannie Mae
 
4,915

 
(22
)
 
1,891

 
(7
)
 
6,806

 
(29
)
Government National Mortgage Assoc.
 

 

 
3,208

 
(14
)
 
3,208

 
(14
)
Total securities available-for-sale in an unrealized loss position
 
$
16,634

 
$
(101
)
 
$
16,815

 
$
(1,293
)
 
$
33,449

 
$
(1,394
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Agencies
 
$
1,967

 
$
(11
)
 
$

 
$

 
$
1,967

 
$
(11
)
State and municipal
 
1,393

 
(40
)
 

 

 
1,393

 
(40
)
Fannie Mae
 

 

 
8,467

 
(205
)
 
8,467

 
(205
)
Freddie Mac
 

 

 
1,952

 
(26
)
 
1,952

 
(26
)
Government National Mortgage Assoc.
 

 

 
3,335

 
(24
)
 
3,335

 
(24
)
Total securities held-to-maturity in an unrecognized loss position
 
$
3,360

 
$
(51
)
 
$
13,754

 
$
(255
)
 
$
17,114

 
$
(306
)
 
 
 
Less than 12 Months
 
More than 12 Months
 
Total
December 31, 2014
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Description of Securities
Available-for-sale
 
(In thousands)
U.S. Agencies
 
$
999

 
$
(1
)
 
$
6,858

 
$
(142
)
 
$
7,857

 
$
(143
)
Corporate
 
9,237

 
(49
)
 
10,552

 
(1,459
)
 
19,789

 
(1,508
)
Agency asset backed securities
 
3,789

 
(35
)
 

 

 
3,789

 
(35
)
State and municipal
 
563

 
(1
)
 

 

 
563

 
(1
)
Small Business Administration
 

 

 
4

 

 
4

 

Fannie Mae
 
5,393

 
(16
)
 
2,002

 
(23
)
 
7,395

 
(39
)
Freddie Mac
 
5,567

 
(33
)
 

 

 
5,567

 
(33
)
Government National Mortgage Assoc.
 
2,084

 
(11
)
 
3,028

 
(47
)
 
5,112

 
(58
)
Total securities available-for-sale in an unrealized loss position
 
$
27,632

 
$
(146
)
 
$
22,444

 
$
(1,671
)
 
$
50,076

 
$
(1,817
)
Held-to-maturity
 
 
 
 
 
 
 
 
 
 
 
 
State and municipal
 
2,285

 
(4
)
 
822

 
(3
)
 
3,107

 
(7
)
Fannie Mae
 
2,361

 
(23
)
 
9,459

 
(248
)
 
11,820

 
(271
)
Freddie Mac
 
734

 
(3
)
 
2,238

 
(50
)
 
2,972

 
(53
)
Government National Mortgage Assoc.
 
3,631

 
(95
)
 

 

 
3,631

 
(95
)
Total securities held-to-maturity in an unrecognized loss position
 
$
9,011

 
$
(125
)
 
$
12,519

 
$
(301
)
 
$
21,530

 
$
(426
)

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

13


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.
 
As of September 30, 2015, the Company’s security portfolio consisted of 338 securities, 46 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.

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, 2015, of the 27 U.S. Government sponsored enterprise agency and mortgage-backed securities in an unrealized loss position, seventeen were in a continuous unrealized loss position for 12 months or more.  The unrealized losses at September 30, 2015 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, 2015.
 
Corporate Debt and Municipal Securities
 
At September 30, 2015, of the 19 corporate debt and municipal securities in an unrealized loss position, eight 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 eight 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 1.54%.  The unrealized loss was $916,907 and $1,004,076 at September 30, 2015 and December 31, 2014, 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 seven securities in a continuous unrealized loss position were finance sector corporate debt securities and municipal securities all rated above investment grade at September 30, 2015, that have maturities ranging from 2022 to 2028.  The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2015.

Note D — Loans Receivable
 
The components of loans receivable at September 30, 2015 and December 31, 2014 are as follows:
 
September 30, 2015
 
December 31, 2014
 
(In thousands)
Commercial loans
$
53,049

 
$
53,669

Commercial real estate
98,899

 
93,427

Consumer loans
60,752

 
46,883

Home equity
54,313

 
53,150

Residential mortgages
131,479

 
121,910

 
398,492

 
369,039

Deferred fees
1,847

 
1,483

Allowance for loan losses
(3,442
)
 
(3,502
)
Net loans
$
396,897

 
$
367,020

 

14


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, 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 individually evaluated for impairment and included in the separately identified impairment disclosures. Troubled debt restructurings 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 troubled debt restructurings that subsequently default, the Company determines the amount of allowance on the loan in accordance with the accounting policy for the allowance for loan losses on loans individually identified as impaired. The Company incorporates recent historical experience related to troubled debt restructurings that subsequently default into the calculation of the allowance by loan portfolio segment.
 
The general allowance 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 (including troubled debt restructurings); levels of and trends in charge-offs and recoveries; migration of loans to the classification of special mention, substandard, or doubtful; 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.
 
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.

15


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, 2015
 
 
(In thousands)
Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
952

 
$
997

 
$
648

 
$
317

 
$
545

 
$
3,459

Charge-offs
 

 

 
(26
)
 
(5
)
 

 
(31
)
Recoveries
 

 

 
14

 

 

 
14

Provision for loan losses
 
(95
)
 
24

 
33

 
15

 
23

 

Ending balance
 
$
857

 
$
1,021

 
$
669

 
$
327

 
$
568

 
$
3,442

For the Nine Months Ended
 
Commercial
Loans
 
Commercial
Real Estate
 
Consumer
Loans
 
Home
Equity
 
Residential
Mortgages
 
Total
September 30, 2015
 
 
(In thousands)
Allowance for loan losses:
 
 

 
 

 
 

 
 

 
 

 
 

Beginning balance
 
$
1,175

 
$
1,085

 
$
445

 
$
295

 
$
502

 
$
3,502

Charge-offs
 

 

 
(83
)
 
(24
)
 

 
(107
)
Recoveries
 

 

 
46

 

 
1

 
47

Provision for loan losses
 
(318
)
 
(64
)
 
261

 
56

 
65

 

Ending balance
 
$
857

 
$
1,021

 
$
669

 
$
327

 
$
568

 
$
3,442

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


16


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


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, 2015
 
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
 
$
122

 
$
11

 
$

 
$

 
$

 
$
133

 
Collectively evaluated for impairment
 
735

 
1,010

 
669

 
327

 
568

 
3,309

 
Total
 
$
857

 
$
1,021

 
$
669

 
$
327

 
$
568

 
$
3,442

 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
Individually evaluated for impairment
 
$
1,149

 
$
383

 
$

 
$

 
$

 
$
1,532

 
Collectively evaluated for impairment
 
51,900

 
98,516

 
60,752

 
54,313

 
131,479

 
396,960

 
Total
 
$
53,049

 
$
98,899

 
$
60,752

 
$
54,313

 
$
131,479

 
$
398,492


 
December 31, 2014
 
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
 
$
115

 
$
21

 
$

 
$

 
$

 
$
136

 
Collectively evaluated for impairment
 
1,060

 
1,064

 
445

 
295

 
502

 
3,366

 
Total
 
$
1,175

 
$
1,085

 
$
445

 
$
295

 
$
502

 
$
3,502

 
Loans:
 
 

 
 

 
 

 
 

 
 

 
 

 
Individually evaluated for impairment
 
$
1,048

 
$
462

 
$

 
$

 
$

 
$
1,510

 
Collectively evaluated for impairment
 
52,621

 
92,965

 
46,883

 
53,150

 
121,910

 
367,529

 
Total
 
$
53,669

 
$
93,427

 
$
46,883

 
$
53,150

 
$
121,910

 
$
369,039



17


The following table presents information related to loans individually evaluated for impairment by segment of loans as of September 30, 2015 and December 31, 2014:
 
 
September 30, 2015
 
December 31, 2014
 
 
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
1,149

 
1,149

 
122

 
1,048

 
1,048

 
115

 
Commercial real estate
383

 
383

 
11

 
462

 
462

 
21

 
Total
$
1,532

 
$
1,532

 
$
133

 
$
1,510

 
$
1,510

 
$
136


The following table presents the average recorded investment in impaired loans for the periods indicated:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
 
 
(In thousands)
 
With no related allowance recorded:
0

 
0

 
0

 
0

 
Commercial loans
$

 
$

 
$

 
$

 
Commercial real estate

 

 

 

 
With an allowance recorded:
 
 
 
 
 
 
 
 
Commercial loans
1,273

 
1,023

 
1,404

 
1,007

 
Commercial real estate
417

 
477

 
441

 
487

 
Total
$
1,690

 
$
1,500

 
$
1,845

 
$
1,494

 
At September 30, 2015, impaired commercial real estate loans were represented by two loans.  At September 30, 2015, impaired commercial loans were represented by ten loans. Eight of the commercial loans were considered troubled debt restructurings and totaled $784,000 as of September 30, 2015. The remaining two commercial loans and the two commercial real estate loans were for customers who had commercial loans considered to be troubled debt restructurings. Cash basis interest income of $26,000 and $86,000 was recognized for the three months and nine months ended September 30, 2015, respectively. Cash basis interest income of $22,000 and $66,000 was recognized for the three months and nine months ended September 30, 2014, respectively. 

At September 30, 2014, impaired commercial real estate loans were represented by three loans. At September 30, 2014, impaired commercial loans were represented by nine loans. Seven of the commercial loans were considered trouble 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.


18


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, 2015 and December 31, 2014:
 
 
September 30, 2015
 
 
Nonaccrual
 
Loans Past Due Over 90 days still Accruing
 
 
 
(In thousands)
 
Commercial loans
$
31

 
$

 
Commercial real estate

 

 
Consumer loans

 

 
Home equity
34

 

 
Residential mortgages
266

 

 
Total
$
331

 
$

 
 
December 31, 2014
 
 
Nonaccrual
 
Loans Past Due Over 90 days still Accruing
 
 
 
 
(In thousands)
 
Commercial loans
$
39

 
$

 
Commercial real estate

 

 
Consumer loans

 

 
Home equity

 

 
Residential mortgages
267

 

 
Total
$
306

 
$


The following represents the aging of the recorded investment in past due loans as of September 30, 2015 and December 31, 2014 by class of loans.
 
 
September 30, 2015
 
 
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
$
53,049

 
$
129

 
$
183

 
$

 
$
312

 
$
52,737

 
Commercial real estate
98,899

 

 
82

 

 
82

 
98,817

 
Consumer loans
60,752

 
56

 
1

 

 
57

 
60,695

 
Home equity
54,313

 

 

 
34

 
34

 
54,279

 
Residential mortgages
131,479

 
276

 
24

 
266

 
566

 
130,913

 
Total
$
398,492

 
$
461

 
$
290

 
$
300

 
$
1,051

 
$
397,441

 
 
December 31, 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
$
53,669

 
$

 
$
56

 
$

 
$
56

 
$
53,613

 
Commercial real estate
93,427

 
39

 

 

 
39

 
93,388

 
Consumer loans
46,883

 
70

 
11

 

 
81

 
46,802

 
Home equity
53,150

 
118

 

 

 
118

 
53,032

 
Residential mortgages
121,910

 
233

 

 
267

 
500

 
121,410

 
Total
$
369,039

 
$
460

 
$
67

 
$
267

 
$
794

 
$
368,245



19


The carrying value of foreclosed residential real estate property as of September 30, 2015 and December 31, 2014 was $0 and $245,692, respectively. There were six loans in process of foreclosure as of September 30, 2015 totaling $385,806. There were four loans in process of foreclosure as of December 31, 2014 totaling $334,266.

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, 2015 and December 31, 2014 by class of loans:
 
 
September 30, 2015
 
December 31, 2014
 
 
Number of Loans
 
Recorded Investment
 
Allowance for Loan Losses Allocated
 
Number of Loans
 
Recorded Investment
 
Allowance for Loan Losses Allocated
 
 
 
(In thousands except number of loans)
 
 
 

 
 

 
 

 
 

 
 

 
 

 
Commercial loans
8

 
$
784

 
$
77

 
7

 
$
804

 
$
58

 
Commercial real estate

 

 

 

 

 

 
Consumer loans

 

 

 

 

 

 
Home equity

 

 

 

 

 

 
Residential mortgages

 

 

 

 

 

 
Total
8

 
$
784

 
$
77

 
7

 
$
804

 
$
58


There were no new troubled debt restructurings recorded during the three months ended September 30, 2015. There were no new troubled debt restructurings recorded during the three months ended September 30, 2014. During the nine months ended September 30, 2015, there were three new troubled debt restructurings recorded compared to one new troubled debt restructuring recorded during the same period in 2014. The Company has not committed to lend additional amounts as of September 30, 2015 to customers with outstanding loans that are classified as troubled debt restructurings.

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 or fixed rate loan 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 eight loans considered troubled debt restructurings as of September 30, 2015 represented five commercial relationships. Two of the commercial loans representing one relationship with a principal balance of $31,000 and $39,000 as of September 30, 2015 and December 31, 2014, 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, 2015 and 2014. All of the troubled debt restructurings were considered impaired as of September 30, 2015 and December 31, 2014. 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.

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:
 

20


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, 2015
 
 
Not
Rated
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
 
 
(In thousands)
 
Commercial loans
$
11,979

 
$
39,078

 
$
476

 
$
1,516

 
$

 
Commercial real estate
15,370

 
78,285

 
1,506

 
3,738

 

 
Total
$
27,349

 
$
117,363

 
$
1,982

 
$
5,254

 
$

 
 
December 31, 2014
 
 
Not
Rated
 
Pass
 
Special
Mention
 
Substandard
 
Doubtful
 
 
 
(In thousands)
 
Commercial loans
$
13,592

 
$
35,546

 
$
191

 
$
4,240

 
$

 
Commercial real estate
14,956

 
72,938

 
4,437

 
1,097

 

 
Total
$
28,548

 
$
108,484

 
$
4,628

 
$
5,337

 
$


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, 2015 and 2014, the Bank's insurance, risk management and employee benefit activities consisted of those conducted through its wholly owned subsidiary OneGroup 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.


21


Information about the Bank’s segments is presented in the following table for the periods indicated:
 
Three Months Ended September 30, 2015
 
Banking
Activities
 
Insurance, Risk Management and Employee Benefit
Activities
 
Financial/Investment Advisory Activities
 
Total
 
 
 
 
(In thousands)
Net interest income
$
5,086

 
$

 
$

 
$
5,086

Provision for loan losses

 

 

 

Net interest income after provision for loan losses
5,086

 

 

 
5,086

Investment losses, net
(48
)
 

 

 
(48
)
Commissions and fees on sales of non-banking products
352

 
5,277

 
1,003

 
6,632

Non-interest income
1,144

 

 

 
1,144

Non-interest expenses
5,367

 
4,886

 
819

 
11,072

Depreciation and amortization
328

 
158

 
6

 
492

Income before income taxes
839

 
233

 
178

 
1,250

Income tax expense
283

 
65

 
78

 
426

Net income
$
556

 
$
168

 
$
100

 
$
824

Total Assets
$
789,331

 
$
31,052

 
$
4,449

 
$
824,832

 
Three Months Ended September 30, 2014
 
Banking
Activities
 
Insurance, Risk Management and Employee Benefit
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



22


 
 
Nine Months Ended September 30, 2015
 
 
Banking
Activities
 
Insurance, Risk Management and Employee Benefit
Activities
 
Financial/Investment Advisory Activities
 
Total
 
 
 
(In thousands)
 
Net interest income
$
15,396

 
$

 
$

 
$
15,396

 
Provision for loan losses

 

 

 

 
Net interest income after provision for loan losses
15,396

 

 

 
15,396

 
Investment gains, net
196

 

 

 
196

 
Commissions and fees on sales of non banking products
804

 
16,866

 
2,929

 
20,599

 
Non-interest income
3,801

 

 

 
3,801

 
Non-interest expenses
16,776

 
14,586

 
2,615

 
33,977

 
Depreciation and amortization
989

 
352

 
20

 
1,361

 
Income before income taxes
2,432

 
1,928

 
294

 
4,654

 
Income tax expense
513

 
747

 
127

 
1,387

 
Net income
$
1,919

 
$
1,181

 
$
167

 
$
3,267

 
Total Assets
$
789,331

 
$
31,052

 
$
4,449

 
$
824,832

 
 
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


The following represents a reconciliation of the Company’s reported segment assets to consolidated assets as of September 30:
 
2015
 
2014
 
(In thousands)
Total assets for reportable segments
$
824,832

 
$
798,279

Elimination of intercompany cash balances
(9,066
)
 
(11,511
)
Consolidated Total
$
815,766

 
$
786,768









23


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), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). 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. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. 

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, 2015 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
$
2,567

 
$
972

 
$
1,595

 
$

Available-for-sale securities
 

 
 

 
 

 
 

U.S. Agencies
27,474

 

 
27,474

 

U.S. Treasury
1,997

 

 
1,997

 

Corporate
11,467

 

 
11,467

 

State and municipal
31,713

 

 
31,676

 
37

Small Business Administration
3,643

 

 
3,643

 

Residential mortgage-backed securities
57,914

 

 
57,914

 

Total
$
136,775

 
$
972

 
$
135,766

 
$
37

 

24


 
 
Fair Value Measurement at December 31, 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
$
3,900

 
$
1,083

 
$
2,817

 
$

 
Available-for-sale securities
 

 
 

 
 

 
 

 
U.S. Agencies
27,232

 

 
27,232

 

 
Corporate
34,097

 

 
34,097

 

 
Agency asset backed securities
8,790

 

 
8,790

 

 
State and municipal
34,218

 

 
34,150

 
68

 
Small Business Administration
6,970

 

 
6,970

 

 
Residential mortgage-backed securities
63,530

 

 
63,530

 

 
Private placement mortgage obligation
1,477

 

 
1,477

 

 
Total
$
180,214

 
$
1,083

 
$
179,063

 
$
68


There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2015 or 2014

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:

25


 
 
Fair Value Measurements Using Significant
Unobservable Inputs (Level 3)
 
 
Municipal
Securities
 
Total
 
 
 
(In thousands)
 
Beginning balance January 1, 2015
$
68

 
$
68

 
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, 2015
$
68

 
$
68

 
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, 2015
$
67

 
$
67

 
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
(2
)
 
(2
)
 
Ending balance September 30, 2015
$
37

 
$
37


26


 
 
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

 
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, 2015 or December 31, 2014.

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.
 

27


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, 2015
 
September 30, 2014
 
September 30, 2015
 
September 30, 2014
 
 
 
(In thousands)
 
Interest income
$

 
$

 
$

 
$

 
Change in fair value
36

 
(1,507
)
 
58

 
(684
)
 
Total change in fair value
$
36

 
$
(1,507
)
 
$
58

 
$
(684
)
 
Fair Value of Financial Instruments
 
Carrying amounts and estimated fair values of financial instruments at September 30, 2015 and December 31, 2014 were as follows: 
September 30, 2015
 
Carrying
Value
 
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Financial assets:
 
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
 
$
70,612

 
$
70,612

 
$

 
$

 
$
70,612

Trading securities
 
2,567

 
972

 
1,595

 

 
2,567

Investment securities, available-for-sale
 
134,208

 

 
134,171

 
37

 
134,208

Investment securities, held-to-maturity
 
120,014

 

 
121,300

 
3,286

 
124,586

Loans held for sale
 
85

 

 
90

 

 
90

Loans receivable, net
 
396,897

 

 

 
411,495

 
411,495

Federal Home Loan Bank stock
 
1,404

 
N/A

 
N/A

 
N/A

 
N/A

Accrued interest receivable
 
2,360

 

 
1,293

 
1,067

 
2,360

Financial liabilities:
 
0

 
 

 
 

 
 

 
 

Deposits
 
$
707,542

 
$
572,861

 
$
136,539

 
$

 
$
709,400

Accrued interest payable
 
5

 
2

 
3

 

 
5


December 31, 2014
 
Carrying Value
 
Fair Value Measurement Using
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Financial assets:
 
 

 
 
 
 
 
 
 
 

Cash and cash equivalents
 
$
31,075

 
$
31,075

 
$

 
$

 
$
31,075

Trading securities
 
3,900

 
1,083

 
2,817

 

 
3,900

Investment securities, available-for-sale
 
176,314

 

 
176,246

 
68

 
176,314

Investment securities, held-to-maturity
 
129,415

 

 
130,053

 
3,844

 
133,897

Loans held for sale
 
839

 

 
865

 

 
865

Loans receivable, net
 
367,020

 

 

 
381,084

 
381,084

Federal Home Loan Bank stock
 
1,391

 
N/A

 
N/A

 
N/A

 
N/A

Accrued interest receivable
 
2,342

 

 
1,339

 
1,003

 
2,342

Financial liabilities:
 
 

 
 
 
 
 
 
 
 

Deposits
 
$
689,170

 
$
543,262

 
$
148,115

 
$

 
$
691,377

Accrued interest payable
 
7

 
2

 
5

 

 
7


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 

28


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.  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 demand deposits (e.g., interest and non-interest checking, savings and money market accounts)are, by definition, equal to the amount payable on demand at the reporting date (i.e. their carrying value) resulting in a Level 1 classification. The carrying amounts of variable rate certificates of deposit approximate their fair values at the reporting date resulting in a Level 2 classification. Fair values for fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.
 
(f)  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.
 
(g)  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 $266,321 and $157,381 for the three months ended September 30, 2015 and 2014, respectively.  Total compensation cost that has been charged against income for the plan was $419,096 and $443,545 for the nine months ended September 30, 2015 and 2014, respectively. The total income tax benefit was $100,536 and $158,209 for the three months and nine months ended September 30, 2015, respectively. The total income tax benefit was $60,592 and $170,765 for the three months and nine months ended September 30, 2014, 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, 2015. Compensation recorded in conjunction with the option awards was $9,437 and $27,311 for the three months and nine months ended September 30, 2015, respectively. 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.

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

29


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:
 
2015
2014
Risk-free interest rate
0.00
%
1.52
%
Expected term
0.24 years

3.10 years

Expected stock price volatility
28.31
%
22.86
%
Dividend yield
4.66
%
4.66
%
  
A summary of activity in the stock option plan for 2015 was as follows:
 
Shares
 
Average
Exercise
Price
 
Weighted
Remaining
Contractual
Term
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2015
172,348

 
$
10.44

 
7.06

 
$
443,550

Granted
364

 
$
19.61

 

 
$
288

Exercised
(18,848
)
 
$
11.10

 

 
$
144,025

Forfeited or expired
(364
)
 
$
19.61

 

 
$
288

Outstanding at September 30, 2015
153,500

 
$
10.36

 
6.82

 
$
1,540,765

Fully vested and expected to vest
72,000

 
$
10.39

 
6.82

 
$
720,810

Exercisable as of September 30, 2015
81,500

 
$
10.34

 
6.82

 
$
819,955

 
Information related to the stock option plan was as follows:
 
2015
 
2014
Intrinsic value of options exercised
$
144,025

 
$
29,210

Cash received from option exercises
169,178

 
103,009

Weighted average fair value of options granted
0.9728

 
1.3259


The tax benefit realized from option exercises was not considered material to the 2015 and 2014 period. As of September 30, 2015, there was $64,413 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 1.8 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, 2015 and 130,000 shares have been issued.  A summary of changes in the Company’s nonvested shares for the years follows:

30


 
Nonvested Shares
Shares
 
Weighted Average
Grant Date
Fair Value
 
 
Nonvested at January 1, 2015
78,000

 
$
10.46

 
Granted

 

 
Vested
26,000

 
$
10.46

 
Forfeited

 

 
Nonvested at September 30, 2015
52,000

 
$
10.46

 
As of September 30, 2015, there was $493,537 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 1.8 years. Compensation expense recorded in conjunction with the RRP awards was $68,518 and $203,419 for the three months and nine months ended September 30, 2015, respectively. 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.
 
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 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. Due to the merger with Community Bank System, Inc. (see footnote J), all nonvested shares will vest at the date of merger and therefore the unvested shares based on performance criteria were not forfeited on July 24, 2015. There were 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%. As of December 31, 2014, the compensation cost expensed ranged from 50% - 100% payout under the terms of the plan for the different performance sets. 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, 2015 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, 2015
75,000

 
$
10.30

Granted

 

Vested
67,825

 
$
10.30

Forfeited

 

Nonvested at September 30, 2015
7,175

 
$
10.30

 
As of September 30, 2015, there was no unrecognized compensation cost related to nonvested shares granted under the Plan. Compensation expense recorded in conjunction with the performance shares totaled $188,366 for the three months and nine months ended September 30, 2015. 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.


31


Note H - Comprehensive Income (Loss)

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, 2015
 
Pre-tax
 
Tax
 
After-tax
 
(In thousands)
Unrealized holding gains on available-for-sale securities during the period
$
698

 
$
(262
)
 
$
436

Reclassification adjustment for losses included in net income (1)
84

 
(32
)
 
52

Net unrealized gains on available-for-sale securities
782

 
(294
)
 
488

 
 
 
 
 
 
Amortization of unrealized gains on transfer of securities to held-to-maturity (3)
148

 
(57
)
 
91

Net unrealized gains
148

 
(57
)
 
91

 
 
 
 
 
 
Net pension gain arising during period (2)

 

 

Net unrecognized postretirement benefit obligation

 

 

Other comprehensive income
$
930

 
$
(351
)
 
$
579

 
For the Nine Months Ended September 30, 2015
 
Pre-tax
 
Tax
 
After-tax
 
(In thousands)
Unrealized holding losses on available-for-sale securities during the period
$
(107
)
 
$
41

 
$
(66
)
Reclassification adjustment for gains included in net income (1)
(138
)
 
52

 
(86
)
Net unrealized losses on available-for-sale securities
(245
)
 
93

 
(152
)
 
 
 
 
 
 
Amortization of unrealized gains on transfer of securities to held-to-maturity (3)
468

 
(177
)
 
291

Net unrealized gains
468

 
(177
)
 
291

 
 
 
 
 
 
Net pension gain arising during period (2)

 

 

Net unrecognized postretirement benefit obligation

 

 

Other comprehensive income
$
223

 
$
(84
)
 
$
139


 
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 (3)
142

 
(57
)
 
85

Net unrealized gains
142

 
(57
)
 
85

 
 
 
 
 
 
Net pension gain arising during period (2)

 

 

Net unrecognized postretirement benefit obligation

 

 

Other comprehensive loss
$
(1,204
)
 
$
481

 
$
(723
)


32


 
For the Nine Months Ended 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 (3)
417

 
(167
)
 
250

Net unrealized gains
417

 
(167
)
 
250

 
 
 
 
 
 
Net pension gain arising during period (2)
24

 
(10
)
 
14

Net unrecognized postretirement benefit obligation
24

 
(10
)
 
14

Other comprehensive income
$
2,022

 
$
(810
)
 
$
1,212

___________________________________
(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.
(3) Amortization of unrealized gains on transfer of securities held-to-maturity are reported in the interest on investment securities 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, 2015 and 2014:
 
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, 2015
$
477

 
$
(2,328
)
 
$
(752
)
 
$
(2,603
)
Other comprehensive (loss) income, during the period, net of adjustments
(66
)
 
291

 

 
225

Amounts reclassified from AOCI
(86
)
 

 

 
(86
)
Other comprehensive (loss) income
(152
)
 
291

 

 
139

Balance at September 30, 2015
$
325

 
$
(2,037
)
 
$
(752
)
 
$
(2,464
)
 
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
)

Note I — Accounting Pronouncements
 
In June 2014, the FASB amended existing guidance and created a new Topic 606, Revenue from Contracts with Customers which supersedes 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

33


revenue when or as each performance obligation is satisfied. The amendments in this guidance are effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. 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, 2019 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. The adoption of this guidance did not have a material effect on the Company's operating results or financial condition.

Note J - Merger

On February 24, 2015, the Company entered into a definitive merger agreement to be acquired by Community Bank System, Inc. for approximately $142 million in Community Bank System, Inc. stock and cash. The merger agreement has been unanimously approved by the board of directors of both companies and the stockholders of Oneida Financial Corp. The merger is expected to close in December 2015, subject to required regulatory approval.

Current Litigation Relating to the Merger
 
On March 13, 2015, the Company filed a complaint in the Supreme Court of the State of New York, County of Madison, against FinPro, Inc. (“FinPro”). The Company’s complaint alleged that FinPro has wrongfully demanded a $1.42 million services fee as a result of the Company's entering into the merger even though FinPro has provided no services in connection with the merger and has no right, contractual or otherwise, to such a fee. In November 2015, we entered into a settlement of the litigation that included among other things, a payment to FinPro. The settlement was not material to either the current or future years.



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

     On February 24, 2015, the Company entered into a definitive merger agreement to be acquired by Community Bank System, Inc. for approximately $142 million in Community Bank System, Inc. stock and cash. The merger agreement has been unanimously approved by the board of directors of both companies and by the stockholders of Oneida Financial Corp. The merger is expected to close in December 2015, subject to required regulatory approvals.
   
The Company announced on September 23, 2015 a quarterly cash dividend of $0.12 per share, which was paid on October 20, 2015 to its shareholders of record on October 6, 2015.
    
 FINANCIAL CONDITION
 
ASSETS.  Total assets at September 30, 2015 were $815.8 million, an increase of $17.6 million, or 2.2%, from $798.2 million at December 31, 2014. The increase in total assets was primarily attributable to an increase in cash and cash equivalents and loans receivable.

35


Cash and cash equivalents increased $39.5 million, or 127.0%, to $70.6 million at September 30, 2015 as compared with $31.1 million at December 31, 2014. The increase in cash and cash equivalents was due to the Company's strategy to hold a higher level of cash and cash equivalents given the increase in deposits over the trailing twelve months and to support loan originations.

Trading securities decreased $1.3 million, or 33.3%, to $2.6 million at September 30, 2015 as compared with $3.9 million at December 31, 2014. Trading securities represent common and preferred equity securities that we have elected to adjust to fair value.  The decrease in trading securities was due to the sale of $1.3 million of trading securities sold during the third quarter 2015 including all of our Freddie Mac preferred stock.

Mortgage-backed securities decreased $13.4 million, or 11.6%, to $102.5 million at September 30, 2015 as compared with $115.9 million at December 31, 2014.  Investment securities decreased $38.1 million, or 20.1%, to $151.7 million at September 30, 2015 as compared to $189.8 million at December 31, 2014. The decrease in mortgage-backed securities and investment securities was due to maintaining a higher liquidity position as well as investing excess funds in loans receivable.
 
Loans receivable, net of allowance for loan loss, including loans held for sale, increased $29.1 million, or 7.9%, to $397.0 million at September 30, 2015 as compared with $367.0 million at December 31, 2014.  We continue to maintain a diversified loan portfolio. The increase in net loan balances reflects the Company's continued loan origination efforts partially offset by loan sales activity. Loan originations during the first nine months of 2015 totaled $112.0 million as compared to total loan originations during the nine months ended September 30, 2014 of $79.8 million. We sold $4.7 million in newly originated fixed rate residential loans with terms exceeding 15 years during the nine months ended September 30, 2015 compared to $5.2 million during the same period in 2014.
 
LIABILITIES.  Total liabilities increased by $16.2 million, or 2.3%, to $718.6 million at September 30, 2015 from $702.4 million at December 31, 2014.  The increase was the result of an increase in deposits of $18.3 million partially offset by a decrease in other liabilities of $2.1 million.
 
Deposit accounts increased $18.3 million, or 2.7%, to $707.5 million at September 30, 2015 from $689.2 million at December 31, 2014.  Interest-bearing deposit accounts decreased $3.7 million, or 0.6% to $599.8 million at September 30, 2015 from $603.5 million at December 31, 2014.  Non-interest bearing deposit accounts increased $22.0 million, or 25.7%, to $107.7 million at September 30, 2015 from $85.7 million at December 31, 2014.  The increase in deposit accounts was primarily a result of an increase in our municipal deposits offered through our limited purpose commercial banking subsidiary, State Bank of Chittenango.  Municipal deposits increased $30.2 million, or 17.7%, to $200.7 million at September 30, 2015 from $170.5 million at December 31, 2014.  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. Partially offsetting the increase in municipal deposits, retail deposits decreased $11.9 million, or 2.3%, to $506.8 million at September 30, 2015 from $518.7 million at December 31, 2014. 
 
We had no borrowings outstanding at September 30, 2015 or December 31, 2014. At September 30, 2015 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 $2.1 million, or 15.9%, to $11.1 million at September 30, 2015 from $13.2 million at December 31, 2014. 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, 2015 from December 31, 2014.
 
STOCKHOLDERS’ EQUITY.  Total stockholders’ equity at September 30, 2015 was $97.1 million, an increase of $1.3 million, or 1.4%, from $95.8 million at December 31, 2014.  The increase in stockholders’ equity was a result of net income of $3.3 million for the nine months ended September 30, 2015 as well as an increase in accumulated other comprehensive income of $139,000 at September 30, 2015 as a result of an increase in the fair value of mortgage-backed and investment securities reflecting the recent changes in interest rates. Offsetting this increase in stockholders' equity was a decrease resulting from the payment of quarterly dividends during the first nine months of 2015 totaling $0.36 per share.

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.
 

36


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, 2015 and 2014 and for the year ended December 31, 2014.  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.
 
TABLE 1.  Average Balance Sheet.
 
 
Three Months Ended September 30,
 
Twelve Months Ended Dec. 31,
 
 
2015
 
2014
2014
 
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
$
394,563

 
$
3,993

 
4.05
%
 
$
349,920

 
$
3,767

 
4.31
%
 
$
348,136

 
$
14,928

 
4.29
%
 
Investment and mortgage-backed securities
266,528

 
1,592

 
2.39
%
 
296,819

 
1,886

 
2.54
%
 
292,039

 
7,508

 
2.57
%
 
Federal funds
50,587

 
17

 
0.13
%
 
13,998

 
4

 
0.11
%
 
28,811

 
25

 
0.09
%
 
Equity securities
3,423

 
23

 
2.69
%
 
5,870

 
23

 
1.57
%
 
5,297

 
95

 
1.79
%
 
Total interest-earning assets
715,101

 
5,625

 
3.15
%
 
666,607

 
5,680

 
3.41
%
 
674,283

 
22,556

 
3.35
%
 
Non interest-earning Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Cash and due from banks
13,717

 
 

 
 

 
14,018

 
 

 
 

 
14,905

 
 

 
 

 
Other assets
93,418

 
 

 
 

 
90,688

 
 

 
 

 
89,160

 
 

 
 

 
Total assets
$
822,236

 
 

 
 

 
$
771,313

 
 

 
 

 
$
778,348

 
 

 
 

 
Liabilities and Stockholders’ Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Interest-bearing Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Money market deposits
$
244,423

 
$
125

 
0.20
%
 
$
207,743

 
$
189

 
0.36
%
 
$
222,110

 
$
783

 
0.35
%
 
Savings accounts
148,878

 
94

 
0.25
%
 
138,526

 
96

 
0.27
%
 
136,520

 
363

 
0.27
%
 
Interest-bearing checking
81,665

 
8

 
0.04
%
 
77,224

 
15

 
0.08
%
 
77,503

 
58

 
0.07
%
 
Time deposits
135,055

 
312

 
0.92
%
 
141,877

 
345

 
0.96
%
 
142,210

 
1,386

 
0.97
%
 
Borrowings

 

 

 
1,183

 
9

 
3.02
%
 
796

 
35

 
4.40
%
 
Notes payable

 

 

 
211

 
1

 
1.88
%
 
274

 
9

 
3.28
%
 
Total interest-bearing liabilities
610,021

 
539

 
0.35
%
 
566,764

 
655

 
0.46
%
 
579,413

 
2,634

 
0.45
%
 
Non-interest-bearing Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Demand deposits
100,039

 
 

 
 

 
88,763

 
 

 
 

 
85,557

 
 

 
 

 
Other liabilities
14,960

 
 

 
 

 
19,389

 
 

 
 

 
19,064

 
 

 
 

 
Total liabilities
725,020

 
 

 
 

 
674,916

 
 

 
 

 
684,034

 
 

 
 

 
Stockholders’ equity
97,216

 
 

 
 

 
96,397

 
 

 
 

 
94,314

 
 

 
 

 
Total liabilities and stockholders’ equity
$
822,236

 
 

 
 

 
$
771,313

 
 

 
 

 
$
778,348

 
 

 
 

 
Net interest income
 

 
$
5,086

 
 

 
 

 
$
5,025

 
 

 
 

 
$
19,922

 
 

 
Net interest spread
 

 
 

 
2.80
%
 
 

 
 

 
2.95
%
 
 

 
 

 
2.90
%
 
Net earning assets
$
105,080

 
 

 
 

 
$
99,843

 
 

 
 

 
$
94,870

 
 

 
 

 
Net yield on average interest-earning assets
 

 
2.84
%
 
 

 
 

 
3.02
%
 
 

 
 

 
2.95
%
 
 

 
Average interest-earning assets to average interest-bearing liabilities
 

 
117.23
%
 
 

 
 

 
117.62
%
 
 

 
 

 
116.37
%
 
 



37


 
 
Nine Months Ended September 30,
 
Twelve Months Ended Dec. 31,
 
 
2015
 
2014
2014
 
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 inThousands)
 
Assets
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Interest-earning Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Loans receivable
$
385,897

 
$
11,791

 
4.07
%
 
$
343,551

 
$
11,117

 
4.31
%
 
$
348,136

 
$
14,928

 
4.29
%
 
Investment and mortgage-backed securities
285,754

 
5,213

 
2.43
%
 
290,233

 
5,624

 
2.58
%
 
292,039

 
7,508

 
2.57
%
 
Federal funds
57,274

 
54

 
0.13
%
 
29,374

 
16

 
0.07
%
 
28,811

 
25

 
0.09
%
 
Equity securities
3,822

 
70

 
2.44
%
 
5,605

 
71

 
1.69
%
 
5,297

 
95

 
1.79
%
 
Total interest-earning assets
732,747

 
17,128

 
3.12
%
 
668,763

 
16,828

 
3.36
%
 
674,283

 
22,556

 
3.35
%
 
Non interest-earning Assets:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Cash and due from banks
13,774

 
 

 
 

 
15,166

 
 

 
 

 
14,905

 
 

 
 

 
Other assets
92,145

 
 

 
 

 
89,178

 
 

 
 

 
89,160

 
 

 
 

 
Total assets
$
838,666

 
 

 
 

 
$
773,107

 
 

 
 

 
$
778,348

 
 

 
 

 
Liabilities and Stockholders’ Equity
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Interest-bearing Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Money market deposits
$
260,714

 
$
458

 
0.23
%
 
$
216,942

 
$
589

 
0.36
%
 
$
222,110

 
$
783

 
0.35
%
 
Savings accounts
144,645

 
282

 
0.26
%
 
137,219

 
272

 
0.27
%
 
136,520

 
363

 
0.27
%
 
Interest-bearing checking
82,030

 
24

 
0.04
%
 
77,938

 
46

 
0.08
%
 
77,503

 
58

 
0.07
%
 
Time deposits
140,547

 
967

 
0.92
%
 
142,237

 
1,045

 
0.98
%
 
142,210

 
1,386

 
0.97
%
 
Borrowings
416

 
1

 
0.32
%
 
1,061

 
35

 
4.41
%
 
796

 
35

 
4.40
%
 
Notes payable

 

 

 
338

 
8

 
3.16
%
 
274

 
9

 
3.28
%
 
Total interest-bearing liabilities
628,352

 
1,732

 
0.37
%
 
575,735

 
1,995

 
0.46
%
 
579,413

 
2,634

 
0.45
%
 
Non-interest-bearing Liabilities:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
Demand deposits
97,919

 
 

 
 

 
84,400

 
 

 
 

 
85,557

 
 

 
 

 
Other liabilities
14,692

 
 

 
 

 
19,108

 
 

 
 

 
19,064

 
 

 
 

 
Total liabilities
740,963

 
 

 
 

 
679,243

 
 

 
 

 
684,034

 
 

 
 

 
Stockholders’ equity
97,703

 
 

 
 

 
93,864

 
 

 
 

 
94,314

 
 

 
 

 
Total liabilities and stockholders’ equity
$
838,666

 
 

 
 

 
$
773,107

 
 

 
 

 
$
778,348

 
 

 
 

 
Net interest income
 

 
$
15,396

 
 

 
 

 
$
14,833

 
 

 
 

 
$
19,922

 
 

 
Net interest spread
 

 
 

 
2.75
%
 
 

 
 

 
2.89
%
 
 

 
 

 
2.90
%
 
Net earning assets
$
104,395

 
 

 
 

 
$
93,028

 
 

 
 

 
$
94,870

 
 

 
 

 
Net yield on average interest-earning assets
 

 
2.80
%
 
 

 
 

 
2.96
%
 
 

 
 

 
2.95
%
 
 

 
Average interest-earning assets to average interest-bearing liabilities
 

 
116.61
%
 
 

 
 

 
116.16
%
 
 

 
 

 
116.37
%
 
 


RESULTS OF OPERATIONS
 
General Net income for the three months ended September 30, 2015 was $824,000 compared to $1.5 million for the three months ended September 30, 2014.  For the three months ended September 30, 2015, diluted net income per share was $0.12 as compared with diluted net income per share of $0.21 for the three months ended September 30, 2014. The decrease in net income during the current third quarter period is primarily the result of a decrease in net investment gains, an increase in income tax provision and merger-related expenses incurred in connection with our previously announced merger with Community Bank System, Inc. Net income for the nine months ended September 30, 2015 was $3.3 million compared to $4.8 million for the nine months ended September 30, 2014. The decrease in net income for the nine month period was primarily the result of merger-related expenses incurred, an increase in non-interest expenses (excluding merger-related expenses) and a decrease in net investment

38


gains, partially offset by an increase in net interest income, an increase in non-interest income and a decrease in the provision for loan losses.

Interest and Dividend Income.  Interest and dividend income decreased by $55,000, or 1.0%, to $5.6 million for the three months ended September 30, 2015 from $5.7 million for the three months ended September 30, 2014. Interest and fees on loans increased by $226,000 for the three months ended September 30, 2015 as compared with the same period in 2014.  Interest and dividend income on mortgage-backed and investment securities decreased $294,000 to $1.6 million for the three months ended September 30, 2015 from $1.9 million for the three months ended September 30, 2014. Interest income earned on federal funds sold increased to $17,000 for the three months ended September 30, 2015 as compared with $4,000 for the three months ended September 30, 2014.

For the nine months ended September 30, 2015, interest and dividend income increased $300,000, or 1.8%, to $17.1 million from $16.8 million for the nine months ended September 30, 2014. Interest and fees on loans increased by $674,000 for the nine months ended September 30, 2015 compared with the same period in 2014. Interest and dividend income on mortgage-backed and investment securities decreased $412,000 for the nine months ended September 30, 2015 as compared with the nine months ended September 30, 2014. Interest income earned on federal funds sold increased to $54,000 for the nine months ended September 30, 2015 as compared with $16,000 for the nine months ended September 30, 2014.

For the three months ended September 30, 2015, the increase in income on loans resulted from an increase of $44.7 million in the average balance of loans to $394.6 million in the third quarter of 2015 from $349.9 million in the third quarter of 2014 partially offset by a decrease of 26 basis points in the average yield on loans to 4.05% from 4.31%. At September 30, 2015, net loans receivable, including loans held for sale, were $397.0 million as compared with $355.7 million at September 30, 2014; reflecting an increase of 11.6%. For the nine months ended September 30, 2015, the increase in loan interest income resulted from an increase of $42.3 million in the average balance of loans to $385.9 million from $343.6 million for the nine months ended September 30, 2014 partially offset by a decrease of 24 basis points in the average yield on loans to 4.07% from 4.31%. 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 decrease in interest income from investment and mortgage-backed securities for the three months ended September 30, 2015 compared to the same period in 2014 was the result of a decrease of $30.3 million in the average balance of investment and mortgage-backed securities to $266.5 million in the third quarter of 2015 from $296.8 million in the third quarter of 2014 along with a decrease in the average yield earned to 2.39% from 2.54%.  For the nine months ended September 30, 2015, interest on investment and mortgage-backed securities decreased $411,000 as compared with the same period in 2014 due partially to a decrease in average yield of 15 basis points along with a decrease in the average balance of $4.4 million. The decrease in the average balance of investment and mortgage-backed securities is primarily the result of the Company's strategy to hold a higher level of cash and cash equivalents given the increase in deposits over the trailing twelve months and to support loan origination activities.
 
Interest income on federal funds sold increased $13,000 as a result of an increase in the average balance of federal funds to $50.6 million during the third quarter of 2015 as compared with $14.0 million during the third quarter of 2014 along with an increase in average yield of 2 basis points. For the nine months ended September 30, 2015, interest income on federal funds sold increased $38,000 due to an increase in the average balance of $27.9 million to $47.2 million from $29.4 million and an increase in the average yield of 6 basis points.
 
Dividends from equity securities remained consistent at $23,000 for the three months ended September 30, 2015 from the same period in 2014 due to an increase in the average yield of equity securities of 112 basis points offset by a decrease in the average balance to $3.4 million for the three months ended September 30, 2015 from $5.9 million for the three months ended September 30, 2014. For the nine months ended September 30, 2015, dividend income on equity securities decreased $1,000 as compared with the same period in 2014 due to a decrease in the average balance of equity securities of $1.8 million partially offset by an increase in the average yield of 75 basis points.

Interest Expense.  Interest expense decreased $116,000, or 17.7%, to $539,000 for the three months ended September 30, 2015 from $655,000 for the three months ended September 30, 2014.  The decrease in interest expense was primarily due to a decrease in interest paid on deposit accounts during the third quarter of 2015 of $106,000, to $539,000 from $645,000 during the third quarter of 2014 and no borrowing expense for the three months ended September 30, 2015 compared with $9,000 for the three months ended September 30, 2014.  Interest expense decreased $263,000, or 13.2%, to $1.7 million for the nine months ended September 30, 2015 from $2.0 million for the nine months ended September 30, 2014.
 

39


The decrease in interest expense paid on deposits was primarily due to a decrease in the average rate paid on deposits. Core deposits, consisting of money market accounts, savings accounts and interest-bearing checking accounts, experienced an increase in the average balance of $51.5 million, or 12.2%, to $475.0 million at an average cost of 0.19% during the third quarter of 2015 from $423.5 million at an average cost of 0.28% during the third quarter of 2014.  During the same period, the average balance of time deposits decreased $6.8 million, or 4.8%, to $135.1 million in the third quarter of 2015 from $141.9 million during the third quarter of 2014 in addition to a decrease in the average rate paid on time deposits of 4 basis points. For the nine months ended September 30, 2015, the average cost of deposits was 0.37% as compared with 0.45% for the nine month period in 2014. The average balance of deposits increased $53.6 million for the nine months ended September 30, 2015 as compared with the nine months ended September 30, 2014. Total deposits increased $18.3 million from December 31, 2014, representing an increase of $30.2 million in municipal deposits and a decrease in retail deposits of $11.9 million. 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 of 2015 as compared to the third quarter of 2014 was due to a decrease of 302 basis points in the average rate paid on borrowed funds as well as a decrease in the average balance of borrowings outstanding from $1.2 million during the September 30, 2014 period to no borrowings outstanding during the September 30, 2015 period. For the nine months ended September 30, 2015, interest expense on borrowings decreased $34,000 due to a decrease in the average outstanding balance of borrowings to $416,000 as compared to $1.1 million for the nine month period 2014 and a decrease in cost from 441 basis points to 32 basis points. The change in the average balance and rate of borrowings reflects usage of our overnight line of credit during 2015 compared to a long term FHLB advance that matured during 2014.
 
Provision for Loan Losses.  During the three months and nine months ending September 30, 2015, the Bank made no provision for loan loss. The total provision for loan losses was $270,000 and $470,000 for the three months and nine months ended September 30, 2014, 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.

 Loans individually evaluated for impairment totaled $1.5 million at September 30, 2015 and had an allocated allowance for loan loss reserve of $133,000. 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. The increase in the allowance for loans individually evaluated for impairment during 2015 was due to a commercial relationship that was considered impaired during 2015. Nonperforming loans totaled $331,000, or 0.08% of total loans at September 30, 2015, compared with $607,000, or 0.17% of total loans at September 30, 2014.  Net charge-off activity for the nine months ended September 30, 2015 was $60,000 as compared with $89,000 in net charge-offs during the nine months ended September 30, 2014. The balance of the allowance for loan losses was $3.4 million, or 0.87% of loans receivable at September 30, 2015, compared with $3.5 million, or 0.98% of loans receivable at September 30, 2014.
 
Investment Gains (Losses).  Investment gains (losses) consists of changes in fair value of trading securities and net gains (losses) 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, 2015, the market value of our trading securities increased $36,000 as compared with a decrease of $1.5 million in the 2014 period. For the nine months ended September 30, 2015, the market value of our trading securities increased $58,000 as compared with a decrease of $684,000 for the same period in 2014. During the third quarter of 2015, the Company sold $1.3 million of our trading securities including our Freddie Mac preferred stock.
 
During the third quarter of 2015, the Company realized $84,000 of investment losses. This compares with realized gains of $2.0 million during the three months ended September 30, 2014. For the nine months ended September 30, 2015, the Company realized investment gains of $138,000 as compared with realized gains of $2.1 million for the same period in 2014. The investment gains recorded in the third quarter of 2014 represents the sale of the Company's remaining trust preferred securities that were sold at a market price significantly higher than the previously impaired book value of the securities.

Non-Interest Income.  Non-interest income increased by $218,000, or 2.9%, to $7.8 million for the three months ended September 30, 2015 from $7.6 million for the three months ended September 30, 2014. For the nine months ended September

40


30, 2015, non-interest income increased by $508,000, or 2.1%, to $24.4 million from $23.9 million for the nine months ended September 30, 2014.  

Revenue derived from commissions and fees on sales of non-banking products increased $257,000, or 4.0%, to $6.6 million during the three months ended September 30, 2015 as compared with $6.4 million during the three months ended September 30, 2014. Revenue derived from non-banking subsidiaries increased $833,000, or 4.2%, to $20.6 million for the nine months ended September 30, 2015 as compared with $19.8 million for the nine months ended September 30, 2014. The increase was primarily due to the continued efforts to increase new business as well as maintaining existing account relationships.
 
Deposit account service fees decreased $19,000, or 2.6%, to $705,000 for the three months ended September 30, 2015 compared to $724,000 during the same three months ended in 2014. For the nine months ended September 30, 2015, deposit account service fees decreased $29,000 as compared with the same period in 2014.

Excluding deposit account service fees, other operating income decreased $20,000, or 4.4%, to $439,000 for the three months ended September 30, 2015 as compared to $459,000 during the three months ended September 30, 2014. For the nine months ended September 30, 2015, other operating income, excluding deposit account service fees, decreased $296,000, or 14.7%, to $1.7 million as compared to $2.0 million for the same period in 2014. The decrease for the nine months from the prior year was primarily the result of the receipt during the second quarter of 2014 of $614,000 from the proceeds of a bank-owned like insurance policy partially offset by a partial recovery of a previously charged off asset in the amount of $316,000 during the first quarter 2015.

Mortgage loan sale and servicing income decreased $94,000 to $271,000 for the nine months ended September 30, 2015 as compared with $365,000 for the nine months ended September 30, 2014. The Bank sells substantially all of its newly originated fixed-rate residential mortgage loans 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.
 
Non-Interest Expense.  Non-interest expense increased by $539,000, or 4.9%, to $11.6 million for the three months ended September 30, 2015 from $11.0 million for the three months ended September 30, 2014.  For the nine months ended September 30, 2015, non-interest expense increased $2.0 million, or 6.0%, to $35.3 million as compared with $33.3 million for the same period in 2014. Excluding merger related expenses, non-interest expense increased $419,000, or 1.3%, to $33.7 million for the nine months ended September 30, 2015 as compared with $33.3 million for the same period in 2014. The increase in non-interest expense excluding merger related expenses was primarily due to an increase in equipment and occupancy costs related to the new building for our Syracuse-based insurance and financial services businesses.

 Merger-related expenses of $1.7 million for the nine months ended September 30, 2015 represent legal and other expenses incurred with the pending acquisition by Community Bank System, Inc., which is expected to close in December 2015, subject to regulatory approval.

Salaries, wages and other compensation paid to the employees of Oneida Financial Corp. during the three months ended September 30, 2015 was $7.3 million; a decrease of $106,000, or 1.4%, from the third quarter of 2014. Compensation expense for the nine months ended September 30, 2015 was $21.8 million; a decrease of $22,000, or 0.0%, as compared with compensation expense of $21.9 million for the same period in 2014.
 
Building and occupancy expense increased $212,000, or 16.9%, to $1.5 million for the three months ended September 30, 2015 as compared to $1.3 million during the three months ended September 30, 2014. For the nine months ended September 30, 2015, building and occupancy expense increased $271,000, or 7.1%, to $4.1 million as compared with $3.8 million for the same period in 2014. The increase in building and occupancy expense for the three months and nine months ended September 30, 2015 compared to the same period in 2014 is due to the new building for our Syracuse-based insurance and financial services businesses.
 
Other operating expenses increased $32,000, or 1.3%, to $2.4 million for the three months ended September 30, 2015 as compared to $2.4 million during the three months ended September 30, 2014. For the nine months ended September 30, 2015, other operating expenses increased $170,000, or 2.2%, to $7.8 million as compared with $7.6 million for the same period in 2014. The increase in other operating expenses was primarily the result of an increase in consulting and related expenses associated with the sales of insurance and other non-banking products through our subsidiaries.

Provision for Income Taxes.  Provision for income taxes was $426,000 for the three months ended September 30, 2015, an increase of $61,000 from the third quarter 2014 income tax provision of $365,000.  For the nine months ended September 30, 2015, the provision for income taxes was $1.4 million, a decrease of $206,000 from $1.6 million for the same period in 2014. The

41


effective tax rate was 29.8% during the first nine months of 2015 as compared with an effective tax rate of 24.8% for the same time period in 2014. The increase in the effective tax rates for both the quarter and year-to date 2015 as compared to the same period in 2014 was due to changes in the Bank’s overall tax rate expected to be recognized for the full year. The increase in the overall tax rate expected for 2015 was due largely to the non-deductibility of merger-related expenses, decreases in tax exempt municipal income as well as changes in New York State tax laws effective January 1, 2015.

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 2015, loan originations totaled $45.8 million compared to $34.4 million during the third quarter of 2014. There were no purchases of securities available-for-sale during the third quarter of 2015 as compared to $1.8 million during the third quarter of 2014.
 
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, 2015, the Company had outstanding commitments to originate loans of approximately $6.7 million, which generally have an expiration period of less than 120 days. Commitments to sell residential mortgages amounted to $85,000 at September 30, 2015 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 $56.9 million at September 30, 2015 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, 2015, the total of cash, interest-earning demand accounts and federal funds sold was $70.6 million.

On July 2, 2013, the Federal Reserve Board and FDIC approved final rules implementing changes to the regulatory capital framework for financial institutions. The final rules, which are subject to a multi-year phase-in period, began for the Bank on January 1, 2015. Under the final rules, minimum requirements increased for both the quantity and quality of capital held by the Bank. The final rules include a new minimum common equity Tier 1 capital to risk-weighted assets (CET) ratio of 4.5%, in addition to raising the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and requiring a minimum leverage ratio of 4.0%. The final rules also established a new capital conservation buffer of 2.5% of risk-weighted assets, which is phased-in over a four-year period beginning January 1, 2016.

42



At September 30, 2015, the Bank exceeded all regulatory capital requirements. The current requirements and the actual levels for the Bank at September 30, 2015 and December 31, 2014 are as follows:
 
 
Actual
 
For Capital
Adequacy Purposes
 
Capitalized Under
Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
As of September 30, 2015:
 

 
 

 
 

 
 

 
 

 
 

Total Capital
 

 
 

 
 

 
 

 
 

 
 

(to Risk Weighted Assets)
$
78,168

 
16.96
%
 
$
36,877

 
8
%
 
$
46,096

 
10
%
Tier I Capital
 

 
 

 
 

 
 

 
 

 
 

(to Risk Weighted Assets)
$
74,725

 
16.21
%
 
$
27,658

 
6
%
 
$
36,877

 
8
%
CET Risk-based Capital
 
 
 
 
 
 
 
 
 
 
 
(to Risk Weighted Assets)
$
74,725

 
16.21
%
 
$
20,743

 
4.5
%
 
$
29,962

 
6.5
%
Tier I Capital
 

 
 

 
 

 
 

 
 

 
 

(to Average Assets)
$
74,725

 
9.37
%
 
$
31,887

 
4
%
 
$
39,858

 
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, 2014:
 

 
 

 
 

 
 

 
 

 
 

 
Total Capital
 

 
 

 
 

 
 

 
 

 
 

 
(to Risk Weighted Assets)
$
75,363

 
16.54
%
 
$
36,456

 
8
%
 
$
45,570

 
10
%
 
Tier I Capital
 

 
 

 
 

 
 

 
 

 
 

 
(to Risk Weighted Assets)
$
71,861

 
15.77
%
 
$
18,228

 
4
%
 
$
27,342

 
6
%
 
Tier I Capital
 

 
 

 
 

 
 

 
 

 
 

 
(to Average Assets)
$
71,861

 
9.36
%
 
$
30,720

 
4
%
 
$
38,400

 
5
%


43


ONEIDA FINANCIAL CORP. 
SELECTED FINANCIAL RATIOS
At and for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)

(Annualized where appropriate)
 
Three Months Ending September 30,
 
Nine Months Ending September 30,
 
2015
 
2014
 
2015
 
2014
Performance Ratios:
 

 
 

 
 

 
 

Return on average assets
0.40
%
 
0.76
%
 
0.52
%
 
0.83
%
Return on average equity
3.39
%
 
6.06
%
 
4.46
%
 
6.87
%
Return on average tangible equity
4.64
%
 
8.34
%
 
6.09
%
 
9.56
%
Interest rate spread
2.80
%
 
2.95
%
 
2.75
%
 
2.89
%
Net interest margin
2.84
%
 
3.02
%
 
2.80
%
 
2.96
%
Efficiency ratio
89.46
%
 
87.05
%
 
88.34
%
 
85.32
%
Non-interest income to average total assets
3.78
%
 
3.92
%
 
3.88
%
 
4.12
%
Non-interest expense to average total assets
5.63
%
 
5.72
%
 
5.62
%
 
5.74
%
Average interest-earning assets as a ratio to average interest-bearing liabilities
117.23
%
 
117.62
%
 
116.61
%
 
116.16
%
Asset Quality Ratios:
 

 
 

 
 

 
 

Non-performing assets to total assets
0.04
%
 
0.11
%
 
0.04
%
 
0.11
%
Non-performing loans to total loans
0.08
%
 
0.17
%
 
0.08
%
 
0.17
%
Net charge-offs to average loans
0.00
%
 
0.01
%
 
0.02
%
 
0.03
%
Allowance for loan losses to non-performing loans
1,039.88
%
 
575.12
%
 
1,039.88
%
 
575.12
%
  Allowance for loan losses to loans receivable
0.87
%
 
0.98
%
 
0.87
%
 
0.98
%
Capital Ratios:
 

 
 

 
 

 
 

Average equity to average total assets
11.82
%
 
12.50
%
 
11.65
%
 
12.14
%
Equity to total assets (end of period)
11.91
%
 
12.06
%
 
11.91
%
 
12.06
%
Tangible equity to tangible assets (end of period)
8.99
%
 
9.01
%
 
8.99
%
 
9.01
%

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, 2015, 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, 2015, the Bank had $94.3 million in time deposits scheduled to mature within one year. At that date, the average maturity of our investment portfolio was 3.7 years, and fixed rate residential mortgage loans totaled $79.6 million representing 20.0% 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 of Operations” in the Company’s 2014 Annual Report to Stockholders.  There has been no material change in the Company’s interest rate risk profile since December 31, 2014.

44


ITEM 4.                                                  Controls and Procedures
 
Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we 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 Principal Executive Officer and Principal Financial Officer concluded that, as of the period covered by this quarterly report, the Company’s disclosure controls and procedures were 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.


45


ONEIDA FINANCIAL CORP.
AND SUBSIDIARIES
 
Part II — Other Information
 
Item 1.                                                           Legal Proceedings
 
On March 13, 2015, the Company filed a complaint in the Supreme Court of the State of New York, County of Madison, against FinPro, Inc. (“FinPro”). The Company’s complaint alleged that FinPro has wrongfully demanded a $1.42 million services fee as a result of the Company's entering into the merger even though FinPro has provided no services in connection with the merger and has no right, contractual or otherwise, to such a fee. In November 2015, we entered into a settlement of the litigation that included, among other things, a payment to FinPro. The settlement was not material to either the current or future years.

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, 2014.

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, 2015.

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


46


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 Principal 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, 2015, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Condition, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statement 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.
 






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, 2015
By:
/s/ Eric E. Stickels
 
 
Eric E. Stickels
 
 
President and Chief Operating Officer
Date:
November 13, 2015
By:
/s/ Deresa F. Durkee
 
 
Deresa F. Durkee
 
 
Senior Vice President and Chief Financial Officer


48