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| ONFC > SEC Filings for ONFC > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
This section presents Management's discussion and analysis of and changes to the Company's consolidated financial results of operations and condition and should be read in conjunction with the Company's financial statements and notes thereto included herein.
When used in this quarterly report the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.
The Company does not undertake, and specifically declines any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
GENERAL
Oneida Financial Corp. is the parent company of Oneida Savings Bank ("the Bank"). The Company conducts no business other than holding the common stock of the Bank and general investment activities resulting from the capital it holds. Consequently, the net income of the Company is primary derived from its investment in the Bank. The Bank's results of operations are primarily dependent on its net interest income, which is the difference between interest income earned on its investments in loans, investment securities and mortgage-backed securities and its cost of funds consisting of interest paid on deposits and borrowings. The Bank's net income is also affected by its provision for loan losses, as well as by the amount of other income, including income from fees and service charges, revenue derived from the insurance agency and employee benefit services provided by subsidiaries of the Bank, net gains and losses on sales of investments and loans, and operating expenses such as employee compensation and benefits, FDIC insurance assessments, occupancy and equipment costs and income taxes. Earnings of the Bank are also affected significantly by general economic and competitive conditions, particularly changes in market interest rates, which tend to be highly cyclical, and government policies and actions of regulatory authorities, which events are beyond the control of the Bank. The Company has four primary business segments; it's banking franchise, insurance activities, benefit consulting activities and risk management activities. However, only the banking franchise is deemed material to the Bank's financial condition and results of operations. Consequently, segment disclosures are not presented in the Management's Discussion and Analysis. At December 31, 2007 and September 30, 2008 the Company had 7,726,710 shares and 7,726,810 shares outstanding of which 4,309,750 were held by Oneida Financial MHC, the Company's mutual holding company parent.
RECENT DEVELOPMENTS
The Company announced a semi-annual cash dividend of $0.24 per share which was paid to its shareholders as of July 29, 2008, on August 12, 2008. Oneida Financial MHC waived its receipt of dividends.
On April 2, 2007, the Bank completed its acquisition of Vernon Bank Corporation, the stock holding company of the National Bank of Vernon. Under terms of the agreement, Oneida Savings Bank paid $11.4 million or $54.00 in cash for each of the 210,447 outstanding shares of common stock of Vernon Bank Corporation. The results of Vernon Bank Corporation are included in the consolidated financial statements since April 2, 2007.
Assets acquired as a result of the acquisition totaled $66.9 million and resulted in additional goodwill and core deposit intangibles of approximately $5.9 million. Amortization expense of the core deposit intangible was $60,000 for the three months ended September 30, 2008 and $185,000 for the nine months ended September 30, 2008. Amortization expense was $66,000 and $132,000 for the three months and nine months ended September 30, 2007. The core deposit intangible is being amortized using a 10-year accelerated method amortization term.
Effective January 1, 2008, the Company adopted FASB No. 157 Fair Value Measurements and FASB No. 159, The Fair Value Option for Financial Assets and Financial Liabilities. FASB No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. Footnote J to the consolidated financial statements sets forth the fair value measurements using Level 1, Level 2 or Level 3 as defined in the FASB as of September 30, 2008. Level 3 assets totaled $11.9 million and $10.5 million as of September 30, 2008 and December 31, 2007 respectively and represented 2.2% and 2% of total assets respectively. The assets include trust preferred securities and corporate debt and equity securities which are all rated investment grade except for three trust preferred securities that totaled $4.0 million as of September 30, 2008. There was $4.3 million of assets transferred into the Level 3 category during the quarter. The assets transferred represented additional trust preferred securities that there currently is no active market for. In addition, for the Level 3 assets, $2.0 million represents trading securities whose change in fair value for the three months ended and nine months ended September 30, 2008 of a $10,000 gain and an $81,000 gain respectively were recognized in the consolidated statement of operations. The remaining Level 3 assets of $9.8 million had an unrealized loss at September 30, 2008 of $4.7 million.
FASB No. 159 provides companies with the option to report selected financial assets and liabilities at fair value and establishes disclosure requirements. Footnote J to the consolidated financial statements sets forth the assets which management has elected to report at fair value. As of January 1, 2008, Management has elected to apply FASB 159 to preferred and common equity securities currently in the portfolio. These securities do not have stated market values and whose fair value fluctuates with market changes. As of the three months ended and nine months ended September 30, 2008, the change in fair value of $6.4 million loss and $7.0 million loss respectively was recognized in the consolidated statement of operations. The significant change in fair value was due to the significant decline in value of Federal Home Loan Mortgage Corporation ("Freddie Mac") perpetual preferred stock following the announcement by the United States Treasury and the Federal Housing Finance Agency ("the FHFA") that the government sponsored enterprise was placed under conservatorship. Additionally, the FHFA eliminated the payment of dividends on common stock and preferred stock and assumed the powers of the Board and management of Freddie Mac which adversely impacted the market value of this investment.
The Company has a $1.0 million Lehman Brothers Holding Inc. medium term fixed rate note. The security has been considered other-than-temporarily impaired as a result of Lehman Brothers having filed a Chapter 11 bankruptcy petition on September 15, 2008. As a result, the Company recorded a non-cash charge to earnings of $832,000 during the third quarter 2008.
During the first quarter 2008 we renamed our MacDonald/Yando Agency Inc. subsidiary to "Workplace Health Solutions, Inc."("WHS") WHS is designed to develop a series of proactive medical services to help mitigate and prevent work related injuries. This subsidiary was designed to complement our other subsidiaries with an overall philosophy of innovative risk management services.
FINANCIAL CONDITION
ASSETS. Total assets at September 30, 2008 were $549.9 million, an increase of $27.6 million from $522.3 million at December 31, 2007. Mortgage-backed securities increased $29.0 million reflecting purchases of $53.3 million of mortgage-backed securities offset by the principal collected on and proceeds from sales and maturities of mortgaged-backed securities. Investment securities decreased $26.6 million due to principal collected on and proceeds from sales and maturities of investment securities of $32.0 million offset by purchases of investment securities. Market rate fluctuations during the quarter have resulted in mortgage-backed securities being a more attractive vehicle for the investment of proceeds from called securities and excess cash and cash equivalents. Loans receivable, including loans held for sale, increased $14.3 million to $298.7 million at September 30, 2008 compared with $284.4 million at December 31, 2007. At September 30, 2008 total consumer loans increased by $2.4 million from December 31, 2007. Residential loans increased by $14.7 million since December 31, 2007, after the sale of $14.3 million of fixed-rate residential real estate loans in the secondary market during the nine month period. At September 30, 2008, total commercial real estate loans decreased by $4.7 million while commercial business loans increased by $1.9 million from December 31, 2007. Goodwill and other intangibles totaled $25.2 million as of September 30, 2008 and $25.4 million at December 31, 2007. Additional goodwill in the amount of $129,000 was recorded for the contingent purchase payment made to Benefit Consulting Group LLC. Under the terms of the agreement, contingent purchase payments based on future performance levels may be made over a five-year period starting with the year ended December 31, 2006. Offsetting this payment was the amortization expense recorded on a monthly basis.
The allowance for loan losses was $2.5 million at September 30, 2008 and December 31, 2007. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance required by using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. Quarterly, management evaluates the adequacy of the allowance and determines the appropriate provision for loan losses by applying a range of estimated loss percentages to each category of performing loans and classified loans. The allowance adjustment is based upon the net change in each portfolio category, as well as adjustments related to impaired loans, since the prior quarter. Management monitors and modifies the level of the allowance for loan losses to maintain it at a level which management considers adequate to provide for probable incurred loan losses. A loan is considered impaired, based on current information and events, if it is probable that the Bank will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. The measurement of impaired loans is generally based on the present value of expected future cash flows discounted at the historical effective interest rate, except that all collateral- dependent loans are measured for impairment based on the estimated fair value of the collateral. At September 30, 2008 the allowance for loan losses as a percentage of net loans receivable was 0.83% as compared to 0.88% as of December 31, 2007.
LIABILITIES. Total liabilities increased by $36.2 million to $499.2 million at September 30, 2008 from $463.0 million at December 31, 2007. The increase is primarily the result of an increase in interest-bearing deposits of $39.3 million. Contributing to the increase in deposits has been an increase in municipal deposits offered through the Bank's limited purpose commercial banking subsidiary, State Bank of Chittenango. Municipal deposits increased $31.5 million from December 31, 2007 to September 30, 2008. Non-interest bearing deposits increased $200,000 from $65.7 million at December 31, 2007 to $65.9 million at September 30, 2008. Borrowings decreased $4.5 million from December 31, 2007 to September 30, 2008 reflecting matured borrowings.
STOCKHOLDERS' EQUITY. Total stockholders' equity decreased by $8.6 million to $50.7 million at September 30, 2008 as compared to $59.3 million at December 31, 2007. Stockholders' equity decreased due to the after-tax net loss of $3.4 million, the valuation adjustments of $3.7 million made for the Company's available for sale investment and mortgage-backed securities and $1.7 million due to the payment of semiannual cash dividends of $0.24.
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on interest-earning assets and expense on interest-bearing liabilities. Net interest income also depends on the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on the assets or liabilities.
AVERAGE BALANCE SHEET. The following tables set forth certain information relating to the Company for the three and nine months ended September 30, 2008 and 2007 and for the year ended December 31, 2007. For the periods indicated, the 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 percentages. No tax equivalent adjustments were made. The average balance is computed based upon an average daily balance.
TABLE 1. Average Balance Sheet.
Three Months Ended September 30,
---------------------------------------------------------------------------
2008 2007
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Assets Balance Paid Rate Balance Paid Rate
------ ----------- -------- ------- ----------- -------- -------
Interest-earning Assets: (Dollars in Thousands)
------------------------
Loans Receivable $ 298,448 $ 4,634 6.21% $ 280,957 $ 4,816 6.86%
Investment and Mortgage-Backed
Securities 151,614 1,862 4.91% 110,195 1,421 5.16%
Federal Funds 3,216 19 2.36% 14,356 216 6.02%
Equity Securities 12,962 136 4.20% 15,328 206 5.38%
----------- -------- ------- ----------- -------- -------
Total Interest-earning Assets 466,240 6,651 5.71% 420,836 6,659 6.33%
----------- -------- ------- ----------- -------- -------
Non interest-earning Assets:
----------------------------
Cash and due from banks 12,020 15,392
Other assets 75,544 72,511
----------- -----------
Total assets $ 553,804 $ 508,739
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Interest-bearing Liabilities:
-----------------------------
Money Market Deposits $ 88,816 $ 433 1.94% $ 60,662 $ 493 3.22% 3.14%
Savings Accounts 79,718 161 0.80% 76,648 154 0.80% 0.77%
Interest-bearing Checking 40,652 56 0.55% 38,531 72 0.74% 0.74%
Time Deposits 162,388 1,431 3.51% 144,200 1,696 4.67% 4.60%
Borrowings 57,306 645 4.48% 56,400 693 4.87% 4.94%
Notes Payable 70 1 5.68% 681 9 5.24% 5.02%
----------- -------- ------- ----------- -------- ------- ----
Total Interest-bearing Liabilities 428,950 2,727 2.53% 377,122 3,117 3.28% 3.27%
----------- -------- ------- ----------- -------- ------- ----
Non-interest-bearing Liabilities:
---------------------------------
Demand deposits 65,681 64,816
Other liabilities 4,274 8,772
----------- -----------
Total liabilities $ 498,905 $ 450,710
----------- -----------
Stockholders' equity 54,899 58,029
----------- -----------
Total liabilities and stockholders'
equity $ 553,804 $ 508,739
=========== ===========
Net Interest Income $ 3,924 $ 3,542
======== ========
Net Interest Spread 3.18% 3.05% 3.02%
======= ======= ====
Net Earning Assets $ 37,290 $ 43,714
=========== ===========
Net yield on average
Interest-earning assets 3.37% 3.37%
======== ========
Average interest-earning
assets to average
Interest-bearing liabilities 108.69% 111.59%
======== ========
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Nine Months Ended September 30,
-------------------------------------------------------------------
2008 2007
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Assets Balance Paid Rate Balance Paid Rate
------ ----------- -------- ------- ----------- -------- -------
Interest-earning Assets: (Dollars in Thousands)
------------------------
Loans Receivable $ 290,150 $ 13,857 6.37% $ 267,270 $ 13,669 6.82%
Investment and Mortgage-Backed
Securities 143,993 5,410 5.01% 103,309 3,904 5.04%
Federal Funds 7,787 160 2.74% 13,706 639 6.22%
Equity Securities 14,891 668 5.98% 15,325 603 5.25%
----------- -------- ------- ----------- -------- -------
Total Interest-earning Assets 456,821 20,095 5.87% 399,610 18,815 6.28%
----------- -------- ------- ----------- -------- -------
Non interest-earning Assets:
----------------------------
Cash and due from banks 12,408 14,313
Other assets 74,847 69,986
----------- -----------
Total assets $ 544,076 $ 483,909
=========== ===========
Liabilities and Stockholders' Equity
------------------------------------
Interest-bearing Liabilities:
-----------------------------
Money Market Deposits $ 79,888 $ 1,223 2.04% $ 53,587 $ 1,274 3.18%
Savings Accounts 77,097 459 0.80% 74,276 423 0.76%
Interest-bearing Checking 40,104 184 0.61% 35,425 194 0.73%
Time Deposits 161,931 4,757 3.92% 134,282 4,589 4.57%
Borrowings 56,781 1,954 4.60% 60,740 2,233 4.92%
Notes Payable 106 4 5.04% 993 37 4.98%
----------- -------- ------- ----------- -------- -------
Total Interest-bearing Liabilities 415,907 8,581 2.76% 359,303 8,750 3.26%
----------- -------- ------- ----------- -------- -------
Non-interest-bearing Liabilities:
---------------------------------
Demand deposits 64,227 59,870
Other liabilities 6,248 6,401
----------- -----------
Total liabilities $ 486,382 $ 425,574
----------- -----------
Stockholders' equity 57,695 58,335
----------- -----------
Total liabilities and stockholders' equity $ 544,077 $ 483,909
=========== ===========
Net Interest Income $ 11,514 $ 10,065
======== ========
Net Interest Spread 3.11% 3.02%
======= =======
Net Earning Assets $ 40,914 $ 40,307
=========== ===========
Net yield on average
Interest-earning assets 3.36% 3.36%
======== ========
Average interest-earning
assets to average
Interest-bearing liabilities 109.84% 111.22%
======== ========
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RESULTS OF OPERATIONS
GENERAL. The net loss for the three months ended September 30, 2008 was $4.4 million or ($0.57) per share compared with net income of $931,000 or $0.12 per share for the three months ended September 30, 2007. The net loss was primarily the result of non-cash investment charges of $7.3 million, an increase in other expenses and an increase in the provision for loan losses offset by an increase in net interest income and a decrease in the provision for income taxes. The net loss for the nine months ended September 30, 2008 was $3.4 million, a decrease of $5.8 million from net income of $2.4 million for the nine months ended September 30, 2007. The net loss from operations for the nine months, which excludes a non-cash impairment charge of a medium term note and the non-cash charge to earnings recognized in the connection with the adoption of FASB159 (The Fair Value Option of Financial Assets and Financial Liabilities) $7.9 million, net of $2.1 million in income taxes, was $2.4 million or $0.31 per basic share. This compares to net income from operations for the nine months ending September 30, 2007 of $2.4 million, or $0.32 per basic share. The net income excluding the non-cash charge to earnings remained stable as other income remained stable, and other expenses increased offsetting an increase in net interest income. The Company believes these non-GAAP financial measures provide a meaningful comparison of the underlying operational performance of the Company, and facilitate investors' assessments of business and performance trends in comparison to others in the financial services industry. In addition, the Company believes the exclusion of these items enables management to perform a more effective evaluation and comparison of the Company's results and assess performance in relation to the Company's ongoing operations. The acquisition of The National Bank of Vernon and the opening of a banking, insurance and retail center in the Griffiss Business and Technology Park in Rome, New York both . . .
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