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ONFC > SEC Filings for ONFC > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for ONEIDA FINANCIAL CORP. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for ONEIDA FINANCIAL CORP.


14-May-2013

Quarterly Report


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. ("the Company's") consolidated financial results of operations and condition and should be read in conjunction with the Company's financial statements and notes thereto included herein.

When used in this quarterly report the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically declines any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

GENERAL

Oneida Financial Corp. is the parent company of Oneida Savings Bank ("the Bank"). The Company is a Maryland corporation and the successor to a Federal corporation of the same name through a second step conversion transaction completed on July 7, 2010. The Company conducts no business other than holding the common stock of the Bank and general 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 agency, benefit consulting and risk management subsidiaries and fees from trust services, and net gains and losses on sale of investments. Interest income and non-interest income are offset by provisions for loan losses, general administrative and other expenses, including employee compensation and benefits and occupancy and equipment costs, as well as by state and federal income tax expense.

Our results of operations are also significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities. Future changes in applicable law, regulation or government policies may materially affect our financial condition and results of operations.

RECENT DEVELOPMENTS

The Company announced on March 28, 2013, a quarterly cash dividend of $0.12 per share, which was paid on April 23, 2013 to its shareholders of record on April 9, 2013.

During the quarter ended March 31, 2013, the Bank received regulatory approval to reorganize the business functions of its wholly-owned subsidiaries. While the reorganization will result in changes in the net income and operations of the individual subsidiaries, it will not have an impact in the basis of presentation contained in this Form 10-Q report. For more information, see Note E - Segment Information.

At December 31, 2012, the Company completed its acquisition of Schenectady Insuring Agency, Inc., an insurance agency operating in Schenectady, New York. The Company paid $795,149 in cash and established a note payable for $1.0 million to be paid monthly over 24 months with interest at 3.00% per annum to acquire 100% of the capital stock of the Schenectady Insuring Agency, Inc. Goodwill in the amount of $1.5 million and intangible assets in the amount of $929,000 were recorded in conjunction with the


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acquisition. Schenectady Insuring Agency, Inc. which was merged into Bailey and Haskell Associates, Inc. effective December 31, 2012. The Company began payment on the note in 2013.

FINANCIAL CONDITION

ASSETS. Total assets at March 31, 2013 were $719.7 million, an increase of $38.3 million, or 5.6%, from $681.4 million at December 31, 2012. The increase in total assets was primarily attributable to an increase in cash and cash equivalents and loans receivable.

Cash and cash equivalents increased $34.1 million, or 172.2%, to $53.9 million at March 31, 2013 from $19.8 million at December 31, 2012. The increase in cash and cash equivalents reflects the increase in retail and municipal deposits and the timing of investing the excess cash on hand in higher yielding securities and loans.

Trading securities decreased $1.7 million, or 29.9%, to $3.9 million at March 31, 2013 as compared with $5.6 million at December 31, 2012. 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 $2.5 million of common equity securities offset by an increase in fair value during the first three months of 2013 that was reflected through the income statement.

Mortgage-backed securities increased $780,000, or 0.9%, to $91.7 million at March 31, 2013 as compared with $90.9 million at December 31, 2012. Investment securities increased $208,000, or 0.1%, to $166.7 million at March 31, 2013 as compared to $166.5 million at December 31, 2012. The increase in mortgage-backed and investment securities was due to the reinvestment of proceeds received from sales, calls and principal pay downs during the quarter in order to obtain a higher return than is obtainable from cash and cash equivalents.

Loans receivable, including loans held for sale, increased $6.0 million, or 1.9%, to $317.7 million at March 31, 2013 as compared with $311.7 million at December 31, 2012. We continue to maintain a diversified loan portfolio. The increase in net loan balances reflect the Company's continued loan origination efforts partially offset by loan sales activity. We sold $3.8 million in fixed rate residential loans, which represents the majority of the Company's fixed-rate residential loan origination volume during the three months ended March 31, 2013 with terms exceeding 15 years. Loan originations during the first three months of 2013 totaled $22.8 million as compared to total loan originations during the three months ended March 31, 2012 of $25.6 million.

LIABILITIES. Total liabilities increased by $37.4 million, or 6.4%, to $625.8 million at March 31, 2013 from $588.4 million at December 31, 2012. The increase was the result of an increase in deposits of $39.7 million and an increase in other liabilities of $2.7 million offset partially by a decrease in borrowings of $5.0 million.

Deposit accounts increased $39.7 million, or 7.0%, to $608.0 million at March 31, 2013 from $568.3 million at December 31, 2012. Interest-bearing deposit accounts increased by $44.1 million, or 9.0%, to $536.6 million at March 31, 2013 from $492.5 million at December 31, 2012. Non-interest bearing deposit accounts decreased $4.4 million, or 5.8%, to $71.4 million at March 31, 2013 from $75.8 million at December 31, 2012. The increase in deposit accounts was primarily a result of increases in both our retail deposits and municipal deposits offered through our limited purpose commercial banking subsidiary, State Bank of Chittenango. Retail deposits increased $9.2 million or 2.0% to $471.7 million at March 31, 2013 from $462.5 million at December 31, 2012. Municipal deposits increased $30.5 million to $136.3 million at March 31, 2013 from $105.8 million at December 31, 2012. This increase was concurrent with local tax collections by various municipalities.

Borrowings decreased $5.0 million, or 83.3%, to $1.0 million at March 31, 2013 from $6.0 million at December 31, 2012. The decrease in borrowings was due to our decision not to renew the Federal Home Loan Bank ("FHLB") advances that matured during the first three months of 2013. At March 31, 2013 our overnight line of credit was not in use. Our overnight line of credit is used from time to time for liquidity management.

Other liabilities increased $2.7 million, or 19.1%, to $16.8 million at March 31, 2013 from $14.1 million at December 31, 2012. The increase in other liabilities is primarily due to an increase in investment purchases with trade dates in March and settlement dates after the quarter end.

STOCKHOLDERS' EQUITY. Total stockholders' equity at March 31, 2013 was $93.9 million, an increase of $845,000, or 0.9%, from $93.0 million at December 31, 2012. The increase in stockholders' equity was a result of net income of $2.0 million for the three months ended March 31, 2013, partially offset by the payment of cash dividends to stockholders. Stockholders were paid quarterly dividends during the first three months of 2013 totaling $0.12 per share resulting in a reduction in stockholders' equity of $843,000. In addition, there was a decrease in the accumulated other comprehensive income of $468,000 at March 31, 2013 resulting from a decrease in the fair value of mortgage-backed and investment securities.


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ANALYSIS OF NET INTEREST INCOME

Oneida Savings Bank's principal business has historically consisted of offering savings accounts and other deposits to the general public and using the funds from such deposits to make loans secured by residential and commercial real estate, as well as consumer and commercial business loans. Oneida Savings Bank also invests a significant portion of its assets in investment securities and mortgage-backed securities both of which have classifications of available-for-sale and held-to-maturity. Our results of operations depends primarily upon net interest income, which is the difference between income earned on interest-earning assets, such as loans and investments, and interest paid on interest-bearing liabilities, such as deposits and borrowings. Net interest income is directly affected by changes in volume and mix of interest-earning assets and interest-bearing liabilities which support those assets, as well as the changing interest rates when differences exist in the repricing of assets or liabilities.

AVERAGE BALANCE SHEET. The following table sets forth certain information relating to our average balance sheet, average yields and costs, and certain other information for the three months ended March 31, 2013 and 2012 and for the year ended December 31, 2012. For the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities is expressed in thousands of dollars and rates. No tax equivalent adjustments were made. The average balance is computed based upon an average daily balance. Non-accrual loans and investments have been included in the average balances.


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TABLE 1. Average Balance Sheet.

                                                                    Three months ended March 31,                                                 Twelve Months Ended Dec. 31,
                                                        2013                                             2012                                                2012

                                       Average                                          Average
                                     Outstanding        Interest                      Outstanding        Interest                           Average             Interest
                                       Balance         Earned/Paid    Yield/Rate        Balance         Earned/Paid    Yield/Rate     Outstanding Balance     Earned/Paid     Yield/Rate
                                                                                                   (Dollars in Thousands)
  Assets
  Interest-earning assets:
  Loans receivable                 $      315,725     $     3,727         4.72 %    $      289,053     $     3,808         5.27 %    $       296,156         $     15,126         5.11 %
  Investment and mortgage-backed
  securities                              249,718           1,723         2.76 %           246,300           1,807         2.93 %            256,853                7,273         2.83 %
  Federal funds                            16,064               5         0.12 %            34,054               6         0.07 %             22,178                   22         0.10 %
  Equity securities                         5,172              23         1.78 %             7,020              70         3.99 %              6,929                  344         4.96 %
  Total interest-earning assets           586,679           5,478         3.73 %           576,427           5,691         3.95 %            582,116               22,765         3.91 %
  Non interest-earning Assets:
  Cash and due from banks                  11,595                                           11,995                                            11,154
  Other assets                             85,648                                           79,958                                            82,691
  Total assets                     $      683,922                                   $      668,380                                   $       675,961
  Liabilities and Stockholders'
  Equity
  Interest-bearing liabilities:
  Money market deposits            $      169,777     $       142         0.34 %    $      180,974     $       199         0.44 %    $       176,382         $        751         0.43 %
  Savings accounts                        119,200              76         0.26 %           105,886              68         0.26 %            111,387                  303         0.27 %
  Interest-bearing checking                75,069              14         0.08 %            66,029              14         0.09 %             67,322                   55         0.08 %
  Time deposits                           138,623             374         1.09 %           137,548             426         1.25 %            137,250                1,630         1.19 %
  Borrowings                                2,830              28         4.01 %            11,000             118         4.31 %             10,481                  431         4.11 %
  Notes payable                               957               7         2.97 %               183               1         2.20 %                109                    3         2.75 %
  Total interest-bearing
  liabilities                             506,456             641         0.51 %           501,620             826         0.66 %            502,931                3,173         0.63 %
  Non-interest-bearing
  Liabilities:
  Demand deposits                          73,136                                           67,870                                            72,288
  Other liabilities                        10,613                                           10,248                                            10,728
  Total liabilities                $      590,205                                   $      579,738                                   $       585,947
  Stockholders' equity                     93,717                                           88,642                                            90,014
  Total liabilities and
  stockholders' equity             $      683,922                                   $      668,380                                   $       675,961
  Net Interest Income                                 $     4,837                                      $     4,865                                           $     19,592
  Net Interest Spread                                                     3.22 %                                           3.29 %                                                 3.28 %
  Net Earning Assets               $       80,223                                   $       74,807                                   $        79,185
  Net yield on average
  Interest-earning assets                                    3.30 %                                           3.38 %                                                 3.37 %
  Average interest-earning assets
  to average Interest-bearing
  liabilities                                              115.84 %                                         114.91 %                                               115.74 %


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RESULTS OF OPERATIONS

General. Net income for the three months ended March 31, 2013 was $2.0 million compared to $2.0 million for the three months ended March 31, 2012. For the three months ended March 31, 2013, basic and diluted net income per share was $0.28 as compared with basic and diluted net income per share of $0.29 for the three months ended March 31, 2012.

Net income from operations for the first quarter of 2013, excluding the non-cash charges and benefits to earnings, as referenced in the table below, was $1.5 million. This compares to net income from operations for the 2012 first quarter of $1.7 million. The decrease in operating earnings in the first quarter of 2013 as compared with the same period last year was primarily the result of a decrease in net interest income and an increase in non-interest expense; partially offset by an increase in non-interest income, a decrease in the provision for loan losses and a decrease in the provision for income taxes. The table below summarizes the Company's operating results excluding these cumulative non-cash benefits related to the change in fair value of trading securities in each period.

Reported Results and Operating Results/Non-Gaap
(excluding non-cash gains and losses recognized under the fair value option)
(All amounts in thousands except net income per diluted share)

                                                  Three Months Ending           Three Months Ending
                                                    March 31, 2013                March 31, 2012
Net income attributable to Oneida Financial
Corp.                                         $               1,950         $               2,002
Less:
Change in fair value of investments                            (580 )                        (436 )
Income tax effect                                               144                           112
Operating results attributable to Oneida
Financial Corp.                               $               1,514         $               1,678
Reported net income per diluted share         $                0.22         $                0.25
Operating net income per diluted share        $                0.22         $                0.25

The change in fair value of investments for the three months ended March 31, 2013 in the table above excludes $239,000 in gains received upon the sale of certain trading assets during the period.

We believe these non-GAAP financial measures provide a meaningful comparison of the underlying operational performance of our business, and facilitate investors' assessments of business and performance trends in comparison to others in the financial services industry. In addition, we believe this alternative presentation of these items enables management to perform a more effective evaluation and comparison of our results and to assess overall performance of our business in relation to our ongoing operations.

Interest and Dividend Income. Interest and dividend income decreased by $213,000, or 3.7%, to $5.5 million for the three months ended March 31, 2013 from $5.7 million for the three months ended March 31, 2012. Interest and fees on loans decreased by $81,000 for the three months ended March 31, 2013 as compared with the same period in 2012. Interest and dividend income on mortgage-backed and other investment securities decreased $131,000 to $1.7 million for the three months ended March 31, 2013 from $1.9 million for the three months ended March 31, 2012. Interest income earned on federal funds sold decreased $1,000 during the three months ended March 31, 2013 as compared with the three months ended March 31, 2012.

For the three months ended March 31, 2013, the decrease in income on loans resulted from a decrease of 55 basis points in the average yield on loans to 4.72% from 5.27% offset by an increase of $26.6 million in the average balance of loans to $315.7 million in the first quarter of 2013 from $289.1 million in the first quarter of 2012. At March 31, 2013, net loans receivable were $317.7 million as compared with $286.1 million at March 31, 2012; an increase of 11.0%. During 2012, the Bank began retaining a portion of the one-to-four family residential mortgages with maturities less than 15 years. Residential mortgages increased $19.4 million from March 31, 2012 to March 31, 2013. The decrease in the average yield on loans is a result of the continued low market interest rate environment resulting in lower yields earned on new loans and variable rate loans.

The decrease in interest income from investment and mortgage-backed securities was the result of a decrease of 17 basis points in the average yield earned to 2.76% from 2.93% offset by an increase of $3.4 million in the average balance of investment and mortgage-backed securities to $249.7 million in the first quarter of 2013 from $246.3 million in the first quarter of 2012. The


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decrease in average yield is the result of lower market interest rates. The increase in the average balance of investment and mortgage-backed securities is the result of the timing of investing cash on hand during the first three months of 2013.

Interest income on federal funds sold decreased as a result of a decrease in the average balance of federal funds sold to $16.1 million during the first quarter of 2013 as compared with $34.1 million during the first quarter of 2012 partially offset by an increase in average yield of 5 basis points.

Income from equity securities decreased due to a decrease in the average balance to $5.2 million for the three months ended March 31, 2013 from $7.0 million for the three months ended March 31, 2012 as well as a decrease in the average yield of 221 basis points. The decrease in the average balance and average yield was the result of a called preferred equity security during the fourth quarter of 2012.

Interest Expense. Interest expense decreased $185,000, or 22.4%, to $641,000 for the three months ended March 31, 2013 from $826,000 for the three months ended March 31, 2012. The decrease in interest expense was primarily due to a decrease in interest paid on deposit accounts during the first quarter of 2013 of $101,000, decreasing to $606,000 from $707,000 during the first quarter of 2012. In addition, borrowing expense decreased to $28,000 for the three months ended March 31, 2013 compared with $118,000 for the three months ended March 31, 2012.

The decrease in interest expense paid on deposits was primarily due to a decrease in the average cost of deposits. Core deposits, consisting of money market accounts, savings accounts and interest-bearing checking accounts, experienced an increase in the average balance of $11.1 million, or 3.1%, to $364.0 million at an average cost of 0.26% during the first quarter of 2013 from $352.9 million at an average cost of 0.32% during the first quarter of 2012. During the same period the average balance of time deposits increased $1.1 million, or 0.8%, to $138.6 million in the first quarter of 2013 from $137.5 million during the first quarter of 2012 and the average rate paid on time deposits decreased 16 basis points.

The decrease in borrowing expense for the first quarter 2013 as compared to the first quarter 2012 was due to a decrease in the average balance of borrowings outstanding in the March 31, 2013 period to $2.8 million as compared with $11.0 million during the March 31, 2012 period as well as a 30 basis point decrease in the average rate paid on borrowed funds to 4.01% for the 2013 period. The decrease in borrowings was due to our decision not to renew the FHLB advances that matured during 2012 and 2013.

Provision for Loan Losses. The total provision for loan losses was $100,000 for the three months ended March 31, 2013 as compared to a provision of $150,000 for the three months ended March 31, 2012. Oneida Savings Bank establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level deemed appropriate to absorb probable incurred credit losses. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. Management continues to monitor the adequacy of the allowance for loan losses given the risk assessment of the loan portfolio and current economic conditions making appropriate provisions for loan losses on a quarterly basis.

The provision for loan losses made in the first quarter 2013 reflects changes in the composition of the portfolio and an improvement in our asset quality. Loans individually evaluated for impairment totaled $970,000 at March 31, 2013 and had an allocated allowance for loan loss reserve of $237,000. Loans individually evaluated for impairment totaled $1.1 million and had an allocated allowance for loan loss reserve of $237,000 at December 31, 2012. The decrease in loans individually evaluated for impairment is due to payments received on the outstanding loan balances.

Nonperforming loans totaled $683,000 or 0.21% of total loans at March 31, 2013 compared with $1.7 million or 0.58% of total loans at March 31, 2012. Net charge-off activity for the three months ended March 31, 2013 was $15,000 as compared with $43,000 in net charge-offs during the three months ended March 31, 2012. The balance of the allowance for loan losses was $2.9 million or 0.90% of loans receivable at March 31, 2013 compared with $3.0 million or 1.05% of loans receivable at March 31, 2012. The decrease in nonperforming loans and the balance of the allowance for loan losses from March 31, 2012 to March 31, 2013 . . .

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