<DOCUMENT> <TYPE>10-Q <SEQUENCE>1 <FILENAME>form10q-101878_onfc.txt <DESCRIPTION>10-Q <TEXT> SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 -------------------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2009 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from----------------------------- to----------------- Securities Exchange Act Number 000-25101 ONEIDA FINANCIAL CORP. ----------------------------- (Exact name of registrant as specified in its charter) Federal 16-1561678 ----------------------------- ----------------------------- (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 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 No 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 "accelerated filer", "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One): [ ] Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Smaller reporting company Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.). Yes ___ No _X_ Indicate by check mark whether the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes___ 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 7,790,352 shares of the Registrant's common stock outstanding as of August 1, 2009. <PAGE> ONEIDA FINANCIAL CORP. INDEX <TABLE> <CAPTION> Page ------- <S> <C> PART I. FINANCIAL INFORMATION Item 1. Financial Statements 1 Consolidated Statements of Condition (unaudited) 2 As of June 30, 2009 and December 31, 2008 Consolidated Statements of Operations (unaudited) 3 For the three and six months ended June 30, 2009 and 2008 Consolidated Statements of Comprehensive Income (unaudited) 4 For the three and six months ended June 30, 2009 and 2008 Consolidated Statements of Changes in Stockholders' Equity (unaudited) 5 For the three and six months ended June 30, 2009 and 2008 Consolidated Statements of Cash Flows (unaudited) 6 For the three and six months ended June 30, 2009 and 2008 Notes to Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition 25 And Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 34 Item 4T. Controls and Procedures 34 PART II. OTHER INFORMATION 35 Item 1. Legal Proceedings 35 Item 1a. Risk Factors 35 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 35 Item 3. Defaults Upon Senior Securities 36 Item 4. Submission of Matters to a Vote of Security Holders 36 Item 5. Other Information 36 Item 6. Exhibits 36 </TABLE> <PAGE> PART I. FINANCIAL INFORMATION Item I. Financial Statements Page 1 of 37 <PAGE> ONEIDA FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION At June 30, 2009 and December 31, 2008 <TABLE> <CAPTION> (unaudited) At June 30, At December 31, 2009 2008 ---- ---- ASSETS (in thousands, except share data) <S> <C> <C> Cash and due from banks $ 14,106 $ 13,223 Federal funds sold 7,037 71 ----------------------------- TOTAL CASH AND CASH EQUIVALENTS 21,143 13,294 Trading securities 6,491 5,941 Securities available for sale 129,198 134,763 Securities held to maturity (fair value $23,621) 23,774 -- Mortgage loans held for sale 1,031 741 Loans receivable 294,407 304,376 Allowance for loan losses (2,624) (2,624) ----------------------------- LOANS RECEIVABLE, NET 291,783 301,752 Federal Home Loan Bank stock 2,787 3,784 Bank premises and equipment, net 21,455 21,790 Accrued interest receivable 2,432 2,659 Other assets 17,064 15,323 Bank owned life insurance 15,310 15,020 Goodwill 23,183 22,963 Other intangible assets 1,862 2,100 ------------------------------------------------------------------------------------ TOTAL ASSETS $ 557,513 $ 540,130 ==================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Interest bearing deposits $ 398,339 $ 364,911 Non-interest bearing deposits 62,186 60,787 Borrowings 32,000 52,825 Notes payable -- 12 Other liabilities 9,367 6,766 ----------------------------- TOTAL LIABILITIES 501,892 485,301 Oneida Financial Corp. stockholders' equity: Preferred stock, 1,000,000 shares authorized -- -- Common stock ($.01 par value; 20,000,000 shares authorized; 8,322,452 shares issued) 83 83 Additional paid-in capital 19,308 19,221 Retained earnings 42,937 41,585 Accumulated other comprehensive (loss) (6,218) (5,562) Treasury stock (at cost, 496,510 and 533,106 shares) (3,048) (3,058) ----------------------------- Total Oneida Financial Corp. stockholders' equity 53,062 52,269 Noncontrolling interest 2,559 2,560 ----------------------------- TOTAL STOCKHOLDERS' EQUITY 55,621 54,829 ------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 557,513 $ 540,130 ==================================================================================== </TABLE> The accompanying notes are an integral part of the consolidated financial statements Page 2 of 37 <PAGE> ONEIDA FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the Three Months and Six Months Ended June 30, 2009 (unaudited) and 2008 (unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 ---- ---- ---- ---- (in thousands, except share and per share data) <S> <C> <C> <C> <C> INTEREST INCOME: Interest and fees on loans $ 4,410 $4,518 $ 8,891 $ 9,223 Interest on investment securities 1,697 1,869 3,330 3,548 Dividends on equity securities 107 255 211 531 Interest on federal funds sold and interest-earning deposits 11 76 25 141 ------------------------------------------------------------------------------------------------------ Total interest and dividend income 6,225 6,718 12,457 13,443 ------------------------------------------------------------------------------------------------------ INTEREST EXPENSE: Core deposits 563 582 1,084 1,215 Time deposits 963 1,625 2,059 3,326 Borrowings 408 643 964 1,309 Notes payable -- 1 -- 3 ------------------------------------------------------------------------------------------------------ Total interest expense 1,934 2,851 4,107 5,853 ------------------------------------------------------------------------------------------------------ NET INTEREST INCOME 4,291 3,867 8,350 7,590 Less: Provision for loan losses 160 150 160 150 ------------------------------------------------------------------------------------------------------ Net interest income after provision for loan losses 4,131 3,717 8,190 7,440 ------------------------------------------------------------------------------------------------------ OTHER INCOME: Total other-than-temporary impairment losses (1,624) -- (1,624) -- Portion of loss recognized in OCI (before taxes) 1,170 -- 1,170 -- Net impairment losses (454) -- (454) -- Net gains on sale of securities, net -- 22 238 18 Changes in fair value of trading securities 998 5 569 (599) Commissions and fees on sales of non-banking products 3,906 3,373 8,055 6,873 Other operating income 1,095 1,101 2,503 2,226 ------------------------------------------------------------------------------------------------------ Total other income 5,545 4,501 10,911 8,518 ------------------------------------------------------------------------------------------------------ OTHER EXPENSES: Compensation and employee benefits 4,994 4,715 9,981 9,295 Occupancy expenses, net 1,178 1,070 2,407 2,283 Other operating expense 2,037 1,548 3,720 2,911 ------------------------------------------------------------------------------------------------------ Total other expenses 8,209 7,333 16,108 14,489 ------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES 1,467 885 2,993 1,469 ------------------------------------------------------------------------------------------------------ Provision for income taxes 398 239 810 394 ------------------------------------------------------------------------------------------------------ NET INCOME $ 1,069 $ 646 $ 2,183 $ 1,075 Less: net income attributable to noncontrolling interest -- -- -- -- ------------------------------------------------------------------------------------------------------ NET INCOME attributable to Oneida Financial Corp. $ 1,069 $ 646 $ 2,183 $ 1,075 ====================================================================================================== EARNINGS PER SHARE - BASIC $ 0.14 $ 0.08 $ 0.28 $ 0.14 ====================================================================================================== EARNINGS PER SHARE - DILUTED $ 0.14 $ 0.08 $ 0.28 $ 0.14 ====================================================================================================== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. Page 3 of 37 <PAGE> ONEIDA FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the Three Months and Six Months Ended June 30, 2009 (unaudited) and 2008 (unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $ 1,069 $ 646 $ 2,183 $ 1,075 ------- ------- ------- ------- Other comprehensive income, net of tax: Net change in unrealized gains (losses): Other-than-temporary impaired securities Available for sale: Unrealized gains (losses) on securities arising during period 633 -- 1,320) -- Less: reclassification adjustment for losses included in net income 454 -- 454 -- ------- ------- ------- ------- Net unrealized gains (losses) 179 -- (866) -- Income tax effect (72) -- 346 -- ------- ------- ------- ------- 107 -- (520) -- Securities available for sale: Unrealized gains (losses) on securities arising during period 2,357 (4,245) (63) (4,534) Less: reclassification adjustment for gains included in net income -- (22) (238) (18) ------- ------- ------- ------- Net unrealized gains (losses) 2,357 (4,267) (301) (4,552) Income tax effect (943) 1,707 120 1,821 ------- ------- ------- ------- 1,414 (2,560) (181) (2,731) ------- ------- ------- ------- Unrealized holding gains (losses) on securities. net of tax 1,521 (2,560) (701) (2,731) ------- ------- ------- ------- Change in unrealized loss on pension benefits 37 42 74 84 ------- ------- ------- ------- Income tax effect (14) (17) (29) (34) ------- ------- ------- ------- 23 25 45 50 ------- ------- ------- ------- Other comprehensive gain (loss), net of tax 1,544 (2,535) (656) (2,681) Comprehensive income (loss) 2,613 (1,889) 1,527 (1,606) Comprehensive income (loss) attributable to the Noncontrolling interest -- -- -- -- ------- ------- ------- ------- Comprehensive income (loss) attributable to Oneida Financial Corp. $ 2,613 $(1,889) $ 1,527 $(1,606) ======= ======= ======= ======= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. Page 4 of 37 <PAGE> ONEIDA FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the Three Months and Six Months Ended June 30, 2009 (unaudited) <TABLE> <CAPTION> Accumulated Additional Other Common Stock Paid-In Retained Comprehensive Treasury Noncontrolling Total Shares Amount Capital Earnings Loss Stock Interest (in thousands, except number of shares) <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance as of December 31, 2008 8,322,452 $83 $19,221 $41,585 $(5,562) $(3,058) $2,560 $ 54,829 Net income 1,114 1,114 Other comprehensive loss, net of tax (2,200) (2,200) Shares earned under stock plans 38 38 Common stock dividends: $0.24 per share (831) (831) Treasury stock reissued 9 9 Tax benefit from stock plans 12 12 ----------------------------------------------------------------------------------------- Balance as of March 31, 2009 8,322,452 $83 $19,271 $41,868 $(7,762) $(3,049) $2,560 $ 52,971 Net income 1,069 1,069 Other comprehensive loss, net of tax 1,544 1,544 Shares earned under stock plans 38 38 Common stock dividends: $0.24 per share -- Stock repurchased (1) (1) Treasury stock reissued (1) 1 -- ----------------------------------------------------------------------------------------- Balance as of June 30, 2009 8,322,452 $83 $19,308 $42,937 $(6,218) $(3,048) $2,559 $55,621 ========================================================================================= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. Page 5 of 37 <PAGE> ONEIDA FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS For the Three Months and Six Months Ended June 30, 2009 (unaudited) and 2008 (unaudited) <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 ---- ---- ---- ---- Operating Activities: (in thousands) <S> <C> <C> <C> <C> Net income $ 1,069 $ 646 $ 2,183 $ 1,075 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 523 524 1,048 1,047 Amortization of premiums/discounts on securities, net 76 25 116 50 Net change in valuation of financial instruments carried at fair value (998) (5) (569) 599 Provision for loan losses 160 150 160 150 Stock compensation earned 38 41 76 85 Loss on sale of other real estate -- 6 -- 6 Net realized loss (gain) on sale of securities 454 (22) 216 (18) Gain on sale of loans, net (110) (27) (238) (72) Income tax payable (351) (58) 58 108 Accrued interest receivable (232) (262) 227 (22) Other assets (1,041) (1,128) (595) (248) Other liabilities 2,671 (27) 2,663 (1,166) Origination of loans held for sale (19,496) (4,852) (37,396) (6,741) Proceeds from sales of loans 19,271 5,012 37,344 10,029 ------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 2,034 23 5,293 4,882 ------------------------------------------------------------------------------------------------------------------ Investing Activities: Purchase of investment securities (19,859) (4,177) (34,580) (17,180) Principal collected on and proceeds of maturities sales or calls from investments 2,933 10,156 16,592 23,164 Purchase of mortgage-backed securities (4,043) (18,998) (24,007) (40,020) Principal collected on and proceeds from sales of mortgage-backed securities 6,804 3,918 22,306 6,671 Net decrease (increase) in loans 3,172 (10,082) 9,760 (9,792) Purchase of bank premises and equipment (127) (295) (475) (401) Proceeds from sale of other real estate -- 69 -- 69 Purchase of insurance agency (84) (73) (84) (73) Purchase of employee benefits company -- -- (136) (129) Purchase of bank -- -- -- (8) ------------------------------------------------------------------------------------------------------------------ Net cash used in investing activities (11,204) (19,482) (10,624) (37,699) ------------------------------------------------------------------------------------------------------------------ Financing Activities: Net increase in demand deposit, savings, money market, super now and escrow 20,850 22,741 37,946 21,737 Net (decrease) increase in time deposits (5,864) (16,904) (3,119) 6,143 Proceeds from borrowings -- 16,000 -- 36,000 Repayment of borrowings (12,000) (13,500) (20,825) (33,500) Cash dividends -- -- (831) (831) Exercise of stock options (using treasury stock) -- -- 9 -- ------------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 2,986 8,337 13,180 29,549 ------------------------------------------------------------------------------------------------------------------ (Decrease) increase in cash and cash equivalents (6,184) (11,122) 7,849 (3,268) ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of period 27,327 24,315 13,294 16,461 ---------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 21,143 $ 13,193 $21,143 $13,193 ================================================================================================================== </TABLE> Page 6 of 37 <PAGE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> Supplemental disclosures of cash flow information: Cash paid for interest 2,069 2,876 4,253 5,901 Cash paid for income taxes 750 451 750 451 Supplemental noncash disclosures: Transfer of loans to other real estate 49 28 49 104 Adoption of fair value option: Securities transferred from available for sale to trading -- -- -- 16,187 Deferred tax asset related to fair value adjustments -- -- -- 1,255 ================================================================================================================== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. Page 7 of 37 <PAGE> ONEIDA FINANCIAL CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 2009 Note A - Basis of Presentation The accompanying unaudited consolidated financial statements include Oneida Financial Corp. (the "Company") and its wholly owned subsidiary, Oneida Savings Bank (the "Bank") as of June 30, 2009 and December 31, 2008 and for the three and six month periods ended June 30, 2009 and 2008. 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 and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. 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 Company believes that the disclosures are adequate to make the information presented not misleading; however, results of operations and other data presented are not necessarily indicative of results to be expected for the entire year. The data in the consolidated balance sheet for December 31, 2008 was derived from the audited financial statements included in the Company's 2008 Annual Report on Form 10-K. That data, along with the interim financial information presented in the consolidated statement of condition, statements of operations, comprehensive income, changes in stockholders' equity and cash flows should be read in conjunction with the 2008 consolidated financial statements, including the notes thereto included in the Company's Annual Report on Form 10-K. Amounts in the prior periods' consolidated financial statements are reclassified when necessary to conform with the current period's presentation. Note B - Earnings per Share The Company has stock compensation awards with non-forfeitable rights which are considered participating securities. As such, earnings per share is computed using the two-class method as required by FASB Staff Position EITF 03-6-1. Basic earnings per share is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted earnings per share includes the dilutive effect of additional potential common shares from stock-based compensation plans, but excludes awards considered participating securities. The Company adopted FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities, (the "FSP") effective January 1, 2009. The FSP requires the use of the two-class method for computing earnings per share when stock compensation awards with non-forfeitable dividend rights are present. The effect of adopting this FSP has no effect on the basic and diluted earnings per share for the three months and six months ended June 30, 2008. The factors used in the earnings per share computation are as follows for the three and six months ended June 30, 2009 and June 30, 2008: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 ---- ---- ---- ---- <S> <C> <C> <C> <C> Basic Distributed earnings allocated to common stock $ 824,546 $ 824,546 $ 824,546 $ 824,546 Undistributed earnings allocated to common stock 236,238 (188,302) 1,346,529 238,539 ----------- ---------- ---------- ---------- Net earnings allocated to common stock $ 1,060,784 $ 636,244 $ 2,171,075 $1,063,085 =========== ========== =========== ========== Weighted average common shares outstanding including shares considered participating securities 7,792,672 7,771,140 7,783,556 7,771,124 Less: Average participating securities (28,800) (44,400) (28,800) (44,400) ----------- ---------- ---------- ---------- Weighted average shares 7,763,872 7,726,740 7,754,756 7,726,724 =========== ========== =========== ========== Basic earnings per share $ 0.14 $ 0.08 $ 0.28 $ 0.14 =========== ========== =========== ========== </TABLE> Page 8 of 37 <PAGE> Note B - Earnings per Share (Continued) <TABLE> <CAPTION> Diluted <S> <C> <C> <C> <C> Net earnings allocated to common stock $ 1,060,784 $ 636,244 $ 2,171,075 $1,063,085 =========== ========== =========== ========== Weighted average common shares outstanding for basic earnings per common share 7,763,872 7,726,740 7,754,756 7,726,724 Add: Dilutive effects of assumed exercise of stock options 36,377 57,931 39,735 57,821 ----------- ---------- ---------- ---------- Weighted average shares and dilutive potential common shares 7,800,249 7,784,671 7,794,491 7,784,545 ----------- ---------- ---------- ---------- Diluted earnings per common share $ 0.14 $ 0.08 $ 0.28 $ 0.14 =========== ========== =========== ========== </TABLE> Stock options for 81,013 and 51,362 shares of common stock were not considered in computing diluted earnings per common share for the three months ending June 30, 2009 and June 30, 2008 respectively because they were antidilutive. For the six months ending June 30, 2009 and June 30, 2008, stock options for 81,013 and 51,362 shares, respectively, were not considered. Dividends of $6,912 and $10,944 as of June 30, 2009 and 2008 respectively were paid on unvested shares with non-forfeitable dividend rights, none of which was included in net income as compensation expense because all the awards are expected to vest. Note C - Stock-Based Compensation The Company's 2000 Stock Option Plan, which is shareholder approved, permits the granting of share options to its directors, officers and key employees for up to 374,568 shares of common stock. The exercise price of options granted is equal to the market value of the Company's shares at the date of grant. All options granted expire by April 2010 and options vest and become exercisable ratably over a five-year period. The plan also has a reload feature which entitles the option holder, who has delivered common stock as payment of the exercise price for option stock, to a new option to acquire additional shares in the amount equal to the shares traded in. The option period during which the reload option may be exercised expires at the same time as that of the original option that the holder has exercised. The Company has a policy of using shares held as treasury stock to satisfy share option exercises. There were 9,243 shares available for future grants under the plan described above as of June 30, 2009 and 2008. 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 historic volatilities of the Company's common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that 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. 2009 2008 ---- ---- Risk-free interest rate 0.50% N/A Expected stock price volatility 62.09% N/A Expected dividend rate 3.00% N/A Expected life 0.94 years N/A Information related to the stock option plan during each year follows: 2009 2008 ------- ---- Intrinsic value of options exercised $397,285 N/A Cash received from option exercises $ 8,411 N/A Tax benefit realized from option exercises -- N/A Weighted average fair value of options granted 1.788 N/A As of June 30, 2009, there was no unrecognized compensation cost for this plan as all shares are vested under the terms of the plan. New grants are for the reload option feature which are expensed at the date of grant. Page 9 of 37 <PAGE> Note C - Stock-Based Compensation (Continued) Activity in the plan for 2009 was as follows: <TABLE> <CAPTION> Range of ------------------------------ Weighted Average Option Exercise Exercise Price Options Price for Options Intrinsic Outstanding Per Share Outstanding Value ------------------------------------------------------------- <S> <C> <C> <C> <C> Outstanding at December 31, 2008 168,967 $4.722 - $18.167 $ 7.707 $315,434 Granted 25,186 $11.25 Exercised (61,782) $4.722 Forfeited -- ------- Outstanding at June 30, 2009 132,371 $4.722 - $18.167 $ 9.744 $232,549 === ==== ======= </TABLE> At June 30, 2009, the weighted average information for outstanding and exercisable shares is as follows: Shares outstanding and Exercisable ---------------------------------------------------------- Range of Average Average Exercise Exercise Remaining Life Prices Shares Price (Years) ---------------------------------------------------------- $3.63 - $5.45 51,358 $4.722 0.82 $9.09 - $10.90 4,465 $9.419 0.82 $10.91 - $12.72 40,957 $11.532 0.82 $12.73 - $14.53 18,689 $14.000 0.82 $14.54 - $16.35 6,600 $14.794 0.82 $16.36 - $18.17 10,302 $17.247 0.82 ------ ------- ---- Total 132,371 $ 9.774 0.82 ======= ======= ==== The Management Recognition and Retention Plans provide for the issuance of shares of restricted stock to directors, officers and key employees. Compensation expense equal to the market value of Oneida Financial Corp.'s stock on the grant date is recognized ratably over the five year vesting period for shares of restricted stock granted that will be fully vested at December 31, 2010. Compensation expense recorded in conjunction with these plans was $38,208 and $41,413 for the three months ended June 30, 2009 and 2008 respectively and $76,416 and $85,114 for the six month period ending June 30, 2009 and 2008, respectively. Shares unallocated under the plans available for future awards were 15,286 and 12,886 at June 30, 2009 and June 30, 2008 respectively. At June 30, 2009 and December 31, 2008, there were nonvested shares of 28,800 with unrecognized compensation cost of $396,344 and $500,216 respectively. Note D - Dividend Restrictions Oneida Financial MHC, which owns 4,309,750 or 55.18% of the outstanding shares as of June 30, 2009 of Oneida Financial Corp., filed a notice with the OTS regarding its intent to waive its right to receive cash dividends declared by Oneida Financial Corp. The OTS did not object to the notice. Note E - Pension Plan The Bank provides a noncontributory defined benefit retirement accumulation plan covering substantially all employees. Under the plan, retirement benefits are primarily a function of the employee's years of service and level of compensation. As of June 15, 2004, the Bank had a plan amendment to freeze the plan benefits for plan participants. The Bank uses a December 31 measurement date for its pension plan. Net pension and postretirement cost, which is recorded within compensation and employee benefits expenses in the condensed statements of income, is comprised of the following: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 ---- ---- ---- ---- <S> <C> <C> <C> <C> Service cost $ -- $ -- $ -- $ -- Interest cost 41,000 55,000 82,000 110,000 Expected return on plan assets (49,000) (72,000) (98,000) (144,000) Net amortization and deferral 37,000 42,000 74,000 84,000 ------- -------- -------- --------- Net periodic pension cost $29,000 $ 25,000 $ 58,000 $ 50,000 </TABLE> Page 10 of 37 <PAGE> Note E - Pension Plan (Continued) <TABLE> <CAPTION> <S> <C> <C> <C> <C> Net gain (22,200) (25,200) (44,400) (50,400) Prior service cost -- -- -- -- -------- -------- -------- ------- Total recognized in other comprehensive income (22,200) (25,200) (44,400) (50,400) ======== ======== ======== ======= Total recognized in net periodic benefit cost and Other comprehensive income $ 6,800 $ (200) $ 13,600 $ (400) ======== ======== ======== ======= Weighted-average assumptions as of December 31: 2009 2008 ---- ---- Discount rate 5.390% 5.465% Expected return on plan assets 7.500% 7.500% </TABLE> As of June 30, 2009, contributions to the pension for 2009 plan totaled $50,000. The Bank anticipates contributing $200,000 in 2009 to fund its pension plan. State Bank of Chittenango participated in the New York State Bankers Retirement System plan which was a noncontributory defined benefit plan covering substantially all employees. Under the plan, retirement benefits were primarily a function of the employee's years of service and level of compensation. The plan was frozen as of May 31, 2002. State Bank of Chittenango uses a December 31 measurement date for its pension plan. Net pension and postretirement cost (benefit), which is recorded within compensation and employee benefits expenses in the condensed statements of income, is comprised of the following: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 ---- ---- ---- ---- <S> <C> <C> <C> <C> Service cost $ 6,500 $ 6,800 $ 13,000 $ 13,600 Interest cost 34,000 33,700 68,000 67,400 Expected return on plan assets (34,500) (52,000) (69,000) (104,000) Net amortization and deferral 14,000 -- 28,000 -- -------- -------- -------- --------- Net periodic pension cost (benefit) $ 20,000 $(11,500) $ 40,000 $ (23,000) Net loss -- -- -- -- Prior service cost -- -- -- -------- -------- -------- --------- Total recognized in other comprehensive income -- -- -- -------- -------- -------- --------- Total recognized in net periodic benefit cost and Other comprehensive income $ 20,000 $(11,500) $ 40,000 $ (23,000) ======== ======== ======== ========= Weighted-average assumptions as of December 31: 2009 2008 ----------------------------------------------- ---- ---- Discount rate 6.25% 6.25% Expected return on plan assets 7.50% 7.50% </TABLE> As of June 30, 2009, there were no contributions to the plan. The Bank does not anticipate contributing in 2009 to fund its pension plan. Page 11 of 37 <PAGE> Note F - Investment Securities and Mortgage-Backed Securities The amortized cost, gross unrealized gains and losses and approximate fair value of available for sale securities at June 30, 2009 and December 31, 2008 are as follows: <TABLE> <CAPTION> June 30, 2009 ------------------------------------------------------------------ Amortized Gross Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------ Available for sale portfolio: (in thousands) <S> <C> <C> <C> <C> Debt securities: U. S. Agencies $ 14,790 $ 115 $ 102 $ 14,803 Corporate 16,728 34 1,845 14,917 Trust preferred securities 11,286 -- 5,086 6,200 State and municipals 20,926 311 300 20,937 -------------- -------------- -------------- -------------- 63,730 460 7,333 56,857 -------------- -------------- -------------- -------------- Residential mortgage-backed securities: Fannie Mae 20,321 503 15 20,809 Freddie Mac 19,390 487 1 19,876 Ginnie Mae 24,529 533 59 25,003 Small Business Administration 12 -- -- 12 Collateralized Mortgage Obligations 7,715 3 1,077 6,641 -------------- -------------- -------------- -------------- 71,967 1,526 1,152 72,341 -------------- -------------- -------------- -------------- Total available for sale $ 135,697 $ 1,986 $ 8,485 $ 129,198 ============== ============== ============== ============== </TABLE> <TABLE> <CAPTION> December 31, 2008 ------------------------------------------------------------------ Amortized Gross Unrealized Fair Cost Gains Losses Value ------------------------------------------------------------------ Available for sale portfolio: (in thousands) Debt securities: <S> <C> <C> <C> <C> U. S. Agencies $ 21,002 $ 216 $ 13 $ 21,205 Corporate 16,051 -- 3,378 12,673 Trust preferred securities 11,750 -- 2,542 9,208 State and municipals 17,274 223 150 17,347 -------------- -------------- -------------- -------------- 66,077 439 6,083 60,433 -------------- -------------- -------------- -------------- Residential mortgage-backed securities Fannie Mae 19,640 283 83 19,840 Freddie Mac 22,858 416 83 23,191 Ginnie Mae 23,938 533 24 24,447 Small Business Administration 13 -- -- 13 Collateralized Mortgage Obligations 7,569 -- 730 6,839 -------------- -------------- -------------- -------------- 74,018 1,232 920 74,330 -------------- -------------- -------------- -------------- Total available for sale $ 140,095 $ 1,671 $ 7,003 $ 134,763 ============== ============== ============== ============== </TABLE> The amortized cost, unrecognized gains and losses, and fair value of securities held to maturity were as follows: <TABLE> <CAPTION> June 30, 2009 ------------------------------------------------------------------ Amortized Gross Unrealized Fair Cost Gains Losses Value ----------------------------------------------------------------- <S> <C> <C> <C> <C> Debt securities: U. S. Agencies $ 11,992 $ -- $ 98 $ 11,894 State and municipals 7,866 -- 35 7,831 -------------- -------------- -------------- -------------- 19,858 -- 133 19,725 -------------- -------------- -------------- -------------- Residential mortgage-backed securities Ginnie Mae 2,989 -- 6 2,983 Small Business Administration 927 -- 14 913 -------------- -------------- -------------- -------------- 3,916 -- 20 3,896 -------------- -------------- -------------- -------------- Total held to maturity $ 23,774 $ -- $ 153 $ 23,621 ============== ============== ============== ============== </TABLE> Page 12 of 37 <PAGE> Note F - Investment Securities and Mortgage-Backed Securities (Continued) There were no held to maturity securities at December 31, 2008. As of June 30, 2009 and December 31, 2008, mortgage-backed securities were comprised of pass-through securities backed by conventional residential mortgages and guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, which in turn, are supported by the full faith and credit of the United States Government. The collateralized mortgage obligations are non-agency issued obligations. Securities with unrealized losses at June 30, 2009 and December 31, 2008, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows: <TABLE> <CAPTION> June 30, 2009 Less than 12 Months More than 12 Months Total Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Loss Value Loss Value Loss --------------------------------------------------------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> <C> <C> U.S. Agency $ 7,275 $ 101 $ 141 $ 1 $ 7,416 $ 102 Corporate 947 103 8,888 1,742 9,835 1,845 Trust preferred securities -- -- 6,200 5,086 6,200 5,086 State and municipals 3,225 94 2,861 206 6,086 300 Fannie Mae 1,956 13 243 2 2,199 15 Freddie Mac 392 1 -- -- 392 1 Ginnie Mae 4,544 59 -- -- 4,544 59 Collateralized mortgage obligations 944 7 3,971 1,070 4,915 1,077 ---------- ---------- ---------- ---------- ---------- ---------- Total securities available for sale in an unrealized loss position $ 19,283 $ 378 $ 22,304 $ 8,107 $ 41,587 $ 8,485 ========== ========== ========== ========== ========== ========== U.S. Agency $ 3,901 $ 98 $ -- $ -- $ 3,901 $ 98 State and municipals 2,625 35 -- -- 2,625 35 Ginnie Mae 922 6 -- -- 922 6 Small business administration 913 14 -- -- 913 14 ---------- ---------- ---------- ---------- ---------- ---------- Total securities held to maturity in an unrealized loss position $ 8,361 $ 153 $ -- $ -- $ 8,361 $ 153 ========== ========== ========== ========== ========== ========== </TABLE> <TABLE> <CAPTION> December 31, 2008 Less than 12 Months More than 12 Months Total Fair Unrealized Fair Unrealized Fair Unrealized Description of Securities Value Loss Value Loss Value Loss --------------------------------------------------------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> <C> <C> U.S. Agency $ 1,589 $ 13 $ -- $ -- $ 1,589 $ 13 Corporate 5,248 414 4,025 2,964 9,273 3,378 Trust preferred securities 1,955 262 7,253 2,280 9,208 2,542 State and municipals 4,347 150 -- -- 4,347 150 Fannie Mae 4,482 61 1,192 22 5,674 83 Freddie Mac 3,919 80 120 3 4,039 83 Ginnie Mae 1,116 24 -- -- 1,116 24 Small Business Administration 13 -- -- -- 13 -- Collateralized mortgage obligations 6,838 730 1 -- 6,839 730 ---------- ---------- ---------- ---------- ---------- ---------- Total securities available for sale in an unrealized loss position $ 29,507 $ 1,734 $ 12,591 $ 5,269 $ 42,098 $ 7,003 ========== ========== ========== ========== ========== ========== </TABLE> U.S. Agency and Agency Mortgage-Backed Securities Fannie Mae, Freddie Mac, Ginnie Mae and the Small Business Administration guarantees the contractual cash flows of our agency and mortgage-backed securities. Fannie Mae and Freddie Mac are government sponsored enterprises that were placed under the conservatorship of the U.S. Government on September 7, 2008. Our Ginnie Mae mortgage-backed securities are backed by the full faith and credit of the U.S. Government. Page 13 of 37 <PAGE> Note F - Investment Securities and Mortgage-Backed Securities (Continued) At June 30, 2009, of the 18 U.S. Government sponsored enterprise agency and mortgage-backed securities in an unrealized loss position in our available for sale portfolio, 2 were in a continuous unrealized loss position for 12 months or more. The unrealized losses at June 30, 2009 were primarily due to the changes in interest rates and continued illiquidity and uncertainty in the market. We do not consider these securities other than temporarily impaired due to the guarantee provided as to the full payment of principal and interest and the fact that we do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their cost basis, which may be at maturity. Non-Agency Collateralized mortgage obligations. All of our non-agency collateralized mortgage obligations carry various amounts of credit enhancement and none are collateralized with subprime loans. These securities were purchased based on the underlying loan characteristics such as loan to value ratio, credit scores, property type, location and the level of credit enhancement. Current characteristics of each security are reviewed regularly by management. If the level of credit loss coverage is sufficient, it indicates that we will receive all of the originally scheduled cash flows. At June 30, 2009, of the 5 non-agency collateralized mortgage obligations in an unrealized loss position, 4 were in a continuous unrealized loss position of 12 months or more. We have assessed these securities in an unrealized loss position at June 30, 2009 and determined that the decline in fair value was temporary. We believe the decline in fair value was caused by the significant widening in liquidity spreads across sectors related to the continued illiquidity and uncertainty in the markets and not the credit quality of the individual issuer or underlying assets. In making this determination, we considered the period of time the securities were in a loss position, the percentage decline in comparison to the securities' amortized cost, the financial condition of the issuer, and the delinquency or default rates of the underlying collateral. In addition, we do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their cost basis, which may be at maturity. It is possible that the underlying loan collateral on these securities will perform worse than expectations, which may lead to adverse changes in cash flows on these securities and potential future other than temporary impairment losses. Corporate Debt and Municipal Securities At June 30, 2009, of the 26 corporate debt and municipal securities in an unrealized loss position, 8 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 not more likely than not that we will be required to sell these securities before the recovery of their cost basis, which may be at maturity. Included in the 8 securities whose unrealized loss position exceeds 12 months was a $2.0 million General Motors Acceptance Corp. (GMAC) bond, maturing October 15, 2010 which has a rating below investment grade. This is a variable rate note based on the three month Treasury bill whose unrealized was $375,000 and $1.1 million at June 30, 2009 and December 31, 2008 respectively. In addition, also included was a $2.5 million SLMA bond, maturing May 1, 2012 which is rated investment grade. This is a variable rate note based on the consumer price index. The unrealized loss at June 30, 2009 and December 31, 2008 was $762,000 and $875,000. Trust preferred securities The Company currently has $6.2 million invested in nine different trust preferred securities as of June 30, 2009 whose unrealized loss has been in a continuous loss position exceeding 12 months or more. Of the $6.2 million, $2.3 million have variable rates of interest. The unrealized loss at June 30, 2009 and December 31, 2008 on the nine securities totaled $5.1 million and $2.5 million respectively. All of the securities are rated below investment grade as of June 30, 2009. Through review of the current and expected cash flow analysis based on the credit quality of the underlying collateral, default probabilities and anticipated losses given the default assumptions and stress tests performed on these securities, two of the trust preferred securities have been considered other-than-temporarily impaired as of June 30, 2009. The significant inputs utilized in the cash flow analysis are as follows: Significant inputs at June 30, 2009 ----------------------------------- Annual prepayment 0% Annually, 100% at maturity Projected specific defaults/deferrals 15.90% - 37.35% Page 14 of 37 <PAGE> Note F - Investment Securities and Mortgage-Backed Securities (Continued) Projected severity of loss on specific defaults/deferrals 85% - 100% Projected additional defaults: QTR 2 - 2009 4% (not annualized) QTR 3 - 2009 3% (not annualized) QTR 4 - 2009 2% (not annualized) QTR 1 - 2010 1% (not annualized) Thereafter 0.50% applied annually Projected severity of loss on additional defaults 85% - 100% Present value discount rates 2.91% - 9.66% Based on the assumptions utilized, an other than temporary impairment charge of $454,000 was recorded in the second quarter of 2009. It is possible that the underlying collateral of these securities will perform worse than expectations including an increase in deferrals/defaults above projections, which may lead to adverse changes in cash flows on these securities and potential future other than temporary impairment losses. Events that may trigger material declines in fair value for these securities in the future would include, but not limited to, deterioration of credit metrics, such as significantly higher levels of defaults, and severity of loss on the underlying collateral and further illiquidity. A roll-forward of the other-than-temporary impairment amount related to credit losses for the three months ended June 30, 2009 is as follows (in thousands): <TABLE> <CAPTION> <S> <C> Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, beginning of period (as measured effective April 1, 2009 upon adoption of FSP FAS 115-2 and FAS 124-2 $ -- Additional credit loss for which other-than-temporary impairment was not previously recognized 454 Balance of credit losses on debt securities for which a portion of other-than-temporary impairment was recognized in other comprehensive income, end of period $ 454 ===== </TABLE> Scheduled contractual maturities of our investment securities at June 30, 2009 are as follows. 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, primarily mortgage-backed securities, are shown separately. <TABLE> <CAPTION> Available for Sale Held to Maturity ---------------------------- --------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- <S> <C> <C> <C> <C> Debt securities: Within one year $ 2,574 $ 2,584 $ -- $ -- After one year through five years 17,013 15,824 5,160 5,160 After five years through ten years 24,235 24,035 10,744 10,623 After ten years 19,908 14,414 3,954 3,942 ------------ ------------ ------------ ------------- Total debt securities 63,730 56,857 19,858 19,725 Mortgage-backed securities 71,967 72,341 3,916 3,896 ------------ ------------ ------------ ------------- Total $ 135,697 $ 129,198 $ 23,774 $ 23,621 ============ ============ ============ ============ </TABLE> Sales and write-downs of available for sale securities were as follows for the six months ended: June 30, 2009 June 30, 2008 ------------- ------------- Proceeds $ 10,886,797 $ 6,246,831 Gross Gains $ 237,649 $ 70,058 Gross Losses $ 453,626 $ 52,002 Page 15 of 37 <PAGE> Note G - Allowance for Loan Losses 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 it 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 June 30, 2009 the allowance for loan losses as a percentage of net loans receivable was 0.90% as compared to 0.87% at December 31, 2008. The following table sets forth the analysis of the allowance for loan losses for the periods indicated: <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, June 30, June 30, 2009 2008 2009 2008 ---- ---- ---- ---- (In thousands) <S> <C> <C> <C> <C> Balance at beginning of period: $ 2,554 $ 2,496 $ 2,624 $ 2,511 Charge-offs (120) (143) (261) (188) Recoveries 30 25 101 55 Provision for loan losses 160 150 160 150 ------------ ------------ ------------ ------------ Balance at end of period $ 2,624 $ 2,528 $ 2,624 $ 2,528 ============ ============ ============ ============ </TABLE> There were no impaired loans as of June 30, 2009 or December 31, 2008. Note H - Segment Information The Bank has determined that it has four primary business segments, its banking franchise, its insurance activities, its benefit consulting activities and risk management activities. For the three months and six months ended June 30, 2009 and 2008, the Bank's insurance activities consisted of those conducted through its wholly owned subsidiary, Bailey & Haskell Associates, Inc. The Bank's benefit consulting activities consisted of those conducted through its wholly owned subsidiary, Benefit Consulting Group, Inc. The risk management activities consisted of those conducted through its wholly owned subsidiary, Workplace Health Solutions Inc. which was formed in February 2008. Information about the Bank's segments is presented in the following table for the periods indicated: <TABLE> <CAPTION> Three Months Ended June 30, 2009 ------------------------------------------------------------------------- Benefit Risk Banking Insurance Consulting Management Activities Activities Activities Activities Total (In thousands) <S> <C> <C> <C> <C> <C> Net interest income $ 4,291 $ -- $ -- $ -- $ 4,291 Provision for loan losses 160 -- -- -- 160 ------------ ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 4,131 -- -- -- 4,131 Other income 1,639 2,119 1,647 140 5,545 Other expenses 4,331 2,061 1,113 181 7,686 Depreciation and amortization 427 57 38 1 523 ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes 1,012 1 496 (42) 1,467 </TABLE> Page 16 of 37 <PAGE> Note H - Segment Information (Continued) <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> Income tax (benefit) expense 175 2 238 (17) 398 ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 837 $ (1) $ 258 $ (25) $ 1,069 ============ ============ ============ ============ ============ Total Assets $ 539,422 $ 17,277 $ 4,522 $ 86 $ 561,307 ============ ============ ============ ============ ============ </TABLE> <TABLE> <CAPTION> Three Months Ended June 30, 2008 -------------------------------------------------------------------------- Benefit Risk Banking Insurance Consulting Management Activities Activities Activities Activities Total (In thousands) <S> <C> <C> <C> <C> <C> Net interest income $ 3,867 $ -- $ -- $ -- $ 3,867 Provision for loan losses 150 -- -- -- 150 ------------ ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 3,717 -- -- -- 3,717 Other income 1,128 2,006 1,354 13 4,501 Other expenses 3,715 1,957 1,040 97 6,809 Depreciation and amortization 414 64 46 -- 524 ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes 716 (15) 268 (84) 885 Income tax (benefit) expense 143 -- 128 (32) 239 ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 573 $ (15) $ 140 $ (52) $ 646 ============ ============ ============ ============ ============ Total Assets $ 532,584 $ 19,075 $ 4,654 $ 10 $ 556,323 ============ ============ ============ ============ ============ </TABLE> <TABLE> <CAPTION> Six Months Ended June 30, 2009 ------------------------------------------------------------------------- Benefit Risk Banking Insurance Consulting Management Activities Activities Activities Activities Total (In thousands) <S> <C> <C> <C> <C> <C> Net interest income $ 8,350 $ -- $ -- $ -- $ 8,350 Provision for loan losses 160 -- -- -- 160 ------------ ------------ ------------ ------------ ------------ Net interest income after provision for loan losses 8,190 -- -- -- 8,190 Other income 2,856 5,148 2,707 200 10,911 Other expenses 8,284 4,235 2,219 322 15,060 Depreciation and amortization 856 115 76 1 1,048 ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes 1,906 798 412 (123) 2,993 Income tax (benefit) expense 324 335 198 (47) 810 ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 1,582 $ 463 $ 214 $ (76) $ 2,183 ============ ============ ============ ============ =========== Total Assets $ 539,422 $ 17,277 $ 4,522 $ 86 $ 561,307 ============ ============ ============ ============ =========== </TABLE> <TABLE> <CAPTION> Six Months Ended June 30, 2008 ------------------------------------------------------------------------- Benefit Risk Banking Insurance Consulting Management Activities Activities Activities Activities Total (In thousands) <S> <C> <C> <C> <C> <C> Net interest income $ 7,590 $ -- $ -- $ -- $ 7,590 Provision for loan losses 150 -- -- -- 150 ------------ ------------ ------------ ------------ ------------ </TABLE> Page 17 of 37 <PAGE> Note H - Segment Information (Continued) <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> Net interest income after provision for loan losses 7,440 -- -- -- 7,440 Other income 1,645 4,342 2,518 13 8,518 Other expenses 7,385 3,900 2,007 150 13,442 Depreciation and amortization 828 127 92 -- 1,047 ------------ ------------ ------------ ------------ ------------ Income (loss) before income taxes 872 315 419 (137) 1,469 Income tax (benefit) expense 86 159 201 (52) 394 ------------ ------------ ------------ ------------ ------------ Net income (loss) $ 786 $ 156 $ 218 $ (85) $ 1,075 ============ ============ ============ ============ ============ Total Assets $ 532,584 $ 19,075 $ 4,654 $ 10 $ 556,323 ============ ============ ============ ============ ============ </TABLE> The following represents a reconciliation of the Company's reported segment assets to consolidated assets as of June 30: <TABLE> <CAPTION> Assets 2009 2008 ---- ---- (In thousands) <S> <C> <C> Total assets for reportable segments $ 561,307 $ 556,323 Elimination of intercompany cash balances (3,794) (7,207) ------------ ------------ Consolidated Total $ 557,513 $ 549,116 ============ ============ </TABLE> Note I - Accounting Pronouncements In December 2007, the FASB issued FAS No. 141 (revised 2007), Business Combinations ("FAS 141(R)"), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. FAS No. 141 (R) is effective for fiscal years beginning on or after December 31, 2008. Earlier adoption is prohibited. The adoption of this standard did not have an impact on the Company's results of operations or financial position. In December 2007, the FASB issued FAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51" ("FAS No. 160"), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the consolidated balance sheets but separate from the parent's equity. FAS No.160 is effective for fiscal years and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of this standard resulted in a reclassification of $2.6 million from other liabilities to equity as of December 31, 2008. The noncontrolling interest represents the preferred shareholder minority interest in Oneida Preferred Funding Corp, a real estate investment trust. In April 2009, the FASB issued FSP FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly." The FSP provides additional guidance for determining fair value based on observable transactions. The FSP provides that if evidence suggests that an observable transaction was not executed in an orderly way that little, if any, weight should be assigned to this indication of an asset or liabilities' fair value. Conversely, if evidence suggests that the observable transaction was executed in an orderly way, the transaction price of the observable transaction may be appropriate to use in determining the fair value of the asset/liability in question, with appropriate weighting given to this indication based on facts and circumstances. Finally, if there is no way for the entity to determine whether the observable transaction was executed in an orderly way, relatively less weight should be ascribed to this indictor of fair value. The FSP is effective for interim and annual reporting periods ending after June 15, 2009. The adoption did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2; "Recognition and Presentation of Other-Than-Temporary Impairments," which is intended to provide greater clarity to investors about the credit and noncredit component of an other than temporary impairment charge ("OTTI") and to more effectively communicate when an OTTI event has occurred. This FSP applies to debt securities and requires that the total OTTI be presented in the consolidated statement of income with an offset for the amount of impairment that is the noncredit component recognized in other comprehensive income. Noncredit component losses are to be recorded in other comprehensive income if an investor can assess that it does not have the intent to Page 18 of 37 <PAGE> Note I - Accounting Pronouncements (Continued) sell the security or it is more likely than not that it will not have to sell the security prior to its anticipated recovery. Also in accordance with FSP FAS 115-2 and 124-2, prior periods' noncredit component other than temporary impairment charges are reclassified as additions to retained earnings and reductions in accumulated other comprehensive income. Effective for our interim financial statements as of June 30, 2009, the implementation of this guidance did not have a material impact on our Consolidated Financial Statements. As a result of implementing FSP FAS 115-2 and FAS 124-2, the amount of other-than-temporary impairment recognized in income for the three months ended June 30, 2009 was $454,000. Had the standard not been issued, the amount of other-than-temporary impairment that would have been recognized in income for the period would have been $1.6 million. In May 2009, the FASB released SFAS No. 165, "Subsequent Events," which establishes general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, Statement 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events and transactions that occurred after the balance sheet date. The adoption did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. The Company evaluated subsequent events through August 14, 2009, the date the financial statements were issued. In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of Financial Assets -- an Amendment of FASB Statement No. 140," Statement 166 will require more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. It eliminates the concept of "qualifying special-purpose entity," changes the requirements for derecognizing financial assets, and requires additional disclosures. SFAS No. 166 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009. The Company does not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations or cash flows. In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)." Statement 167 is a revision of FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities, and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity's purpose and design and the reporting entity's ability to direct the activities of the other entity that most significantly impact the other entity's economic performance. SFAS No. 167 is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009.The Company does not expect the adoption to have a material impact on the Company's consolidated financial position, results of operations or cash flows. SFAS No. 168, The FASE Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162, replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principle, and establishes the FASB Accounting Standards Codification (the "Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All nongrandfathered non-SEC accounting literature not included in the Codification is superseded and deemed nonauthoritative. SFAS No. 168 will be effective for the Company's financial statements for period ending after September 15, 2009. SFAS No. 168 is not expected to have a significant impact on the Company's financial statements. Note J - Fair Value The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements," and SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities," on January 1, 2008. SFAS No. 159 permits, but does not require, companies to measure many financial instruments and certain other items at fair value. 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. As of January 1, 2008, the Company has elected the fair value option for certain preferred and common equity securities. Page 19 of 37 <PAGE> Note J - Fair Value (Continued) Fair Value Option The following table presents the amount of gains and losses from fair value changes included in income before income taxes for financial assets and liabilities carried at fair value for the six months ended June 30: <TABLE> <CAPTION> Changes in Fair Values for the Period ended June 30, 2009, for items Measured at Fair Value Pursuant to Election of the Fair Value Option -------------------------------------------------------------------- Total Changes In Other Fair Values Included Gains and Interest Interest in Current Period Losses Income Expense Earnings -------------------------------------------------------------------- (In thousands) Assets: <S> <C> <C> <C> Trading securities $549 20 -- $569 <CAPTION> Changes in Fair Values for the Period ended June 30, 2008, for items Measured at Fair Value Pursuant to Election of the Fair Value Option -------------------------------------------------------------------- Total Changes In Other Fair Values Included Gains and Interest Interest in Current Period Losses Income Expense Earnings -------------------------------------------------------------------- (In thousands) Assets: <S> <C> <C> Trading securities $599 -- -- $599 </TABLE> Fair Value Measurement SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an 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. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability. Assets and Liabilities Measured at Fair Value on a Recurring Basis Securities: The fair values of trading securities and securities available for sale are determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), matrix pricing, which is a mathematical technique widely used in the industry to 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 2inputs) or unobservable inputs that represents assumptions such as financial forecasts or projected earnings (Level 3) Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis Loans held-for-sale: The fair value of loans held for sale is determined, when possible, using quoted secondary market prices. If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan. Page 20 of 37 <PAGE> Note J - Fair Value (Continued) Mortgage Servicing Rights: The fair value of our MSRs was estimated using Level 3 inputs. MSRs do not trade in an active, open market with readily observable prices. As such, we determine the fair value of our MSRs using a projected cash flow model that considers loan type, loan rate and maturity, discount rate assumptions, estimated fee income and cost to service, and estimated prepayment speeds. During the three and six months ended June 30, 2009, we recorded a $11,000 as a result of adjusting the carrying value and estimated fair value of our MSRs to $489,000. Real Estate Owned: The fair value of our real estate owned was estimated using Level 2 inputs based on appraisals of similar properties obtained from a third party. Assets and liabilities measured at fair value on a recurring basis, including financial liabilities for which the Company has elected the fair value option, are summarized below: <TABLE> <CAPTION> Fair Value Measurements at June 30, 2009 Using ---------------------------------------------- Significant Quoted Prices in Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs Assets: June 30, 2009 (Level 1) (Level 2) (Level 3) ------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> Trading securities: Common and preferred equity $ 6,491 -- $ 4,411 $ 2,080 Available for sale securities: U.S. Agency 14,803 -- 14,803 -- Corporate 14,917 -- 12,692 2,225 Collateralized debt obligations 6,200 -- -- 6,200 State and municipals 20,937 -- 20,937 -- Residential mortgage-backed securities 72,341 -- 72,341 -- -------------------------------------------------------------------- Total $ 135,689 -- $ 125,184 $ 10,505 ==================================================================== </TABLE> <TABLE> <CAPTION> Fair Value Measurements at December 31, 2008 Using -------------------------------------------------- Significant Quoted Prices in Other Significant Active Markets for Observable Unobservable Identical Assets Inputs Inputs Assets: December 31, 2008 (Level 1) (Level 2) (Level 3) ------------------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> Trading securities: Common and preferred equity $ 5,941 -- $ 3,921 $ 2,020 Available for sale securities: U.S. Agency 21,205 -- 21,205 -- Corporate 12,673 -- 11,173 1,500 Collateralized debt obligations 9,208 -- -- 9,208 State and municipals 17,347 -- 17,347 -- Residential mortgage-backed securities 74,330 -- 73,562 768 -------------------------------------------------------------------- Total $ 140,704 -- $ 127,208 $ 13,496 ==================================================================== </TABLE> The Level 3 assets include trust preferred securities, corporate debt and equity securities and a private collateral mortgage obligation. The table below presents a reconciliation and income statement classification of gains and losses for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months and six months ended June 30, 2009. There were no sales of Level 3 assets during the six months ended June 30, 2009 and 2008. Page 21 of 37 <PAGE> Note J - Fair Value (Continued) <TABLE> <CAPTION> Fair Value Measurements Using Significant Unobservable Inputs (Level 3) ------------------------------------------------ Residential Collateralized Mortgage Trading Debt -backed Securities Corporate Obligations Securities Total ----------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> <C> <C> Beginning balance January 1, 2009 $ 2,020 $ 1,500 $ 9,208 $ 768 $ 13,496 Total gains or losses (realized/unrealized) Included in earnings Interest income (losses) on securities (10) -- (5) -- (15) Other changes in fair value 70 -- -- -- 70 Included in other comprehensive income (losses) -- 631 (3,624) (191) (3,184) ----------------------------------------------------------- Ending balance March 31, 2009 $ 2,080 2,131 $ 5,579 $ 577 $ 10,367 Total gains or losses (realized/unrealized) Included in earnings Interest income (losses) on securities (10) -- (4) 7 (7) Other changes in fair value 10 -- (454) -- (444) Included in other comprehensive income (losses) -- 94 1,079 416 1,589 Transfers out of Level 3 -- -- -- (1,000) (1,000) ----------------------------------------------------------- Ending balance June 30, 2009 $ 2,080 $ 2,225 $ 6,200 $ -- $ 10,505 =========================================================== </TABLE> <TABLE> <CAPTION> Fair Value Measurements Using Significant Unobservable Inputs (Level 3) ---------------------------------------------- Collateralized Trading Debt Securities Corporate Obligations Total --------------------------------------------------------- (In thousands) <S> <C> <C> <C> <C> <C> Beginning balance January 1, 2008 $ 1,996 $ 2,360 $ 8,045 $ 12,401 Total gains or losses (realized/unrealized) Included in earnings Interest income on securities (10) -- (6) (16) Other changes in fair value (158) -- -- (158) Included in other comprehensive income -- (576) (509) (1,085) --------------------------------------------------------- Ending balance March 31, 2008 $ 1,828 $ 1,784 $ 7,530 $ 11,142 Total gains or losses (realized/unrealized) Included in earnings Interest income on securities (10) -- (6) (16) Other changes in fair value 229 -- -- 229 Included in other comprehensive income -- (134) (672) (806) --------------------------------------------------------- Ending balance June 30, 2008 $ 2,047 $ 1,650 $ 6,852 $ 10,549 ========================================================= </TABLE> For items for which the fair value option has been elected, interest income is recorded within the consolidated statements of income based on the contractual amount of interest income earned on financial assets (except any that are in nonaccrual status). Dividend income is recorded based on cash dividends. Cash flows from the purchase and sale of securities for which the fair value option has been elected are shown as investing activities within in the consolidated statement of cash flows. Fair Value of Financial Instruments Carrying amounts and estimated fair values of financial instruments at June 30, 2009 and December 31, 2008 were as follows: Page 22 of 37 <PAGE> Note J - Fair Value (Continued) <TABLE> <CAPTION> June 30, 2009 December 31, 2008 ------------------------- --------------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value ------ ---------- ------ ---------- (in thousands) <S> <C> <C> <C> <C> Financial assets: Cash and cash equivalents $ 21,143 $ 21,143 $ 13,294 $ 13,294 Trading securities 6,491 6,491 5,941 5,941 Investment securities, available for sale 129,198 129,198 134,763 134,763 Investment securities, held to maturity 23,774 23,621 N/A N/A Loans receivable, net 291,783 294,776 301,752 317,625 Federal Home Loan Bank stock 2,787 N/A 3,784 N/A Accrued interest receivable 2,431 2,431 2,659 2,659 Financial liabilities: Deposits $ 460,525 $ 457,851 $ 425,698 $ 421,101 Federal Home Loan Bank advances 32,000 32,314 52,825 52,788 Notes payable -- -- 12 12 Accrued interest payable 151 151 332 332 </TABLE> Our fair value estimates are based on our existing on and off balance sheet financial instruments without attempting to estimate the value of any anticipated future business. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on our fair value estimates and have not been considered in these Our fair value estimates are made as of the dates indicated, based on relevant market information and information about the financial instruments, including our judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in our assumptions could significantly affect the estimates. Our fair value estimates, methods, and assumptions are set forth below for each type of financial instrument. Cash and Cash Equivalents The carrying value of our cash and cash equivalents approximates fair value because these instruments have original maturities of three months or less. Investment Securities We carry our investment securities held to maturity at cost and we carry our investment securities available for sale at fair value. The fair value estimates of these securities are primarily based on quoted market prices of identical assets or liabilities, where available. Where sufficient data is not available to produce a fair valuation, fair value is based on broker quotes of similar assets or liabilities. Broker quotes may be adjusted to ensure that financial instruments are recorded at fair value. Adjustments may include amounts to reflect counterparty credit quality and our creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. If quoted prices are not available, fair value is based upon valuation models that use cash flow, security structure, and other observable information. Loans and Leases Variable-rate loans reprice as the associated rate index changes. Therefore, the carrying value of these loans approximate fair value. The fair value of our fixed-rate loans were calculated by discounting scheduled cash flows through the estimated maturity using credit adjusted quarter-end origination rates. Our estimate of maturity is based on the contractual cash flows adjusted for prepayment estimates based on current economic and lending conditions. FHLB Stock It is not practicable to estimate the fair value of FHLB stock due to restrictions placed on its transferability. Accrued Interest Receivable The carrying value of accrued interest receivable approximates fair value. Deposits The fair value of our deposits with no stated maturity, such as savings and checking, as well as mortgagors' payments held in escrow, is equal to the amount payable on demand. The fair value of time deposits was estimated by discounting expected maturities at interest rates approximating those currently being offered. The fair value of accrued interest approximates fair value Page 23 of 37 <PAGE> Borrowings The fair value of borrowings is estimated using discounted cash flows analysis to maturity. Page 24 of 37 <PAGE> ITEM 2. Management's Discussion and Analysis of Financial Condition and Results Of Operations Page 25 of 37 <PAGE> MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section presents Management's discussion and analysis of and changes to the Company's consolidated financial results of operations and condition and should be read in conjunction with the Company's financial statements and notes thereto included herein. When used in this quarterly report the words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company's market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. The Company does not undertake, and specifically declines any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. GENERAL Oneida Financial Corp. is the parent company of Oneida Savings Bank ("the Bank"). The Company conducts no business other than holding the common stock of the Bank and general investment activities resulting from the capital it holds. Consequently, the net income of the Company is primarily derived from its investment in the Bank. 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, 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, 2008 and June 30, 2009 the Company had 7,745,660 and 7,781,856 respectively of 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 as of July 28, 2009 of $0.24 per share which was paid to its shareholders on August 11, 2009. Oneida Financial MHC waived its receipt of dividends. As an FDIC-insured institution, the Bank is required to pay deposit insurance premiums to the FDIC. Because the FDIC's deposit insurance fund fell below prescribed levels in 2008, the FDIC has announced increased premiums for all insured depository institutions, including the Bank, in order to begin recapitalizing the fund. Insurance assessments range from 0.12% to 0.50% of total deposits for the first calendar quarter 2009 assessment. Effective April 1, 2009, insurance assessments will range from 0.07% to 0.78%, depending on an institution's risk classification and other factors. In addition, on May 22, 2009 the FDIC adopted a final rule that imposed a 5 basis point special assessment on insured depository institutions to be paid on September 30, 2009, based on assets less tier 1 capital as of June 30, 2009. These changes have resulted, and will continue to result, in increased deposit insurance expense for the Bank in 2009. These increases will be reflected in other expenses in the Bank's income statement in the period of enactment. FDIC insurance premium expense was $656,000 for the six months ended June 30, 2009 as compared with $25,000 for the six months ended June 30, 2008. Page 26 of 37 <PAGE> FINANCIAL CONDITION ASSETS. Total assets at June 30, 2009 were $557.5 million, an increase of $17.4 million from $540.1 million at December 31, 2008. Mortgage-backed securities increased $1.9 million reflecting purchases of $24.0 million of mortgage-backed securities partially offset by the principal collected on and proceeds from sales and maturities of mortgaged-backed securities. Investment securities increased $16.3 million reflecting purchases of $34.6 million of investment securities partially offset by the principal collected on and proceeds from sales and maturities of investment securities. The increase in investment and mortgage-backed securities is primarily the result of the increase in collateral for municipal deposit accounts and a decrease in loans receivable partially offset by a decrease in borrowings. Securities held to maturity were purchases in 2009 that are collateral for municipal deposits where management has the intent to hold until the contractual maturity of the securities. Loans receivable, including loans held for sale, decreased $9.7 million to $295.4 million at June 30, 2009 compared with $305.1 million at December 31, 2008. Residential loans decreased by $7.8 million since December 31, 2008, after the sale of $37.1 million of fixed-rate residential real estate loans in the secondary market during the six month period. At June 30, 2009, total commercial real estate loans increased by $3.3 million while commercial business loans decreased by $3.6 million from December 31, 2008. At June 30, 2009 total consumer loans decreased by $1.8 million from December 31, 2008. As a result of the decrease in loans receivable and increase in deposit accounts, cash and cash equivalents increased $7.8 million from $13.3 million at December 31, 2008 to $21.1 million at June 30, 2009. Goodwill and other intangibles totaled $25.0 million as of June 30, 2009 and $25.1 as of December 31, 2008. Additional goodwill in the amount of $136,000 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 $2.6 million at June 30, 2009 and December 31, 2008, respectively. 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 it 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 June 30, 2009 the allowance for loan losses as a percentage of net loans receivable was 0.90% as compared to 0.87% as of December 31, 2008. LIABILITIES. Total liabilities increased by $16.6 million to $501.9 million at June 30, 2009 from $485.3 million at December 31, 2008. The increase is primarily the result of an increase in interest-bearing deposits of $33.4 million and an increase in non-interest bearing deposits of $1.4 million. Contributing to the increase in total deposits has been an increase in municipal deposits offered through Oneida Savings Bank's limited purpose commercial banking subisidiary, State Bank of Chittenango. Municipal deposits increased $23.5 million to $78.4 million at June 30, 2009 from $54.9 million at December 31, 2008. The increase in total deposits also enabled the Bank to reduce borrowings outstanding by $20.8 million to $32.0 million at June 30, 2009 compared with $52.8 million at December 31, 2008. STOCKHOLDERS' EQUITY. Total stockholders' equity increased by $792,000 to $55.6 million at June 30, 2009 as compared to $54.8 million at December 31, 2008. Stockholders' equity decreased $656,000 as a result of the valuation adjustment made for the Company's available for sale investment and mortgage-backed securities. In addition, stockholders' equity decreased by $832,000 due to the payment of semiannual cash dividends of $0.24 partially offset by the addition of after-tax net income of $2.2 million for the three months ended June 30, 2009. Page 27 of 37 <PAGE> 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 six months ended June 30, 2009 and 2008 and for the year ended December 31, 2008. 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. The average yields and rates are annualized where appropriate. No tax equivalent adjustments were made. The average balance is computed based upon an average daily balance. TABLE 1. Average Balance Sheet. <TABLE> <CAPTION> Three Months Ended June 30, Twelve Months Ended Dec. 31, ------------------------------------------------------------ ----------------------------- 2009 2008 2008 Average Interest Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate ----------- -------- ------ ----------- -------- ------ ----------- -------- ------ (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Assets Interest-earning Assets: Loans Receivable $296,782 $ 4,410 5.94% $286,411 $ 4,518 6.31% $293,499 $18,535 6.32% Investment and Mortgage-Backed Securities 149,668 1,697 4.54% 151,156 1,869 4.95% 143,987 7,379 5.12% Federal Funds 16,839 11 0.26% 12,434 76 2.44% 7,342 169 2.30% Equity Securities 5,510 107 7.77% 13,038 255 7.82% 12,814 651 5.08% -------- ------- ------- ------- ------- ------- ------- ------- ------- Total Interest-earning Assets 468,799 6,225 5.31% 463,039 6,718 5.80% 457,642 26,734 5.84% -------- ------- ------- ------- ------- ------- ------- ------- ------- Non interest-earning Assets: Cash and due from banks 12,956 12,355 11,725 Other assets 75,035 74,779 74,999 -------- -------- -------- Total assets $556,790 $550,173 $544,366 ======== ======== ======== Liabilities and Stockholders'Equity Interest-bearing Liabilities: Money Market Deposits $115,240 $ 404 1.41% $79,770 $ 386 1.94% $83,115 $ 1,654 1.99% Savings Accounts 81,739 122 0.60% 77,310 153 0.80% 77,266 603 0.78% Interest-bearing Checking 45,794 37 0.32% 40,082 44 0.44% 40,459 238 0.59% Time Deposits 153,872 963 2.51% 166,922 1,624 3.91% 159,933 6,020 3.76% Borrowings 35,226 408 4.65% 56,428 643 4.58% 56,194 2,561 4.56% Notes Payable 0 0 0.00% 107 1 3.76% 88 5 5.68% -------- ------- ------- ------- ------- ------- ------- ------- ------- Total Interest-bearing Liabilities 431,871 1,934 1.80% 420,619 2,851 2.73% 417,055 11,081 2.66% -------- ------- ------- ------- ------- ------- ------- ------- ------- Non-interest-bearing Liabilities: Demand deposits 59,920 64,450 63,711 Other liabilities 11,719 6,185 7,559 -------- ------- ------- Total liabilities $503,510 $491,254 $488,325 -------- ------- -------- Stockholders' equity 53,280 58,919 56,041 ------- ------- ------- Total liabilities and stockholders' equity $556,790 $550,173 $544,366 ======== ======== ======== Net Interest Income $ 4,291 $ 3,867 $15,653 ======= ======= ======= Net Interest Spread 3.51% 3.07% 3.18% ====== ======= ======= Net Earning Assets $ 36,928 $ 42,420 $ 40,587 ======== ======== ======== Net yield on average Interest-earning assets 3.66% 3.34% 3.42% ======= ======== ======= Average interest-earning assets to average Interest-bearing liabilities 108.55% 110.09% 109.73% ======= ======== ======= </TABLE> Page 28 of 37 <PAGE> <TABLE> <CAPTION> Six Months Ended June 30, Twelve Months Ended Dec. 31, ------------------------------------------------------------ ----------------------------- 2009 2008 2008 Average Interest Average Interest Average Interest Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate ----------- -------- ------ ----------- -------- ------ ----------- -------- ------ (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Assets Interest-earning Assets: Loans Receivable $299,313 $ 8,891 5.94% $286,001 $ 9,223 6.45% $293,499 $18,535 6.32% Investment and Mortgage-Backed Securities 143,965 3,330 4.63% 140,183 3,548 5.06% 143,987 7,379 5.12% Federal Funds 13,650 25 0.37% 10,073 141 2.80% 7,342 169 2.30% Equity Securities 5,722 211 7.38% 15,856 531 6.70% 12,814 651 5.08% ------- ------- ------- ------- ------- ------- ------- ------- ------ Total Interest-earning Assets 462,650 12,457 5.39% 452,113 13,443 5.95% 457,642 26,734 5.84% ------- ------- ------- ------- ------- ------- ------- ------- ------ Non interest-earning Assets: Cash and due from banks 12,767 12,603 11,725 Other assets 75,863 74,500 74,999 -------- -------- -------- Total assets $551,280 $539,216 $544,366 ======== ======== ======== Liabilities and Stockholders' Equity Interest-bearing Liabilities: Money Market Deposits $106,813 $ 772 1.46% $75,424 $ 817 2.18% $83,115 $ 1,654 1.99% Savings Accounts 78,963 238 0.61% 75,787 298 0.79% 77,266 603 0.78% Interest-bearing Checking 45,071 74 0.33% 39,830 100 0.50% 40,459 238 0.59% Time Deposits 154,517 2,059 2.69% 161,703 3,326 4.14% 159,933 6,020 3.76% Borrowings 41,397 964 4.71% 56,519 1,309 4.66% 56,194 2,561 4.56% Notes Payable 2 0 0.00% 125 3 4.83% 88 5 5.68% ------- ------- ------- ------- ------- ------- ------- ------- ------ Total Interest-bearing Liabilities 426,763 4,107 1.95% 409,388 5,853 2.88% 417,055 11,081 2.66% ------- ------- ------- ------- ------- ------- ------- ------- ------ Non-interest-bearing Liabilities: Demand deposits 59,475 63,498 63,711 Other liabilities 10,788 7,236 7,559 -------- -------- -------- Total liabilities $497,026 $480,122 $488,325 -------- -------- -------- Stockholders' equity 54,254 59,094 56,041 -------- -------- -------- Total liabilities and stockholders' equity $551,280 $539,216 $544,366 ======== ======== ======== Net Interest Income $ 8,350 $ 7,590 $15,653 ======= ======= ======= Net Interest Spread 3.44% 3.07% 3.18% ======= ======= ======= Net Earning Assets $35,887 $42,725 $40,587 ======= ======= ======= Net yield on average Interest-earning assets 3.61% 3.36% 3.42% ======= ======= ======= Average interest-earning assets to average Interest-bearing liabilities 108.41% 110.44% 109.73% ======= ======= ======= </TABLE> RESULTS OF OPERATIONS GENERAL. Net income for the three months ended June 30, 2009 was $1.1 million, an increase of $423,000 or 65% from $646,000 for the three months ended June 30, 2008. Net income for the six months ended June 30, 2009 was $2.2 million, an increase of $1.1 million from $1.1 million for the six months ended June 30, 2008. The increase in net income was primarily the result of an increase in net interest income and an increase in other income offset by an increase in other expenses and the provision for income taxes. Net income from operations for the six months ended June 30, 2009 which excludes the FASB 159 change in fair value of $569,000, net of $155,000 income taxes, was $1.8 million or $0.23 per diluted share. This compares to net income from operations for the same period in 2008 of $1.5 million, or $0.19 per diluted share. The increase in net interest income reflects the effects of the steepening yield curve as the cost of our interest-bearing liabilities decreased faster than the yield on our interest-earning assets. Page 29 of 37 <PAGE> INTEREST INCOME. Interest and dividend income decreased by $493,000 or 7.3%, to $6.2 million for the three months ended June 30, 2009 from $6.7 million for three months ended June 30, 2008. The decrease in interest income was the result of a decrease in the yield of 49 basis points on interest earning assets partially offset by an increase in the average balances of interest-earning assets during the current period of $5.7 million. For the six months ended June 30, 2009, interest and dividend income decreased by $986,000 or 7.3%, to $12.5 million from $13.4 million for the six months ended June 30, 2008. Interest on loans decreased $108,000 to $4.4 million for the three months ended June 30, 2009 from $4.5 million for the three months ended June 30, 2008. The decrease in interest income on loans is a result of a decrease of 37 basis points in the average yield to 5.94% for the three months ended June 30, 2009 from 6.31% for the three months ended June 30, 2008 offset by an increase of $10.4 million in the average balance of loans receivable for the three months ended June 30, 2009 as compared with the same period in 2008. For the six months ended June 30, 2009, interest on loans decreased $332,000 or 3.6%, from $9.2 million for the same period in 2008. The average balance of loans for the six month period increased $13.3 million while the average yield decreased 51 basis points to 5.94% during the 2009 period from 6.45% during the 2008 period. The decrease in yield reflected the decrease in market interest rates during the quarter. Interest on investments and mortgage-backed securities decreased $172,000 as a result of a decrease in the average yield of 41 basis points from 4.95% for the three months ended June 30, 2008 to 4.54% for the three months ended June 30, 2009 and a decrease in the average balance of investment securities and mortgage-backed securities of $1.5 million for the three months period ending June 30, 2009 as compared with the same period in 2008. For the six months ended June 30, 2009, interest on investments and mortgage-backed securities decreased $218,000 as compared with the same period in 2008 due to a decrease in the average yield of 43 basis points offset by an increase in the average balance of investments and mortgage-backed securities of $3.8 million. Interest income from federal funds decreased during the three months ended June 30, 2009 to $11,000 as compared with $76,000 for the 2008 period. The decrease in interest income is primarily due to a decrease of 218 basis points in the average yield offset by an increase in the average balance of $4.4 million. For the six months ended June 30, 2009, interest income on federal funds decreased $116,000 due to a decrease in both the average yield and average balance as compared with the same period in 2008. Interest income from equity securities decreased $148,000 as a result of a decrease in the average balances of $7.5 million for the three month period ending June 30, 2009 as compared with the same period in 2008. For the six months ended June 30, 2009, interest income from equity securities decreased $320,000 as a result of a decrease in the average balances of $10.1 million for the period as compared with the same period in 2008. The decrease in the average balance was the result of the continued decline in market values for equity securities during 2009. INTEREST EXPENSE. Interest expense was $1.9 million for the three months ended June 30, 2009, a decrease of $917,000 or 32.2% from the same period in 2008. The decrease in interest expense is due to a decrease in interest paid on deposit accounts. Interest expense on deposits decreased $681,000 and totaled $1.5 million for the three months ended June 30, 2009 as compared to $2.2 million for the three month period in 2008. The average cost of deposits was 1.54% for the three month period ending June 30, 2009 compared with 2.42% for the three month period in 2008. In addition, the average balance of deposit accounts increased $32.6 million from the three months ended June 30, 2008 to the three months ended June 30, 2009. Interest expense on borrowed funds totaled $408,000 for the second quarter of 2009 compared with $643,000 for the 2008 period. The average balance of borrowings decreased $21.2 million for the three months period ending June 30, 2009 as compared with the same period in 2008. For the six months ended June 30, 2009 interest expense on borrowings decreased $345,000 due to a decrease in the average balance outstanding of borrowings to $41.4 million as compared to $56.5 million for the six month period in 2008. Interest expense on deposits decreased $1.4 million and totaled $3.1 million for the six months ended June 30, 2008 as compared to $4.5 million for the six month period in 2008. For the six months ended June 30, 2009, the average cost of deposits was 1.63% as compared with 2.57% for the six month period in 2008. In addition, the average balance of deposit accounts increased $32.6 million for the six months ended June 30, 2009 as compared with six months ended June 30, 2008. PROVISION FOR LOAN LOSSES. The total provision for loan losses for the three months ended and six months ended June 30, 2009 was $160,000. The total provision for loan losses for the three months ended and six months ended June 30, 2008 was $150,000. The allowance for loan losses was $2.6 million as of June 30, 2009 and $2.5 million as of June 30, 2008. The ratio of the loan loss allowance to net loans receivable is 0.90% at June 30, 2009 as compared with a ratio of 0.87% of loans receivable at June 30, 2008. Management continues to monitor changes in the loan portfolio mix in response to the redirection of loan asset origination and retention toward consumer and commercial business loans. The method utilized to evaluate the adequacy of the allowance level accounts for the higher relative degree of credit risk associated with this activity as compared with traditional residential real estate lending. Provisions to the allowance are made as management assesses the level of allowance to maintain it at a level which is considers adequate to provide for probable incurred loan losses. Page 30 of 37 <PAGE> OTHER INCOME. Other operating income increased by $1.0 million for the three month period ending June 30, 2009 compared with the same period in 2008 to $5.5 million from $4.5 million. The increase in other income was primarily due to increases in commissions and fees on the sale of non-banking products through the Company's subsidiaries for the three months ended June 30, 2009 as compared with the same period during 2008. Commissions and fees on sales of non-banking products was $3.9 million for the three months ended June 30, 2009 as compared to $3.4 million for the same period in 2008. Offsetting the increase in other income was an impairment charge of $454,000 recorded for the three months ended June 30, 2009 for two trust preferred securities which were determined to be other-than-temporarily impaired. The trust preferred securities owned by the Company are diversified pools of collateralized debt obligations primarily issued by domestic financial institutions and their holding companies. For the six month period ending June 30, 2009, other operating income increased by $2.4 million to $10.9 million from $8.5 million for the same period in 2008. Commissions and fees on sales of non-banking products was $8.1 million for the six months ended June 30, 2009 as compared to $6.9 million for the same period in 2008. In addition, the non-cash change in fair value as of June 30, 2009 was a gain of $569,000 as compared to a loss of $599,000 that was recognized as of June 30, 2008 in connection with the adoption of FAS 159 for certain preferred and common equity securities. Net investment gains for the six months ended June 30, 2009 were 238,000 compared with net investment gains of $18,000 for the six months ended June 30, 2008. OTHER EXPENSES. Other operating expenses increased by $876,000 or 11.9%, to $8.2 million for the three months ended June 30, 2009 from $7.3 million for the same period in 2008. The increase in noninterest expense is primarily the result of an increase in operating expenses associated with our insurance agency and consulting subsidiaries associated with commissions paid concurrent with revenue increases. In addition, an increase in premiums being assessed by the Federal Deposit Insurance Corporation for the current calendar year has resulted in additional non-interest expense of $459,000 for the three months ended June 30, 2009 as compared with the three months ended June 30, 2008. Other operating expenses increased by $1.6 million or 11.2%, to $16.1 million for the six months ended June 30, 2009 from $14.5 million for the same period in 2008. The premiums being assessed by the Federal Deposit Insurance Corporation for the six months ended June 30, 2009 increased $631,000 compared to the six month period ended June 30, 2008. INCOME TAX. Income tax expense increased to $398,000 for the three months ended June 30, 2009 as compared to $239,000 for the second quarter 2008. For the six months ended June 30, 2009, income tax expense increased to $810,000 from $394,000 for the six months ended June 30, 2009. Net income increased from $1.1 million to $2.2 million for the six month period while the effective tax rate increased to 27.1% for the six months of 2009 from 26.8% for the six months of 2008 to reflect the overall tax rate expected to be in effect for 2009. LIQUIDITY AND CAPITAL RESOURCES. In addition to the Company's primary funding sources of cash flow from banking and insurance operations, deposits and borrowings, funding is provided from the principal and interest payments received on loans and investment securities, proceeds from the maturities and sale of investment securities, as well as proceeds from the sale of fixed rate mortgage loans in the secondary market and fees from the sales of insurance products. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit balances and mortgage prepayments are greatly influenced by general interest rates, the economic environment and local competitive conditions. The primary investing activities of the Company are the origination of residential mortgages, commercial loans and consumer loans, as well as the purchase of mortgage-backed and other debt securities. During the second quarter of 2009, loan originations totaled $41.4 million compared to $39.4 million during the second quarter of 2008. The purchases of investment and mortgage-backed securities totaled $23.9 million during the second quarter of 2009 as compared to $23.2 million during the second quarter of 2008. The purchases of investment securities were funded due to additional liquidity provided by increased deposits. 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. Additionally, the Company has lines of credit with the Federal Home Loan Bank, Federal Reserve Bank and two commercial banks that provide funding sources for lending, liquidity and asset and liability management as needed. During the second quarter of 2009 cash flows provided by the sale, principal payments and maturity of securities available for sale was $9.7 million compared to $14.1 million for the same period in 2008. In the ordinary 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 Page 31 of 37 <PAGE> June 30, 2009 the Company had outstanding commitments to originate loans of approximately $7.2 million, which generally have an expiration period of less than 120 days. Commitments to sell residential mortgages amounted to $8.0 million at June 30, 2009. 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 $54.4 million at June 30, 2009 and generally have an expiration period of less than one year. It is anticipated that there will be sufficient funds available to meet the current loan commitments and other obligations through the sources described above. The credit risk involved in issuing these commitments is essentially the same as that involved in extending loans to customers and is limited to the contractual notional amount of those instruments. Cash, interest-earning demand accounts at correspondent banks, federal funds sold, and other short-term investments are the Company's most liquid assets. The level of these assets are monitored daily and are dependent on operating, financing, lending and investing activities during any given period. Excess short-term liquidity is usually invested in overnight federal funds sold. In the event that funds beyond those generated internally are required due to higher expected loan commitment fundings, deposit outflows or the amount of debt being called, additional sources of funds are available through the use of repurchase agreements, the sale of loans or investments or the Company's various lines of credit. As of June 30, 2009 the total of cash, interest-earnings demand accounts and federal funds sold was $21.1 million. At June 30, 2009, the Bank exceeded all regulatory capital requirements. The current requirements and the actual levels for the Bank are detailed in the following table. <TABLE> <CAPTION> To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------------ -------------------------- --------------------------- Amount Ratio Amount Ratio Amount Ratio <S> <C> <C> <C> <C> <C> <C> As of June 30, 2009: (Dollars in thousands) Total Capital (to Risk Weighted Assets) $ 39,618 10.16% $ 31,194 8% $ 38,993 10% Tier I Capital (to Risk Weighted Assets) $ 36,994 9.49% $ 15,597 4% $ 23,396 6% Tier I Capital (to Average Assets) $ 36,994 6.95% $ 21,300 4% $ 26,625 5% <CAPTION> To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ---------------------- -------------------------- --------------------------- Amount Ratio Amount Ratio Amount Ratio <S> <C> <C> <C> <C> <C> <C> As of December 31, 2008: (Dollars in thousands) Total Capital (to Risk Weighted Assets) $ 37,214 10.21% $ 29,165 8% $ 36,457 10% Tier I Capital (to Risk Weighted Assets) $ 34,590 9.49% $ 14,582 4% $ 21,873 6% Tier I Capital (to Average Assets) $ 34,590 6.64% $ 20,837 4% $ 26,046 5% </TABLE> Page 32 of 37 <PAGE> ONEIDA FINANCIAL CORP. SELECTED FINANCIAL RATIOS At and for the Three and Six Months Ended June 30, 2009 and 2008 (unaudited) <TABLE> <CAPTION> (Annualized where appropriate) Three Months Ending Six Months Ended June 30, June 30, 2009 2008 2009 2008 ---- ---- ---- ---- <S> <C> <C> <C> <C> Performance Ratios: Return on average assets 0.77% 0.47% 0.79% 0.40% Return on average equity 8.03% 4.39% 8.05% 3.64% Net interest margin 3.66% 3.34% 3.61% 3.36% Efficiency Ratio 80.43% 86.03% 82.39% 88.25% Ratio of operating expense to average total assets 5.90% 5.33% 5.84% 5.37% Ratio of average interest-earning assets to average interest-bearing liabilities 108.55% 110.09% 108.14% 110.44% Asset Quality Ratios: Non-performing assets to total assets 0.19% 0.09% 0.19% 0.09% Allowance for loan losses to non-performing loans 420.51% 566.82% 420.51% 566.82% Allowance for loan losses to loans receivable, net 0.90% 0.87% 0.90% 0.87% Capital Ratios: Total stockholders' equity to total assets 9.98% 10.37% 9.98% 10.37% Average equity to average assets 9.57% 10.71% 9.84% 10.96% </TABLE> Page 33 of 37 <PAGE> ITEM 3. Quantitative and Qualitative Disclosure About Market Risk Various forms of market risk are inherent in the business of the Bank including concentration risk, liquidity management, credit risk and collateral risk among others. However, the Bank's most significant form of market risk is interest rate risk, as the majority of the Bank's assets and liabilities are sensitive to changes in interest rates. Ongoing monitoring and management of this risk is an important component of the Company's asset and liability management process. The Bank's interest rate risk management program focuses primarily on evaluating and managing the composition of the Bank's assets and liabilities in the context of various interest rate scenarios. Factors beyond Management's control, such as market interest rates and competition, also have an impact on interest income and expense. Based on the asset-liability composition at June 30, 2009, in a rising interest rate environment, Management would expect that the Company's cost of shorter-term deposits might rise faster than its earnings on longer-term loans and investments. Conversely, as interest rates decrease, the prepayment of principal on loans and investments tends to increase, causing the Company to invest funds in a lower rate environment. To mitigate the effect of interest rate changes, Management has taken steps to emphasize core deposits, monitor certificate of deposit rates to better match asset changes, and sell substantially all newly originated longer term fixed rate loans in the secondary market without recourse. Management believes this approach will help reduce the exposure to interest rate fluctuations and enhance long-term profitability. For a discussion of the Company's asset and liability management policies as well as the potential impact of interest rate changes upon the earnings of the Company, see "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2008 Annual Report to Stockholders. There has been no material change in the Company's interest rate risk profile since December 31, 2008. ITEM 4T. Controls and Procedures Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(3) and 15d - 15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the period covered by this quarterly report, the Company's disclosure controls and procedures are effective to ensure that information to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods or submits specified in the Securities and Exchange Commission's rules and forms. There has been no change in the Company's internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Page 34 of 37 <PAGE> ONEIDA FINANCIAL CORP. AND SUBSIDIARIES Part II - Other Information Item 1 Legal Proceedings Much of the Bank's market area is included in the 270,000-acre land claim of the Oneida Indian Nation ("Oneidas"). The land claim area is held primarily by private persons. Over 15 years ago the United States Supreme Court ruled in favor of the Oneidas in a lawsuit which management believes was intended to encourage the State of New York to negotiate an equitable settlement in a land dispute that has existed over 200 years. In June 1998, the United States Justice Department intervened in the action on behalf of the Oneidas against Madison County and Oneida County in New York State. In September 1998, an U.S. District Court removed a stay of litigation, having been in place since the late 1980's pending settlement negotiations. In December 1998, both the Oneidas and the U.S. Justice Department filed motions to amend the long outstanding claim against the State of New York. The motion attempts to include in the claim, various named and 20,000 unnamed additional defendants, who own real property in parts of Madison and Oneida counties, thereby including the additional defendants in the original suit. The U.S. District Court granted the motions to add as a defendant the State of New York, but denied the motions to add the private landowners. Neither the Bank nor the Company is a named defendant in the motion. The Court further rejected as not being viable the remedies of ejectment and/or of monetary damages against private landowners. In January 2001, amended complaints were served by the Oneidas and the United States which seek to eject the Counties of Madison and Oneida from lands owned by the counties, and the Oneidas also seek a declaration that they have the right to possess all land within the land claim area. In June 2001, the Court determined that certain land purchased by the Oneidas in 1997 and 1998 are exempt from real estate taxes, accepting the Oneidas argument that the acquired parcels lie within the boundaries of the "reservation" established in 1974 by the Federal Government. In February 2002, a joint statement was issued by the Oneidas, State of New York, and the counties of Madison and Oneida, indicating that the framework for a settlement had been agreed upon subject to the approval by the State legislature and the Federal Government. The Oneidas of Wisconsin and the Stockbridge-Munsee Band of the Mohican Indians have commenced separate actions in the United State District Court for the Northern District of New York to dispute and interrupt any settlement pending. In July 2003, the United States Court of Appeals affirmed the decision of the lower court against the City of Sherrill but appeals continue relative to the decision against the Counties of Madison and Oneida. In January 2005 the United State Supreme Court heard the appeal brought forward by the City of Sherrill against the Oneidas arguing that the acquisition of real property by the Oneidas within the land claim area does not return the property to sovereign status. Therefore, the City of Sherrill contends that the property is subject to the payment of real property taxes or revert to the ownership of the taxing authority if assessed property taxes are not paid. The United States Supreme Court filed their decision in March 2005, ruling in favor of the City of Sherrill. To date neither the original claim nor the motion to amend has had an adverse impact on the local economy or real property values. In addition, title insurance companies continue to underwrite policies in the land claim area with no change in premiums or underwriting standards. The Bank requires title insurance on all residential real estate loans, excluding home equity loans. Both the State of New York and the Oneidas have indicated in their respective communications that individual landowners will not be adversely affected by the ongoing litigation. The Company continues to monitor the situation. The Company is not involved in any other pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which are believed by management to be immaterial to the financial condition or operations of the Company. Item 1a Risk Factors There has not been any material change in the risk factors disclosure from that contained in the Company's 2008 Form 10-K for the fiscal year ended December 31, 2008. Item 2 Unregistered Sales of Equity Securities and Use of Proceeds The following table summarizes our share repurchase activity during the six months ended June 30, 2009. The shares repurchased were stock options that were exercised using reload options. Our current repurchase plan of 250,000 was announced on February 13, 2008 and represents 3.2% of the common stock outstanding. The plan has no expiration date. Page 35 of 37 <PAGE> <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------------------ Period Total Number Average Total Number of Shares Maximum Number of Shares of Shares Price Paid Purchased as Part of that May Yet Be Purchased Purchased per Share Publicly Announced Plans Under the Plan ------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> April 1, 2009 - April 30, 2009 -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------ May 1, 2009 - May 31, 2009 2,518 $11.25 -- -- ------------------------------------------------------------------------------------------------------------------------------ June 1, 2009 - June 30, 2009 -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------ Total 2,518 $11.25 -- 250,000 ------------------------------------------------------------------------------------------------------------------------------ </TABLE> Item 3 Defaults Upon Senior Securities Not applicable. Item 4 Submission of Matters to a Vote of Security Holders At the Annual Meeting of Shareholders, held on May 5, 2009, shareholders voted on the following matters as follows: Proposal No. 1 - Election of Directors <TABLE> <CAPTION> For Withheld --- -------- <S> <C> <C> Patricia D. Caprio 7,292,964 72,620 Frank O. White Jr. 7,287,619 77,965 Ralph L. Stevens MD 7,264,920 100,664 Gerald N. Volk 7,301,606 63,978 John A. Wight MD 7,296,810 68,774 </TABLE> Directors continuing in Office are as follows: Michael R. Kallet John E. Haskell Edward J. Clarke Rodney D. Kent Richard B. Myers Proposal No. 2 - Ratification of Crowe Horwath LLP as auditors for the Company for the fiscal year ended December 31, 2009: For Against Abstain --- ------- ------- 7,340,199 12,618 12,767 Item 5 Other Information None Item 6 Exhibits (a) All required exhibits are included in Part I under Consolidated Financial Statements, Notes to Unaudited Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations, and are incorporated by reference, herein. Exhibits Exhibit 31.1 - Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 - Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes - Oxley Act of 2002 Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Page 36 of 37 <PAGE> SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized. ONEIDA FINANCIAL CORP. Date: August 14, 2009 By: /s/ Michael R. Kallet ------------------------------------------- Michael R. Kallet President and Chief Executive Officer Date: August 14, 2009 By: /s/ Eric E. Stickels ------------------------------------------- Eric E. Stickels Executive Vice President and Chief Financial Officer Page 37 of 37 </TEXT> </DOCUMENT>