SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Securities Exchange Act Number 000-25101
ONEIDA FINANCIAL CORP.
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(Exact name of registrant as specified in its charter)
Federal 16-1561678
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(State or other jurisdiction of (IRS Employer)
incorporation or organization) Identification Number)
182 Main Street, Oneida, New York 13421
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (315) 363-2000
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Former name, former address and former fiscal year, if changed since last report
Indicate by check x whether the Registrant 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 [ ]
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 4,861,085 shares of
the Registrant's common stock outstanding as of October 1, 2002.
ONEIDA FINANCIAL CORP.
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Consolidated Statements of Condition 2
As of September 30, 2002 (unaudited) and December 31, 2001 (audited)
Consolidated Statements of Operations (unaudited) 3
For the three months ended and nine months ended September 30, 2002 and 2001
Consolidated Statements of Comprehensive Income (unaudited) 4
For the three months ended and nine months ended September 30, 2002 and 2001
Consolidated Statements of Cash Flows (unaudited) 5
For the three months ended and nine months ended September 30, 2002 and 2001
Notes to Consolidated Financial Statements (unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition 13
And Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
PART II. OTHER INFORMATION 22
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Page 1 of 24
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
At September 30, 2002 and December 31, 2001
(unaudited) (audited)
At At
September 30, December 31,
2002 2001
---- ----
(in thousands)
ASSETS
Cash and due from banks $ 11,314 $ 11,851
Federal funds sold 0 9,900
------------------------
TOTAL CASH AND CASH EQUIVALENTS 11,314 21,751
Investment securities, at fair value 121,257 78,390
Mortgage-backed securities, at fair value 53,217 53,686
Mortgage loans held for sale 5,441 5,946
Loans receivable 194,975 166,619
Allowance for credit losses (2,484) (1,672)
------------------------
LOANS RECEIVABLE, NET 192,491 164,947
Bank premises and equipment, net 10,106 8,015
Accrued interest receivable 2,335 2,028
Other real estate 29 77
Other assets 4,212 3,751
Goodwill 10,145 4,744
Other intangible assets 1,214 0
Cash surrender value - life insurance 9,765 9,382
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TOTAL ASSETS $ 421,526 $ 352,717
===========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest bearing deposits $ 250,674 $ 198,281
Non-interest bearing deposits 45,942 29,882
Borrowings 74,000 76,600
Other liabilities 3,432 2,940
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TOTAL LIABILITIES 374,048 307,703
Stockholders' equity:
Preferred stock, 1,000,000 shares authorized 0 0
Common stock ($.01 par value; 20,000,000
shares authorized; 5,495,069 issued) 55 55
Additional paid-in capital 16,777 16,779
Retained earnings 34,068 33,031
Common shares issued under employee
stock plans - unearned (874) (874)
Accumulated other comprehensive income (loss) 1,087 (157)
Treasury stock (at cost, 434,050
and 444,094 shares) (3,131) (3,198)
Unearned stock compensation (504) (622)
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TOTAL STOCKHOLDERS' EQUITY 47,478 45,014
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TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 421,526 $ 352,717
===========================================================================
The accompanying notes are an integral part of the consolidated financial
statements
Page 2 of 24
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended and Nine Months Ended September 30, 2002 (unaudited)
and 2001 (unaudited )
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except Earnings Per Share Data)
INTEREST INCOME:
Interest and fees on loans $ 3,746 $ 3,552 $10,331 $10,748
Interest on investment and mortgage-
backed securities 1,757 1,663 4,925 5,326
Dividends on equity securities 178 243 633 787
Interest on federal fund sold and
interest-bearing deposits 44 55 152 188
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Total interest and dividend income 5,725 5,513 16,041 17,049
- -----------------------------------------------------------------------------------------------------------------------------
NTEREST EXPENSE:
Savings deposit 159 211 393 684
Money market and Super NOW 170 185 452 505
Time deposits 1,376 1,637 4,197 4,937
Borrowings 877 1,080 2,718 3,194
- -----------------------------------------------------------------------------------------------------------------------------
Total interest expense 2,582 3,113 7,760 9,320
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NET INTEREST INCOME 3,143 2,400 8,281 7,729
Less: Provision for credit losses 80 120 350 360
- -----------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for credit losses 3,063 2,280 7,931 7,369
- -----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Investment security gain, net 112 54 116 44
Commission income 1,398 1,284 4,194 3,640
Other operating income 711 543 1,892 1,398
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Total other income 2,221 1,881 6,202 5,082
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OTHER EXPENSES:
Compensation and employee benefits 2,528 1,869 6,845 5,680
Occupancy expenses, net 775 548 2,061 1,711
Other operating expense 810 716 2,214 2,100
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Total other expenses 4,113 3,133 11,120 9,491
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INCOME BEFORE INCOME TAXES 1,171 1,028 3,013 2,960
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Provision for income taxes 346 287 864 880
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NET INCOME $ 825 $ 741 $ 2,149 $ 2,080
=============================================================================================================================
EARNINGS PER SHARE - BASIC $ 0.17 $ 0.15 $ 0.44 $ 0.43
=============================================================================================================================
EARNINGS PER SHARE - DILUTED $ 0.16 $ 0.15 $ 0.43 $ 0.43
=============================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3 of 24
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Three Months Ended and Nine Months Ended September 30, 2002 (unaudited)
and 2001 (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Net income $ 825 $ 741 $ 2,149 $ 2,080
------- ------- ------- -------
Other comprehensive income, net of tax:
Unrealized gains on investment securities available for sale:
Unrealized holding gains
arising during period 1,004 856 2,189 1,049
Less: reclassification adjustment for
gains included in net income (112) (54) (116) (44)
------- ------- ------- -------
892 802 2,073 1,005
Income tax effect (357) (321) (829) (402)
------- ------- ------- -------
Other comprehensive income, net of tax 535 481 1,244 603
Comprehensive Income $ 1,360 $ 1,222 $ 3,393 $ 2,683
====================================================
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4 of 24
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months Ended and Nine Months Ended September 30, 2002 (unaudited)
and 2001 (unaudited )
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands)
Operating Activities:
Net income $ 825 $ 741 $ 2,149 $ 2,080
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 306 285 782 881
Amortization of premiums/discounts on securities, net 36 (5) 98 25
Provision for credit losses and other real estate losses 80 120 350 360
Provision for investment losses 0 79 256 79
Stock compensation earned 39 39 117 118
Loss on sale of other real estate 0 25 19 25
Gain on sale/call of securities, net (112) (54) (116) (44)
Gain on sale of loans, net (124) (51) (245) (88)
Income tax payable (8) 22 (118) (100)
Accrued interest receivable 127 39 139 160
Other assets (283) (274) (1,157) (1,682)
Other liabilities (19) (558) (108) 666
Origination of loans held for sale (7,247) (6,805) (18,876) (20,832)
Proceeds from sales of loans 6,010 6,998 19,626 19,531
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash (used by) provided by operating activities (370) 601 2,916 1,179
- ---------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchase of investment securities (27,540) (13,176) (57,280) (38,466)
Principal collected on and proceeds of maturities
sales or calls from investments 12,716 13,451 38,337 56,435
Purchase of mortgage-backed securities (5,493) (4,378) (13,524) (25,260)
Principal collected on and proceeds from sales
of mortgage-backed securities 9,005 4,606 21,048 10,929
Net increase in loans (2,281) (4,277) (1,242) (4,531)
Purchase of bank premises and equipment (399) (323) (1,883) (1,474)
Proceeds from sale of other real estate 97 214 244 269
Purchase of SBC Financial Corp, net of cash acquired 0 0 (3,328) 0
Purchase of insurance agencies (201) 0 (384) (965)
Purchase of life insurance 0 0 0 (9,000)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,096) (3,883) (18,012) (12,063)
- ---------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net increase in demand deposit, savings,
money market, super now and escrow 3,410 2,271 16,257 7,514
Net (decrease) increase in time deposits (3,291) 3,209 (7,952) 9,443
Proceeds from borrowings 9,300 5,000 13,800 16,500
Repayment of borrowings (6,400) (5,000) (16,400) (12,000)
Cash dividends (565) (517) (1,114) (1,119)
Purchase of treasury stock 0 0 (3) (17)
Exercise of stock options (using treasury stock) 25 16 71 29
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Net cash provided by financing activities 2,479 4,979 4,659 20,350
- ---------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in cash and cash equivalents (11,987) 1,697 (10,437) 9,466
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 23,301 16,586 21,751 8,817
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 11,314 $ 18,283 $ 11,314 $ 18,283
=================================================================================================================================
Supplemental disclosures of cash flow information:
Cash paid for interest 2,558 2,989 7,689 9,264
Cash paid for income taxes 405 265 1,025 816
Non-cash investing activities:
Unrealized gain on investment and mortgage-backed
securities designated as available for sale 892 802 2,073 1,005
Transfer of loans to other real estate 29 42 54 281
Note payable for insurance acquisition 194 0 194 0
=================================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5 of 24
Oneida Financial Corp.
Notes to Consolidated Financial Statements
(Unaudited)
September 30, 2002
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary to fairly present the consolidated
financial position of the Oneida Financial Corp. (the "Company") at September
30, 2002 and the results of its consolidated operations and cash flows for the
period then ended have been included. Operating results for the three-month
period and nine-month period are not necessarily indicative of the results that
may be expected for the year ended December 31, 2002.
Note B - Earnings Per Share
Basic earnings per share is computed based on the weighted average shares
outstanding at September 30, 2002. Diluted earnings per share is computed based
on the weighted average shares outstanding adjusted for the dilutive effect of
the assumed exercise of stock options and awards during the year. The Company
paid a three-for-two stock dividend based on the ex-dividend date of April, 23,
2002. The following is a reconciliation of basic and diluted earnings per share
for the three months ended and nine months ended September 30. All share data
from prior periods have been retroactively restated to reflect the effect of the
stock dividend.
Income Shares Per Share
September 30, 2002:
- -------------------
Net income (Three Months Ended) $ 824,954
Basic Earnings Per Share: $ 824,924 4,859,477 $ 0.17
--------
Effect of dilutive securities:
Stock options and awards 0 175,585
----------------------------------
Diluted Earnings Per Share $ 824,924 5,033,062 $ 0.16
--------
September 30, 2001:
- -------------------
Net income (Three Months Ended) $ 741,014
Basic Earnings Per Share $ 741,014 4,799,477 $ 0.15
--------
Effect of dilutive securities:
Stock options and awards 0 130,273
----------------------------------
Diluted Earnings Per Share $ 741,014 4,929,750 $ 0.15
--------
September 30, 2002:
- -------------------
Net income (Nine Months Ended) $2,148,821
Basic Earnings Per Share: $2,148,821 4,845,938 $ 0.44
--------
Effect of dilutive securities:
Stock options and awards 0 172,151
----------------------------------
Diluted Earnings Per Share $2,148,821 5,018,089 $ 0.43
--------
September 30, 2001:
- -------------------
Net income (Nine Months Ended) $2,080,326
Basic Earnings Per Share $2,080,326 4,783,873 $ 0.43
--------
Effect of dilutive securities:
Stock options and awards 0 87,042
----------------------------------
Diluted Earnings Per Share $2,080,326 4,870,915 $ 0.43
--------
Page 6 of 24
Note C - Nature of Operations
On October 2, 2000, the Bank completed its acquisition of Bailey & Haskell
Associates, Inc., an insurance agency (the "Agency"). The Bank paid $3,075,000
in cash and $500,000 in Company stock, of which 45,496 shares were issued in
January 2001, to the Agency's shareholders. Goodwill in the amount of $3,350,000
was recorded in conjunction with the transaction. Under terms of the agreement,
contingent purchase payments based on future performance levels may be made over
a five-year period ending in 2005. As of September 30, 2002, $182,291 additional
goodwill was recorded for the contingent purchase payment for 2001.
On January 2, 2001, the Bank completed its acquisition of Noyes and LaLonde,
Inc., an insurance agency. The Bank paid $667,500 in cash for $55,200 in fixed
assets and established a note payable for $612,500 to be paid over 24 months
with interest at 7.5% per annum to acquire certain tangible and intangible
assets of the agency. Goodwill in the amount of $1,250,000 was recorded in
conjunction with the transaction. Noyes and LaLonde, Inc. was subsequently
merged into Bailey and Haskell Associates, Inc. Additionally, effective as of
January 1, 2001, the Bank also completed its acquisition of The Dunn Agency. The
Bank paid $247,500 in cash and established a note payable for $247,500 to be
paid over 24 months with interest at 7.5% per annum to acquire 100% of the
capital stock of The Dunn Agency. Goodwill in the amount of $523,000 was
recorded in conjunction with this transaction. The Dunn Agency was merged into
Bailey and Haskell Associates, Inc. as of January 1, 2002.
On July 1, 2002, the Bank completed its acquisition of Kennedy & Clarke, Inc.,
an insurance agency. The Bank paid $200,855 in cash and established a note
payable for $194,500 to be paid over 24 months with interest at 6.0% per annum
in exchange for $6,000 in fixed assets. Goodwill in the amount of $401,000 was
recorded in conjunction with the transaction. Kennedy & Clarke, Inc. has been
subsequently merged into Bailey and Haskell Associates, Inc.
The acquisitions were accounted for under the purchase method of accounting and,
accordingly, the results of the Agency operations are included in the financial
statements as of the date of the acquisitions.
On May 31, 2002, the Bank completed its acquisition of the State Bank of
Chittenango ("SBC"); a New York State chartered commercial bank. The results of
SBC's operations have been included in the consolidated financial statements
since that date. The Bank paid $11.9 million or $102.60 in cash for each of the
116,079 shares of common stock outstanding in SBC Financial Corporation. Assets
acquired as a result of the acquisition totaled $66.6 million and resulted in
additional goodwill and a core deposit intangible of approximately $6.1 million.
Amortization expense of the core deposit intangible approximated $29,000 and
$36,000 for the three months and nine months ended September 30, 2002
respectively.
The following summarizes the estimated fair values of the assets acquired and
liabilities assumed as of May 31, 2002:
(in thousands)
Cash and cash equivalents $ 8,593
Investment and mortgage-backed securities 29,146
Loans receivable, net 26,706
Other assets 2,159
Total assets acquired 66,604
Deposits (60,146)
Other liabilities (421)
Net assets acquired $ 6,037
The following represents pro-forma information on the results of operations for
the three months ended and nine months ended as of September 30, 2002 and 2001:
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(in thousands, except for per share data)
Net interest income
Oneida Financial Corp. $ 3,143 $ 2,400 $ 8,281 $ 7,729
------- ------- ------- -------
State Bank of Chittenango (1) 0 548 910 1,642
------- ------- ------- -------
Combined $ 3,143 $ 2,948 $ 9,191 $ 9,371
======= ======= ======= =======
Net income
Oneida Financial Corp. $825 $ 741 $ 2,149 $ 2,080
State Bank of Chittenango (1) 0 115 123 301
------- ------- ------- -------
Combined $825 $ 856 $ 2,272 $ 2,381
======= ======= ======= =======
Earnings per share
Oneida Financial Corp. $0.17 $ 0.15 $ 0.44 $ 0.43
State Bank of Chittenango (1) 0 0.03 0.03 0.07
------- ------- ------- -------
Combined $0.17 $ 0.18 $ 0.47 $ 0.50
======= ======= ======= =======
(1) - Information for the nine months ended 2002 for State Bank of Chittenango
reflects the results of operations through the closing as of May 31, 2002.
Page 7 of 24
Note D - New Pronouncements
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which addresses financial accounting and reporting for acquired
goodwill and other intangible assets. Under the new rule, goodwill will no
longer be amortized but will subject to annual impairment tests in accordance
with the Statement. Other intangible assets will continue to be amortized over
their useful lives. This statement was effective for the Company beginning on
January 1, 2002. The Company will periodically review for impairment based on
fair values and make adjustments as necessary. As of September 30, 2002, no
impairment adjustment has been made to the goodwill. The impact of the
pronouncement on the financial statements is as follows:
For the Three Months Ended For the Nine Months Ended
September 30, September 30, September 30, September 20,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands, except for Earnings Per Share Data)
Reported net income $ 825 $ 741 $2,149 $ 2,080
Add back: Goodwill amortization, net of tax 0 62 0 181
------ ------- ------ ---------
Adjusted Net income $ 825 $ 803 $2,149 $ 2,261
====== ======= ====== =========
Basic earnings per share:
Reported net income $ 0.17 $ 0.15 $ 0.44 $ 0.43
Goodwill amortization, net of tax 0 0.02 0 0.04
------ ------- ------ ---------
Adjusted net income $ 0.17 $ 0.17 $ 0.44 $ 0.47
====== ======= ====== =========
Diluted earnings per share:
Reported net income $ 0.16 $ 0.15 $ 0.43 $ 0.43
Goodwill amortization, net of tax 0 0.01 0 0.03
------ ------- ------ ---------
Adjusted net income $ 0.16 $ 0.16 $ 0.43 $ 0.46
====== ======= ====== =========
Note E - Charter Conversion
The Company received regulatory approval to convert its charter from a Delaware
Corporation to a Federal Corporation chartered by the Office of Thrift
Supervision ("OTS") on July 12, 2001 and completed the charter conversion on
July 18, 2001. As part of the charter conversion, the total number of shares
authorized changed from 8,000,000 at a par value of $0.10 to 20,000,000 at a par
value of $0.01. In addition, one million shares of serial preferred stock were
authorized. There is no serial preferred stock outstanding at September 30,
2002.
Note F - Dividend Restrictions
Oneida Financial MHC, which owns 2,873,167 or 56.77% of the outstanding shares
as of September 30, 2002 of Oneida Financial Corp., had filed a notice with the
OTS regarding its intent to waive its right to receive cash dividends declared
by Oneida Financial Corp. The notice was approved by the OTS subject to the
condition that Oneida Financial Corp.'s retained earnings be restricted by the
dollar amount of dividends waived by Oneida Financial MHC. As of September 30,
2002 and December 31, 2001, the retained earnings restricted for cash dividends
waived was $2,164,453 and $689,560, respectively.
Page 8 of 24
Note G - Stock Split
On March 13, 2002, the Company declared a three-for-two stock dividend to
shareholders of record as of April 9, 2002, payable on April 23, 2002. The stock
dividend was paid with additional shares of common stock and fractional shares
were paid in cash based on the last sales price of the common stock on the first
trading date following the record date, as adjusted for the stock dividend. The
Company recorded the stock dividend as of the ex-dividend date. All share data
from previous periods have been retroactively restated to reflect the effect of
the stock dividend.
Note H - Allowance for Credit Losses
The allowance for credit losses decreased $150,000 net of the allowance for
credit losses of State Bank of Chittenango to $2.5 million at September 30,
2002. The decrease in the allowance is due in part to one commercial loan
charged off during the first quarter of 2002 and due to a change in the
methodology used by management in determining the adequacy of the allowance for
credit losses. The allowance is established based upon management's evaluation
of the probable and estimable losses in the loan portfolio, the composition of
the loan portfolio and other quantitative and qualitative factors. Management
monitors and modifies the level of the allowance for credit losses in order to
maintain a level considered adequate to provide for potential loan losses.
Annually, management evaluates the adequacy of the allowance and determines the
appropriate level of provision for credit losses by applying fixed percentages
to each category of performing loans and classified loans. Management has
updated the fixed percentages to be applied during 2002 to each loan category
based on net charge-off experience and delinquencies over the past five years
and currently. Utilization of a similar methodology as applied during 2001 would
have resulted in additional provisions charged against earnings during the first
quarter of 2002 of approximately $250,000. Management believes that the current
method of determining the adequacy of the allowance for credit losses is prudent
in light of the evaluation and review of the fair value of underlying
collateral, economic conditions, historic loan loss experience and geographic
concentrations. Offsetting the decrease in the allowance due to the change in
methodology was the addition of $962,000 related to SBC's acquisition as of May
31, 2002. At September 30, 2002 the allowance for credit losses as a percentage
of net loans receivable was 1.25% as compared to 1.00% on September 30, 2001.
Note I - Segment Information
The Company has determined that it has two primary business segments, its
banking franchise and its insurance activities. For the three months ended and
nine months ended September 30, 2002 and 2001, the Company's insurance
activities consisted of those conducted through Bailey & Haskell Associates,
Inc. and The Dunn Agency subsidiaries. Information about the Company's segments
is presented in the following table for the periods indicated:
Three Months Ended September 30, 2002
-------------------------------------
2002
-------------------------------------
(in thousands)
Banking Insurance
Activities Activities Total
Net interest income $3,143 $ -- $3,143
Provision for credit losses 80 -- 80
------ ------ ------
Net interest income after provision
for credit losses 3,063 -- 3,063
Other income 823 1,398 2,221
Other expenses 2,882 1,231 4,113
------ ------ ------
Income before income taxes 1,004 167 1,171
Income tax expense 260 86 346
------ ------ ------
Net income $ 744 $ 81 $ 825
====== ====== ======
Page 9 of 24
Three Months Ended September 30, 2001
-------------------------------------
2002
-------------------------------------
(in thousands)
Banking Insurance
Activities Activities Total
Net interest income $2,400 $ -- $2,400
Provision for credit losses 120 -- 120
------ ------ ------
Net interest income after provision
for credit losses 2,280 -- 2,280
Other income 597 1,284 1,881
Other expenses 2,197 936 3,133
------ ------ ------
Income before income taxes 680 348 1,028
Income tax expense 190 97 287
------ ------ ------
Net income $ 490 $ 251 $ 741
====== ====== ======
Nine Months Ended September 30, 2002
------------------------------------
2002
------------------------------------
(in thousands)
Banking Insurance
Activities Activities Total
Net interest income $ 8,281 $ -- $ 8,281
Provision for credit losses 350 -- 350
------- ------- -------
Net interest income after provision
for credit losses 7,931 -- 7,931
Other income 2,008 4,194 6,202
Other expenses 7,640 3,480 11,120
------- ------- -------
Income before income taxes 2,299 714 3,013
Income tax expense 592 272 864
------- ------- -------
Net income $ 1,707 $ 442 $ 2,149
======= ======= =======
Page 10 of 24
Nine Months Ended September 30, 2001
------------------------------------
2002
------------------------------------
(in thousands)
Banking Insurance
Activities Activities Total
Net interest income $7,729 $ -- $7,729
Provision for credit losses 360 -- 360
------ ------ ------
Net interest income after provision
for credit losses 7,369 -- 7,369
Other income 1,442 3,640 5,082
Other expenses 6,550 2,941 9,491
------ ------ ------
Income before income taxes 2,261 699 2,960
Income tax expense 672 208 880
------ ------ ------
Net income $1,589 $ 491 $2,080
Page 11 of 24
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
Page 12 of 24
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 financial
condition and should be read in conjunction with the Company's consolidated
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 raised and
retained in the initial public stock offering. Consequently, the net income of
the Company is primarily derived from its investment in the Bank. The Bank's net
income is 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 credit losses, as well as by the amount of
other income, including income from fees and service charges, revenue derived
from the insurance agency activities 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. At December 31, 2001 and
September 30, 2002 the Company had 4,828,927 shares and 4,861,085 shares
outstanding of which 2,873,167 were held by Oneida Financial MHC, the Company's
mutual holding company parent.
RECENT DEVELOPMENTS
On March 13, 2002, the Company declared a three-for-two stock dividend that
was paid on April 23, 2002. The stock dividend was paid with additional shares
of common stock and fractional shares were paid in cash based on the last sales
price of the common stock on the first trading date following the record date,
as adjusted for the stock dividend. The Company recorded the stock dividend as
of the ex-dividend date. All share data from prior periods have been
retroactively restated to reflect the effect of the stock dividend.
On May 31, 2002, the Bank completed its acquisition of the State Bank of
Chittenango; a New York State chartered commercial bank. The Bank paid $11.9
million or $102.60 in cash for each of the 116,079 shares of common stock
outstanding in SBC Financial Corporation. Assets acquired as a result of the
acquisition totaled $66.6 million and resulted in additional goodwill and core
deposit intangible of approximately $6.1 million. Amortization expense of the
core deposit intangible approximated $29,000 and $36,000 for the three months
and nine months ended September 30, 2002.
On July 1, 2002, the Bank completed its acquisition of Kennedy & Clarke,
Inc., an insurance agency. The Bank paid $200,855 in cash and established a note
payable of $194,500 to be paid over 24 months with interest at 6.0% per annum in
exchange for $6,000 in fixed assets. Goodwill in the amount of $401,000 was
recorded in conjunction with the transaction. Kennedy & Clarke, Inc. has been
subsequently merged into Bailey and Haskell Associates, Inc.
Page 13 of 24
The Company announced a cash dividend to all shareholders of record as of
July 16, 2002 of $0.26 per share of common stock, which was paid on August 6,
2002 to all shareholders other than Oneida Financial MHC our mutual holding
company parent.
FINANCIAL CONDITION
ASSETS. Total assets at September 30, 2002 were $421.5 million, an increase
of $68.8 million from $352.7 million at December 31, 2001. The Company's asset
growth is primarily due to the acquisition of State Bank of Chittenango. Assets
acquired as of the completion of the acquisition totaled $66.6 million. The
merger of the two companies provided $26.7 million in loans receivable, net and
$29.1 million in investment and mortgage-backed securities. The acquisition
resulted in additional goodwill and a core deposit intangible of approximately
$6.1 million. Net loans receivable for the year increased $300,000, net of State
Bank of Chittenango loans. The slight increase in net loans receivable is due to
an increase in commercial real estate of $2.8 million offset by decreases in
consumer loans of $1.6 million and residential loans of $1.2 million.
Residential loans decreased due to the sale of $19.4 million in fixed rate
one-to-four family residential loans during 2002. Investment and mortgage-backed
securities increased $13.3 million net of State Bank of Chittenango investments.
The increase was due to purchases made during the year to invest excess cash on
hand in addition to reinvesting called Agency bond proceeds. Cash and cash
equivalents decreased $10.4 million for the year to $11.3 million at September
30, 2002 from $21.8 million as of December 31, 2001.
The allowance for credit losses decreased $150,000 net of the allowance for
credit losses of State Bank of Chittenango to $2.5 million at September 30,
2002. The decrease in the allowance is due in part to one commercial loan
charged-off during the first quarter of 2002 and due to a change in the
methodology used by management in determining the adequacy of the allowance for
credit losses. The allowance is established based upon management's evaluation
of the probable and estimable losses in the loan portfolio, the composition of
the loan portfolio and other quantitative and qualitative factors. Management
monitors and modifies the level of the allowance for credit losses in order to
maintain a level considered adequate to provide for potential loan losses.
Annually, management evaluates the adequacy of the allowance and determines the
appropriate level of provision of credit losses by applying fixed percentages to
each category of performing loans and classified loans. Management has updated
the fixed percentages to be applied during 2002 to each loan category based on
net charge-off experience and delinquencies over the past five years and
currently. Utilization of a similar methodology as applied during 2001 would
have resulted in additional provisions charged against earnings during the first
quarter of 2002 of approximately $250,000. Management believes that the current
method of determining the adequacy of the allowance for credit losses is prudent
in light of the evaluation and review of the fair value of underlying
collateral, economic conditions, historic loan loss experience and geographic
concentrations. Offsetting the decrease in the allowance due to the change in
methodology was the addition of $962,000 related to SBC's acquisition as of May
31, 2002. At September 30, 2002 the allowance for credit losses as a percentage
of net loans receivable was 1.25% as compared to 1.00% on September 30, 2001.
LIABILITIES. Total liabilities increased by $66.3 million or 21.6% to
$374.0 million at September 30, 2002 from $307.7 million at December 31, 2001.
The increase is primarily the result of $60.1 million in deposits assumed in
connection with the acquisition of State Bank of Chittenango. The Bank continues
to emphasize core deposits and checking accounts, which increased by $3.7
million since December 31, 2001. In addition, lower yielding savings and Money
Market/NOW accounts increased $7.1 million. Certificates of deposit decreased
$8.0 million or by 6.5% since December 31, 2001. Borrowings decreased $2.6
million since December 31, 2001 due to repayment of maturing borrowings.
STOCKHOLDERS' EQUITY. Stockholders' equity at September 30, 2002 was $47.5
million, an increase of $2.5 million from $45.0 million at December 31, 2001.
The increase in stockholders' equity reflects the addition of after-tax net
income of $2.1 million for the nine months ended September 30, 2002 and an
adjustment for the net unrealized gain on available for sale mortgage-backed and
other investment securities at September 30, 2002 as compared with December 31,
2001. A decrease in interest rates generally has a positive effect on the market
value of the Company's investments and mortgage-backed securities portfolios.
Accumulated Other Comprehensive Income (Loss) increased $1.2 million from
December 31, 2001. The increases to stockholders' equity were partially offset
by the payment of cash dividend during the year of $0.51 resulting in an equity
reduction of $1.1 million.
Page 14 of 24
ANALYSIS OF NET INTEREST INCOME
Net interest income represents the difference between income on
interest-earning assets and expense on interest-bearing liabilities. Net
interest income also depends on the relative amounts of interest-earning assets
and interest-bearing liabilities and the interest rates earned or paid on the
assets or liabilities.
AVERAGE BALANCE SHEET. The following tables set forth-certain information
relating to the Company for the three months ended and nine months ended
September 30, 2002 and 2001 and for the year ended December 31, 2001. For the
periods indicated, the dollar amount of interest income from average
interest-earning assets and the resultant yields, as well as the interest
expense on average interest-bearing liabilities, is expressed in thousands of
dollars and percentages. No tax equivalent adjustments were made. The average
balance is an average daily balance.
TABLE 1. Average Balance Sheet. (Quarterly)
Three Months Ended September 30, Year Ended Dec. 31,
-------------------------------- -------------------
2002 2001 2001
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)
Interest-earning Assets:
Loans Receivable* $198,361 $ 3,746 7.55% $170,811 $ 3,552 8.32% $169,831 $ 14,232 8.38%
Investment Securities 151,264 1,898 5.02% 125,390 1,848 5.90% 122,372 7,724 6.31%
Federal Funds 9,797 44 1.80% 6,190 55 3.55% 6,935 246 3.55%
Equity Securities 5,824 37 2.54% 6,282 58 3.69% 6,325 259 4.09%
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total Interest-earning Assets 365,246 5,725 6.27% 308,673 5,513 7.14% 305,463 22,461 7.35%
-------- -------- ---- -------- -------- ---- -------- -------- ----
Interest-bearing Liabilities:
Money Market Deposits $ 34,469 $ 157 1.81% $ 18,272 $ 155 3.37% $ 18,317 $ 547 2.99%
Savings Accounts 68,687 159 0.92% 47,958 211 1.75% 48,083 834 1.73%
Interest-bearing Checking 11,723 13 0.44% 9,205 30 1.29% 8,943 116 1.30%
Time Deposits 133,828 1,376 4.08% 115,207 1,637 5.64% 113,762 6,533 5.74%
Borrowings 69,307 877 5.02% 76,600 1,080 5.59% 74,904 4,198 5.60%
-------- -------- ---- -------- -------- ---- -------- -------- ----
Total Interest-bearing Liabs 318,014 2,582 3.22% 267,242 3,113 4.62% 264,009 12,228 4.63%
-------- -------- ---- -------- -------- ---- -------- -------- ----
Net Interest Income $ 3,143 $ 2,400 $ 10,233
======== ======== ========
Net Interest Spread 3.05% 2.52% 2.72%
==== ==== ====
Net Earning Assets $ 47,232 $ 41,431 $ 41,454
======== ======== ==========
Net yield on average
Interest-earning assets 3.44% 3.11% 3.35%
======== ======= ========
Average interest-earning
assets to average
Interest-bearing liabs 114.85% 115.50% 115.70%
======== ======= =======
*Included in Average Loans Receivable balance for the periods presented is
Mortgage Loans Held for Sale.
Page 15 of 24
Nine Months Ended December 30, Year Ended Dec. 31,
------------------------------ -------------------
2002 2001 2001
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)
Interest-earning Assets:
Loans Receivable* $183,000 $ 10,331 7.53% $168,566 $ 10,748 8.50% $169,831 $ 14,232 8.38%
Investment Securities 138,662 5,436 5.23% 121,889 5,915 6.47% 122,372 7,724 6.31%
Federal Funds 11,742 152 1.73% 5,875 188 4.27% 6,935 246 3.55%
Equity Securities 6,111 122 2.66% 6,335 198 4.17% 6,325 259 4.09%
Total Interest-earning Assets 339,515 16,041 6.30% 302,665 17,049 7.51% 305,463 22,461 7.35%
Interest-bearing Liabilities:
Money Market Deposits $ 28,774 $ 418 1.94% $ 17,199 $ 408 3.16% $ 18,317 $ 547 2.99%
Savings Accounts 68,492 393 0.77% 48,309 684 1.89% 48,083 834 1.73%
Interest-bearing Checking 9,911 34 0.46% 8,937 97 1.45% 8,943 116 1.30%
Time Deposits 124,350 4,197 4.51% 112,108 4,937 5.87% 113,762 6,533 5.74%
Borrowings 72,738 2,718 5.00% 74,338 3,194 5.73% 74,904 4,198 5.60%
Total Interest-bearing Liabs 304,265 7,760 3.41% 260,891 9,320 4.76% 264,009 12,228 4.63%
Net Interest Income $ 8,281 $ 7,729 $10,233
======== ======== ========
Net Interest Spread 2.89% 2.75% 2.72%
==== ==== ====
Net Earning Assets $ 35,250 $ 41,774 $ 41,454
======== ======== ==========
Net yield on average
Interest-earning assets 3.25% 3.40% 3.35%
======== ======== ========
Average interest-earning
assets to average
Interest-bearing liabs 111.59% 116.01% 115.70%
======== ======== =======
*Included in Average Loans Receivable balance for the periods presented is
Mortgage Loans Held for Sale.
RESULTS OF OPERATIONS
GENERAL. Net income for the three months ended September 30, 2002 increased
by $84,000 or 11.3% to $825,000 for the third quarter of 2002 from $741,000 for
the three months ended September 30, 2001. The increase was due primarily to an
increase in net interest income and non-interest income as well as a decrease in
the provision for credit losses. Offsetting these were increases in non-interest
expenses as well as the provision for income taxes. Net income for the nine
months ended September 30, 2002 increased by $69,000 and was $2.1 million for
the nine-month periods in both 2002 and 2001. The increase in net income
reflects an increase in net interest income and non-interest income as well as a
decrease in the provision for credit losses and provision for income taxes,
partially offset by an increase in non-interest expense.
INTEREST INCOME. Interest income increased by $212,000 or 3.8%, to $5.7
million for the three months ended September 30, 2002 from $5.5 million for
three months ended September 30, 2001. The increase in interest income was
primarily a result of an increase in interest income on loans receivable of
$194,000 for the third quarter of 2002. In addition, interest income on
investment and mortgage-backed securities increased $94,000 for the three months
ended September 30, 2002. For the nine months ended September 30, 2002 interest
income was $16.0 million, a decrease of $1.0 million or 5.9% as compared with
the same period in 2001. For the nine months ended September 30, 2002, interest
income on loans receivable decreased $417,000 or 3.9% compared with the same
period in 2001.Interest income on investment and mortgage-backed securities
decreased $401,000 for the nine months ended September 30, 2002 compared with
the same period 2001. Dividend income on equity securities decreased $65,000 for
the third quarter 2002 and $154,000 year to date. Interest income on federal
funds decreased $11,000 and $36,000 for the three months and nine months ended
September 30, 2002. The reduction in interest income was due to the decrease in
market interest rates between the two periods as the Federal Reserve reduced the
prime rate by 175 basis points from September 2001 to September 2002.
The increase in interest income from loans is a result of an increase of
$27.6 million in the average balance of loans receivable for the three months
ended September 30, 2002 partially offset by a decrease of 77 basis points in
the average yield to 7.55% at September 30, 2002 from 8.32% at September 30,
2001. For the nine months ended September 30, 2002, the average balance of loans
receivable increased $14.4 million with the average yield decreasing 97 basis
points to 7.53% during the 2002 period from 8.50% during the nine month period
in 2001.
Investment income increased as a result of an increase of $25.9 million in
the average balance of investment and mortgage-backed securities for the three
month period ended September 30, 2002 as compared with the same period in 2001
partially offset by a decrease in the average yield of investment securities of
88 basis points to 5.02%
Page 16 of 24
at September 30, 2002 from 5.90% at September 30, 2001.
For the nine months ended September 30, 2002, the average balance of investments
and mortgage-backed securities increased $16.8 million with the average yield
decreasing 124 basis points to 5.23% during the 2002 period from 6.47% during
the nine month period in 2001.
Interest income from federal funds decreased during the three months ended
September 30, 2002 to $44,000 as compared with $55,000 for the 2001 period. The
decrease in interest income is due to a decrease of 175 basis points in the
average yield earned partially offset by an increase in the average balance of
$3.6 million. The increase in the average balance of fed funds reflects
management's decision to invest in shorter-term assets during a period of
moderate loan growth.
INTEREST EXPENSE. Interest expense was $2.6 million for the three months
ended September 30, 2002, a decrease of $531,000 or 17.1% from the same period
in 2001. The decrease in interest expense is due to a decrease in interest paid
on borrowed funds and deposit accounts. Interest expense of borrowed funds
totaled $877,000 for the third quarter of 2002 compared with $1.1 million for
the 2001 period. The average cost of borrowed funds decreased 57 basis points to
5.02% as of September 30, 2002 from 5.59% for the three months ended September
30, 2001. The average balance outstanding of borrowings also decreased during
the three months ended September 30, 2002 to $69.3 million compared to $76.6
million for the same period in 2001. Interest expense on deposits decreased by
$328,000 for the three months ended September 30, 2002 to $1.7 million, a
decrease of 16.1%. The decrease in interest expense on deposits was due to a 152
basis point decrease in the average cost of deposits for the third quarter 2002
partially offset by an increase in the average balance on deposit accounts of
$58.1 million. The average balance of deposits for the nine months ended
September 30, 2002 increased $45.0 million as compared with the same period of
2001. This increase offset a decrease in the average rate paid on deposits of
148 basis points resulting in a decrease in interest expense for the nine months
of $1.1 million compared with the prior year. The decrease in average rate paid
for both the three months and nine months ended September 30, 2002 is due to a
change in the deposit mix. Certificate of deposits represented 46% of total
deposits as of September 30, 2002 which is a decrease of 7.2% from September 30,
2001. Checking and MM/Now accounts increased 4.5% of total deposits as of
September 30, 2002 as compared to September 30, 2001.
PROVISION FOR CREDIT LOSSES. Total provision for credit losses for the
three months ended September 30, 2002 were $80,000 as compared to $120,000 made
during the same period of 2001. For the nine months ended September 30, 2002,
the provision for credit losses was $350,000 compared to $360,000 for the
comparable period in 2001. The allowance for credit losses was $2.5 million or
1.25% of loans receivable at September 30, 2002 as compared with $1.7 million or
1.00% of loans receivable at September 30, 2001. Management continues to monitor
changes in the loan portfolio mix as the Bank originates a higher level of
commercial and consumer loans. The method utilized to evaluate 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
losses that are probable and reasonably estimable. See Financial Condition for
further discussion of allowance for credit losses.
OTHER INCOME. Other operating income increased by $282,000 for the
three-month period ending September 30, 2002 compared with the same period in
2001 to $2.1 million from $1.8 million. The increase in other income is
primarily due to commissions received from the insurance agencies of $1.4
million for the three months ended September 30, 2002 as compared with $1.3
million for the same period during 2001. In addition, there was an increase in
fee income on deposit accounts of $62,000 to $260,000 during the 2002 period
from $198,000 during the 2001 period. Gains realized on the sale of fixed-rate
residential loans increased during the third quarter of 2002 by $73,000 compared
to the same period in 2001 due to an increase in sales activity during the
quarter.
Investment security gains, net increased $58,000 to $112,000 for the
quarter ended September 30, 2002 from $54,000 for the quarter ended September
30, 2001. For the nine months ended September 30, 2002, investment security
gains, net increased $72,000 to $116,000 for the same period in 2001. Included
in investment security gains was a loss of $256,000 for an other than temporary
decline in the value of an investment security. The investment security was
written down to the fair market value as of March 31, 2002 with a charge to
earnings. Offsetting this write-down were investment gains on the sales of other
investments that totaled $257,000 during the first quarter of 2002.
For the nine months ended September 30, 2002, other operating income
increased $1.1 million from $5.0 million as of September 30, 2001 to $6.1
million as of September 30, 2002. The increase is primarily due to commission
income received from the insurance agencies of $4.2 million for the nine months
ended September 30, 2002 as compared with $3.6 million for the same period
during 2001. In addition, there was an increase in the cash surrender value of
$133,000 from Bank Owned Life Insurance during 2002 as compared with the same
period in 2001 due to timing of the purchase. Gains realized on the sale of
fixed-rate residential loans increased during the nine months ended September
30, 2002 by $156,000 compared to the same period in 2001. Loans sales totaled
$19.4 million for both the nine month periods in 2002 and 2001.
Page 17 of 24
OTHER EXPENSES. Other operating expenses increased by $980,000 or 31.3%, to
$4.1 million for the three months ended September 30, 2002 from $3.1 million for
the same period in 2001. Compensation increased $659,000 or 35.3% due to
increases in employee benefit expense as well as additional expenses associated
with the insurance agency subsidiaries and the purchase of SBC. Building
occupancy increased $227,000, as a result of additional expenses from insurance
agency subsidiaries and the addition of SBC facilities.
For the nine months ended September 30, 2002, operating expenses increased
$1.6 million to $11.1 million from $9.5 million for the nine months ended
September 30,2001. The increase was primarily the result of operating expenses
associated with the insurance agency subsidiaries.
INCOME TAX. Income tax expense was $346,000 for the three months ended
September 30, 2002, an increase of $59,000 from the third quarter 2001 provision
of $287,000. The effective tax rate increased to 29.5% for the third quarter
2002 from 27.9% for the three months ended September 30, 2001. For the nine
months ended, the income tax expense was $864,000 as compared to $880,000 for
the same period in 2001. The effective tax rate decreased to 28.7% for 2002 as
compared with 29.7% for the nine months ended September 30,2001.
Page 18 of 24
ONEIDA FINANCIAL CORP.
SELECTED FINANCIAL RATIOS
At and for the Three Months Ended and Nine Months Ended September 30, 2002 and
September 30, 2001(unaudited)
(annualized where appropriate)
Three Months Ending Nine Months Ending
September 30, September 30,
2001 2002 2002 2001
---- ---- ---- ----
Performance Ratios:
Return on average assets 0.78% 0.87% 0.74% 0.83%
Return on average equity7.02% 6.79% 6.21% 6.43%
Net interest margin 3.44% 3.11% 3.25% 3.40%
Efficiency Ratio 78.31% 71.17% 77.39% 72.08%
Ratio of operating expense to average total assets 3.89% 3.57% 3.85% 3.80%
Ratio of average interest-earning assets to
average interest-bearing liabilities 114.85% 115.50% 111.59% 116.01%
Asset Quality Ratios:
Non-performing assets to total assets 0.08% 0.09% 0.08% 0.09%
Allowance for loan losses to non-performing loans 822.52% 657.75% 822.52% 657.75%
Allowance for loan losses to loans receivable, net 1.25% 1.00% 1.25% 1.00%
Capital Ratios:
Total shareholders' equity to total assets 11.26% 12.83% 11.26% 12.83%
Average equity to average assets 11.97% 12.96% 11.97% 12.96%
Page 19 of 24
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 September 30, 2002, 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 2001 Annual Report to Stockholders. The
Company regularly evaluates the potential impact of interest rate changes and
has evaluated the risk profile subsequent to the SBC acquisition. The Company
continues to manage its interest rate risk tolerance within a reasonable and
consistent range.
ITEM 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Exchange Act) as of a date
(the "Evaluation Date") within 90 days prior to the filing date of this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, our disclosure controls and
procedures were effective in timely alerting them to the material information
relating to us (or our consolidated subsidiaries) required to be included in our
periodic SEC filings.
(b) Changes in internal controls.
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
Page 20 of 24
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. 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 established in 1794 by the Federal Government. The State
of New York, Counties of Madison and Oneida and the City of Sherrill have
appealed the Courts decision with a court date set for March 2002. 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.
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 2 Changes in Securities
None
Item 3 Default Upon Senior Securities
Not applicable.
Page 21 of 24
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(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.
(b) Exhibits
Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxly Act of 2002
Page 22 of 24
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: October 29, 2002 By: /s/ Michael R. Kallet
---------------------------------
Michael R. Kallet
President and Chief Executive Officer
Date: October 29, 2002 By: /s/ Eric E. Stickels
---------------------------------
Eric E. Stickels
Senior Vice President and Chief
Financial Officer
Page 23 of 24
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael R. Kallet, President and Chief Executive Officer, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of September 30, 2002;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
October 29, 2002 /s/ Michael R. Kallet
Date ------------------------------------------------
Michael R. Kallet
President and Chief Executive Officer
Page 24 of 24
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Eric E. Stickels, Senior Vice President and Chief Financial Officer, certify
that:
(1) I have reviewed this quarterly report on Form 10-Q of September 30, 2002;
(2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
(6) The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
October 29, 2002 /s/ Eric E. Stickels
------------------------------------------
Date Eric E. Stickels
Senior Vice President and Chief Financial Officer
Page 23 of 24