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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------------------
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, 2004
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)
Registrant's telephone number, including area code: (315) 363-2000
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
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 is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12,13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. 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 7,489,357 shares
of the Registrant's common stock outstanding as of November 1, 2004.
ONEIDA FINANCIAL CORP.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 1
Consolidated Statements of Condition 2
As of September 30, 2004 (unaudited) and December 31, 2003 (audited)
Consolidated Statements of Operations (unaudited) 3
For the three months ended and nine months ended September 30, 2004 and 2003
Consolidated Statements of Comprehensive Income (Loss) (unaudited) 4
For the three months ended and nine months ended September 30, 2004 and 2003
Consolidated Statements of Changes in Stockholders' Equity
(unaudited) For the three months ended and nine months ended 5
September 30, 2004
Consolidated Statements of Cash Flows (unaudited) 6
For the three months ended and nine months ended September 30, 2004 and 2003
Notes to Consolidated Financial Statements (unaudited) 8
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
Item 1. Legal Proceedings 22
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
PART I. FINANCIAL INFORMATION
Item I. Financial Statements
Page 1 of 23
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
At September 30, 2004 and December 31, 2003
(unaudited) (audited)
At At
September 30, December 31,
2004 2003
---- ----
(in thousands, except share data)
ASSETS
Cash and due from banks $ 12,725 $ 12,289
--------------------------------
TOTAL CASH AND CASH EQUIVALENTS 12,725 12,289
Investment securities, at fair value 123,474 122,049
Mortgage-backed securities, at fair value 36,328 51,788
Mortgage loans held for sale 3,266 1,960
Loans receivable 212,456 200,752
Allowance for loan losses (2,340) (2,115)
--------------------------------
LOANS RECEIVABLE, NET 210,116 198,637
Bank premises and equipment, net 9,967 10,258
Accrued interest receivable 1,991 2,191
Other real estate -- 115
Other assets 5,370 5,798
Cash surrender value - life insurance 10,714 10,373
Goodwill 12,284 11,632
Other intangible assets 1,014 1,099
-------------------------------------------------------------------------------------
TOTAL ASSETS $ 427,249 $ 428,189
=====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Interest bearing deposits $ 252,572 $ 255,871
Non-interest bearing deposits 53,750 49,644
Borrowings 65,570 67,400
Other liabilities 3,620 4,439
--------------------------------
TOTAL LIABILITIES 375,512 377,354
Stockholders' equity:
Preferred stock, 1,000,000 shares authorized -- --
Common stock ($.01 par value; 20,000,000
shares authorized;
8,242,452 and 5,495,069 issued) 82 55
Additional paid-in capital 17,585 17,552
Retained earnings 38,564 37,144
Common shares issued under employee
stock plans - unearned (581) (581)
Accumulated other comprehensive income (loss) (690) 21
Treasury stock (at cost, 587,287
and 401,625 shares) (3,047) (3,039)
Unearned stock-based compensation (176) (317)
-------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 51,737 50,835
-------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 427,249 $ 428,189
=====================================================================================
The accompanying notes are an integral part of the consolidated financial
statements
Page 2 of 23
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 2004 (unaudited) and
2003 (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30 September 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands, except Earnings per Share Data)
INTEREST INCOME:
Interest and fees on loans $ 3,252 $ 3,353 $ 9,650 $ 10,341
Interest on investment and mortgage-
backed securities 1,443 1,626 4,517 4,776
Dividends on equity securities 165 211 520 637
Interest on federal funds sold and
Interest-earning deposits 8 15 20 80
- ------------------------------------------------------------------------------------------------------------------
Total interest and dividend income 4,868 5,205 14,707 15,834
- ------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Savings deposit 88 119 246 342
Money market and interest-bearing checking 111 144 303 433
Time deposits 780 956 2,448 3,036
Borrowings 732 836 2,122 2,543
- ------------------------------------------------------------------------------------------------------------------
Total interest expense 1,711 2,055 5,119 6,354
- ------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 3,157 3,150 9,588 9,480
Less: Provision for loan losses 150 106 450 410
- ------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 3,007 3,044 9,138 9,070
- ------------------------------------------------------------------------------------------------------------------
OTHER INCOME:
Investment security gains, net 103 41 48 228
Gain on sale of mortgages, net 79 69 136 383
Insurance commission income 2,054 1,516 5,855 4,943
Other operating income 867 776 2,413 2,219
- ------------------------------------------------------------------------------------------------------------------
Total other income 3,103 2,402 8,452 7,773
- ------------------------------------------------------------------------------------------------------------------
OTHER EXPENSES:
Compensation and employee benefits 2,887 2,664 8,729 8,208
Occupancy expenses, net 847 802 2,441 2,476
Other operating expense 878 953 2,704 2,629
- ------------------------------------------------------------------------------------------------------------------
Total other expenses 4,612 4,419 13,874 13,313
- ------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,498 1,027 3,716 3,530
- ------------------------------------------------------------------------------------------------------------------
Provision for income taxes 412 276 1,012 1,036
- ------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,086 $ 751 $ 2,704 $ 2,494
==================================================================================================================
EARNINGS PER SHARE - BASIC $ 0.14 $ 0.10 $ 0.36 $ 0.34
==================================================================================================================
EARNINGS PER SHARE - DILUTED $ 0.14 $ 0.10 $ 0.35 $ 0.33
==================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
Page 3 of 23
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three Months and Nine Months Ended September 30, 2004 (unaudited) and
2003 (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30, September 30 September 30,
2004 2003 2004 2003
---- ---- ---- ----
(In thousands)
Net income $ 1,086 $ 751 $ 2,704 $ 2,494
--------- --------- --------- ---------
Other comprehensive income (loss), net of tax:
Unrealized gains on assets available for sale:
Unrealized holding gains (losses)
arising during period 4,115 (2,888) (1,137) (1,086)
Less: reclassification adjustment for
Gains included in net income 103 41 48 228
--------- --------- --------- ---------
4,012 (2,929) (1,185) (1,314)
Net income tax benefit (effect) (1,605) 1,171 474 526
--------- --------- --------- ---------
Other comprehensive income (loss), net of tax 2,407 (1,758) (711) (788)
Comprehensive income (loss) $ 3,493 $ (1,007) $ 1,993 $ 1,706
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
Page 4 of 23
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months and Nine Months Ended September 30, 2004 (unaudited)
Accumulated
Additional Other
Common Stock Paid-In Retained Comprehensive Treasury
Shares Amount Capital Earnings Income (Loss) Stock
(In thousands, except number of shares)
Balance as of December 31, 2003 5,495,069 $ 55 $ 17,552 $ 37,144 $ 21 $ (3,039)
Net income 722
Three-for-two stock split effected in the
form of a 50% stock dividend 2,747,383 27 (27)
Other comprehensive income, net of tax 717
Shares earned under stock plans
Common stock dividends: $0.28 per share (624)
Treasury stock reissued 15 69
- ------------------------------------------------------------------------------------------------------------------------
Balance as of March 31, 2004 8,242,452 $ 82 $ 17,567 $ 37,215 $ 738 $ (2,970)
Net income 896
Other comprehensive income, net of tax (3,835)
Shares issued under stock plans 18
Shares earned under stock plans
Stock repurchased (95)
Treasury stock reissued 13
- ------------------------------------------------------------------------------------------------------------------------
Balance as of June 30, 2004 8,242,452 $ 82 $ 17,585 $ 38,111 $ (3,097) $ (3,052)
Net income 1,086
Other comprehensive income, net of tax 2,407
Shares earned under stock plans
Common stock dividends: $0.19 per share (633)
Treasury stock reissued 5
- ------------------------------------------------------------------------------------------------------------------------
Balance as of September 30, 2004 8,242,452 $ 82 $ 17,585 $ 38,564 $ (690) $ (3,047)
========================================================================================================================
Common Stock
Issued Under Unearned
Employee Stock
Stock Plans- Based
Unearned Compensation Total
(In thousands, except number of shares)
Balance as of December 31, 2003 $ (581) $ (317) $ 50,835
Net income 722
Three-for-two stock split effected in the
form of a 50% stock dividend --
Other comprehensive income, net of tax 717
Shares earned under stock plans 52 52
Common stock dividends: $0.28 per share (624)
Treasury stock reissued 84
- -------------------------------------------------------------------------------------
Balance as of March 31, 2004 $ (581) $ (265) $ 51,786
Net income 896
Other comprehensive income, net of tax (3,835)
Shares issued under stock plans (18) --
Shares earned under stock plans 57 57
Stock repurchased (95)
Treasury stock reissued 13
- -------------------------------------------------------------------------------------
Balance as of June 30, 2004 $ (581) $ (226) $ 48,822
Net income 1,086
Other comprehensive income, net of tax 2,407
Shares earned under stock plans 50 50
Common stock dividends: $0.19 per share (633)
Treasury stock reissued 5
- -------------------------------------------------------------------------------------
Balance as of September 30, 2004 $ (581) $ (176) $ 51,737
=====================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
Page 5 of 23
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months and Nine Months Ended September 30, 2004 (unaudited) and
2003 (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30 September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands)
Operating Activities:
Net income $ 1,086 $ 751 $ 2,704 $ 2,494
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 318 301 861 866
Amortization of premiums/discounts on securities, net 151 67 403 337
Provision for loan losses and other real estate losses 150 106 450 410
Stock compensation earned 50 50 158 158
Loss on sale of other real estate -- 14 -- 14
Gain on sale/call of securities, net (103) (41) (48) (228)
Gain on sale of loans, net (78) (69) (136) (383)
Income tax payable 162 76 263 106
Accrued interest receivable 336 143 200 160
Other assets (384) 739 203 (1,547)
Other liabilities 445 (1,398) (725) (407)
Origination of loans held for sale (6,495) (17,018) (13,394) (45,315)
Proceeds from sales of loans 6,284 12,831 12,224 39,907
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used by) operating activities 1,922 (3,448) 3,163 (3,428)
- ------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Purchase of investment securities (11,634) (21,152) (44,738) (58,650)
Principal collected on and proceeds of maturities
sales or calls from investments 20,870 14,551 42,223 53,666
Purchase of mortgage-backed securities -- (5,023) -- (23,070)
Principal collected on and proceeds from sales
of mortgage-backed securities 4,847 10,079 15,012 27,635
Net (increase) decrease in loans (7,297) (1,980) (12,108) (898)
Purchase of bank premises and equipment (199) (391) (485) (1,036)
Proceeds from sale of other real estate 143 136 294 184
Purchase of insurance agency -- -- (652) (294)
- ------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 6,730 (3,780) (454) (2,463)
- ------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Net increase (decrease) in demand deposit, savings,
money market, interest-bearing checking and escrow 2,459 8,668 11,441 21,782
Net increase (decrease) in time deposits (5,023) (1,903) (10,634) (4,346)
Proceeds from borrowings 16,000 -- 49,575 2,000
Repayment of borrowings (20,405) (7,500) (51,405) (11,500)
Cash dividends (633) (619) (1,257) (1,207)
Purchase of treasury stock -- -- (95) --
Exercise of stock options (using treasury stock) 5 41 102 85
- ------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (7,597) (1,313) (2,273) 6,814
- ------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in cash and cash equivalents 1,055 (8,541) 436 923
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of period 11,670 27,307 12,289 17,843
- ------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 12,725 $ 18,766 $ 12,725 $ 18,766
========================================================================================================================
Page 6 of 23
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Three Months and Nine Months Ended September 30, 2004 (unaudited) and
2003 (unaudited)
Three Months Ended Nine Months Ended
September 30, September 30 September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands)
Supplemental disclosures of cash flow information:
Cash paid for interest 1,697 1,976 5,127 6,324
Cash paid for income taxes 250 200 770 931
Non-cash investing activities:
Unrealized (loss) gain on investment and mortgage-backed
securities designated as available for sale 2,407 (1,754) (711) (788)
Transfer of loans to other real estate 56 224 179 365
===================================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
Page 7 of 23
ONEIDA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2004
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, 2004 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, 2004.
Note B - Earnings per Share
Basic earnings per share is computed based on the weighted average shares
outstanding at September 30, 2004. 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 on February 24, 2004. All share and per
share data from prior periods have been restated to reflect the retroactive
effect of the stock dividend. The following is a reconciliation of basic to
diluted earnings per share for the three months ended and nine months ended
September 30, 2004 and 2003 respectively:
Income Shares Per Share
September 30, 2004:
- -------------------
Net income (Three Months Ended) $1,085,652
----------
Basic Earnings Per Share: $1,085,652 7,488,949 $0.14
-----
Effect of dilutive securities:
Stock options and awards -- 133,683
------------------------
Diluted Earnings Per Share $1,085,652 7,622,632 $0.14
-----
September 30, 2003:
- -------------------
Net income (Three Months Ended) $ 751,021
----------
Basic Earnings Per Share $ 751,021 7,405,848 $0.10
-----
Effect of dilutive securities:
Stock options and awards -- 216,770
------------------------
Diluted Earnings Per Share $ 751,021 7,622,618 $0.10
-----
September 30, 2004:
- -------------------
Net income (Nine Months Ended) $2,703,689
----------
Basic Earnings Per Share: $2,703,689 7,470,721 $0.36
-----
Effect of dilutive securities:
Stock options and awards -- 161,870
------------------------
Diluted Earnings Per Share $2,703,689 7,632,591 $0.35
-----
September 30, 2003:
- -------------------
Net income (Nine Months Ended) $2,493,567
----------
Basic Earnings Per Share: $2,493,567 7,365,911 $0.34
-----
Effect of dilutive securities:
Stock options and awards -- 238,081
------------------------
Diluted Earnings Per Share $2,493,567 7,603,992 $0.33
-----
Page 8 of 23
Note C - Nature of Operations
On October 1, 2003, the Bank completed its acquisition of MacDonald/Yando
Agency, Inc., an insurance agency. The Bank paid $219,783 in cash and
established a note payable for $219,783 to be over 24 months with interest at
5.0% per annum to acquire 100% of the capital stock of the MacDonald/Yando
Agency, Inc. Goodwill of approximately $434,000 was recorded in conjunction with
this transaction. An intangible asset was also established in the amount of
$22,000 which will be amortized over a five year period. Amortization expense
was $1,100 and $3,300 for the three months and nine months ended September 30,
2004 respectively. MacDonald/Yando Agency, Inc. has been subsequently merged
into the Agency.
On May 31, 2002, the Bank completed its acquisition of SBC Financial
Corporation, the holding company of State Bank of Chittenango; a New York state
chartered commercial bank. The two banking offices of Chittenango became banking
offices of the Bank. The Bank has retained SBC as a special purpose commercial
bank subsidiary of the Bank. SBC is permitted to accept municipal deposit
accounts from various municipalities, school districts and other public sources;
a source of funds not available to the Bank under New York law. The results of
SBC's operations have been included in the consolidated financial statements
since that date. The Bank paid $11.9 million ($243,000 was paid to Oneida
Financial Corp. for shares previously owned) 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 $66.5 million and resulted in
additional goodwill of $5.6 million and a core deposit intangible of
approximately $1.2 million. Amortization of the core deposit intangible
approximated $82,000 for the nine months ended September 30, 2004 and 2003, and
$27,000 for the three months ended September 30, 2004 and 2003.
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 of stock 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. As of September 30, 2004 and 2003, $651,599 and
$294,166 additional goodwill was recorded for the contingent purchase payment
for 2004 and 2003, respectively.
The acquisitions were accounted for under the purchase method of accounting.
Note D - Stock-Based Compensation
The Company maintains a fixed award stock option plan and restricted stock plan
for certain officers and directors providing service to the Company. The Company
accounts for those plans under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost is reflected in net
income, as all options granted under the stock option plan had an exercise price
equal to the market value of the underlying common stock on the date of grant.
Compensation expense equal to the market value of ONFC's stock on the grant date
is accrued ratably over the vesting period for shares of restricted stock
granted.
Compensation expense recorded in conjunction with this plan was $49,931 and
$49,727 for the three months ended September 30, 2004 and 2003 respectively. For
the nine months ended September 30, 2004 and 2003, compensation expense recorded
was $158,295 and $157,680, respectively.
The following table illustrates the effect on net income per share if the
Company had applied the fair value recognition provisions of FASB Statement No.
123, "Accounting for Stock-Based Compensation," to stock-based employee
compensation.
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
---- ---- ---- ----
(In thousands)
Net income:
As reported $ 1,086 $ 751 $ 2,704 $ 2,494
Deduct: Total stock-based employee
Compensation expense determined under
fair value method, net of related taxes (30) (35) (91) (101)
------- ------- ------- -------
Pro forma $ 1,056 $ 716 $ 2,613 $ 2,393
======= ======= ======= =======
Page 9 of 23
Note E - Stock-Based Compensation (continued)
Earnings per share:
As reported
Basic $0.14 $0.10 $0.36 $0.34
Diluted $0.14 $0.10 $0.35 $0.33
Pro forma
Basic $0.14 $0.10 $0.35 $0.32
Diluted $0.14 $0.09 $0.34 $0.31
Note E - Dividend Restrictions
Oneida Financial MHC, which owns 4,309,750 or 57.54% of the outstanding shares
as of September 30, 2004 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 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,
2004 and December 31, 2003, the retained earnings restricted for cash dividends
waived was $5,368,034 and $3,744,695, respectively.
Note F - Stock Split
On February 24, 2004, the Company paid a three-for-two stock dividend. The stock
dividend was paid with authorized but unissued 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 per share data from previous periods have been retroactively restated
to reflect the effect of the stock dividend.
Note G - Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
based on management's evaluation of the probable or incurred risk in the loan
portfolio and current economic conditions. 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's evaluation of the adequacy of the allowance is
based on the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse circumstances that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and an analysis of the
levels and trends of delinquencies, charge-offs, and the risk ratings of the
various loan categories. Quarterly, management evaluates the adequacy of the
allowance and determines the appropriate level of provision of 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 adjustment 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 loan losses. Loans are charged against the
allowance for loan losses when management believes that the collectibility of
principal is unlikely. 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. The measurement of impaired loans
is generally based on the present value of expected future cash flows discounted
at the historical effective interest rate, except that all collateral-dependent
loans are measured for impairment based on the estimated fair value of the
collateral. At September 30, 2004 the allowance for loan losses as a percentage
of net loans receivable was 1.10% as compared to 1.05% on September 30, 2003.
Note H - Impaired Loans
Impaired loans were as follows: September 30, 2004 December 31, 2003
Impaired loans $2,435,408 $ 700,012
Allocated allowance for loan losses $ 322,250 $ 352,505
Average of impaired loans during the year $1,556,596 $ 927,073
Cash-basis interest income recognized $ 21,806 $ 41,370
Page 10 of 23
The increase in the impaired loans is due to the reclassification of a $2.0
million unsecured commercial loan to a large multinational Corporation. The
Corporation's debt was restructured during the third quarter of 2004 and as a
result, the Company calculated the potential loss on the loan based on a
liquidation value. The Company believes that both the specific allocation for
the credit and the overall level of the allowance at September 30, 2004 are
adequate. In October 2004, the Company sold the impaired credit to another
financial institution based on the liquidation value. The allocated allowance
for loan losses was adequate to cover the value that the credit was sold for.
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, 2004 and 2003, the Company's insurance
activities consisted of those conducted through its wholly owned subsidiary,
Bailey & Haskell Associates, Inc. Information about the Company's segments is
presented in the following table for the periods indicated (amounts in
thousands):
----------------------------------------
Three Months Ended September 30, 2004
----------------------------------------
Banking Insurance
Activities Activities Total
Net interest income $ 3,157 $ -- $ 3,157
Provision for loan losses 150 -- 150
------- ------- -------
Net interest income after provision
for loan losses 3,007 -- 3,007
Other income 1,049 2,054 3,103
Other expenses 2,950 1,662 4,612
------- ------- -------
Income before income taxes 1,106 392 1,498
Income tax expense 292 120 412
------- ------- -------
Net income $ 814 $ 272 $ 1,086
======= ======= =======
----------------------------------------
Three Months Ended September 30, 2003
----------------------------------------
Banking Insurance
Activities Activities Total
Net interest income $ 3,150 $ -- $ 3,150
Provision for loan losses 106 -- 106
------- ------- -------
Net interest income after provision
for loan losses 3,044 -- 3,044
Other income 875 1,527 2,402
Other expenses 3,021 1,398 4,419
------- ------- -------
Income before income taxes 898 129 1,027
Income tax expense 232 44 276
------- ------- -------
Net income $ 666 $ 85 $ 751
======= ======= =======
Page 11 of 23
----------------------------------------
Nine Months Ended September 30, 2004
----------------------------------------
Banking Insurance
Activities Activities Total
Net interest income $ 9,588 $ -- $ 9,588
Provision for loan losses 450 -- 450
------- ------- -------
Net interest income after provision
for loan losses 9,138 -- 9,138
Other income 2,597 5,855 8,452
Other expenses 9,065 4,809 13,874
------- ------- -------
Income before income taxes 2,670 1,046 3,716
Income tax expense 702 310 1,012
------- ------- -------
Net income $ 1,968 $ 736 $ 2,704
======= ======= =======
----------------------------------------
Nine Months Ended September 30, 2003
----------------------------------------
Banking Insurance
Activities Activities Total
Net interest income $ 9,480 $ -- $ 9,480
Provision for loan losses 410 -- 410
------- ------- -------
Net interest income after provision
for loan losses 9,070 -- 9,070
Other income 2,819 4,954 7,773
Other expenses 9,052 4,261 13,313
------- ------- -------
Income before income taxes 2,837 693 3,530
Income tax expense 800 236 1,036
------- ------- -------
Net income $ 2,037 $ 457 $ 2,494
======= ======= =======
Page 12 of 23
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
Of Operations
Page 13 of 23
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 raised and
retained in the initial public stock offering. Consequently, the net income of
the Company is primary derived from its investment in the Bank. The Bank's
results of operations are primarily dependent on its net interest income, which
is the difference between interest income earned on its investments in loans,
investment securities and mortgage-backed securities and its cost of funds
consisting of interest paid on deposits and borrowings. The Bank's net income is
also affected by its provision for loan losses, as well as by the amount of
other income, including income from fees and service charges, revenue derived
from the insurance agency 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. In addition, the
Company derives a significant portion of its income from its insurance
activities conducted through Bailey and Haskell Associates, Inc. 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, 2003 and
September 30, 2004 the Company had 7,437,982 shares and 7,489,132 shares
outstanding of which 4,309,750 were held by Oneida Financial MHC, the Company's
mutual holding company parent.
RECENT DEVELOPMENTS
On February 24, 2004, the Company paid a three-for-two stock dividend. The
stock dividend was paid with authorized but unissued 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 per share data from previous periods have been retroactively restated
to reflect the effect of the stock dividend.
The Company announced a cash dividend as of July 27, 2004 which was paid
on August 10, 2004 of $0.19 per share to its shareholders. Oneida Financial MHC
waived its receipt of dividends. As of September 30, 2004 and December 31, 2003
the retained earnings restricted for cash dividends waived was $5,368,034 and
$3,744,695.
FINANCIAL CONDITION
ASSETS. Total assets at September 30, 2004 were $427.2 million, a decrease
of $1.0 million from $428.2 million at December 31, 2003. The decrease is
primarily due to a decrease in mortgage-backed securities offset by an increase
in investment securities, loans receivable and mortgages loans held for sale.
Mortgage-backed securities decreased $15.5 million at September 30, 2004
compared with December 31, 2003, while investment securities increased $1.4
million at September 30, 2004 compared with December 31, 2003. Loans receivable
increased $11.7 million at September
Page 14 of 23
30, 2004 as compared with December 31, 2003. Mortgage loans held for sale
increased $1.3 million after recording sales of $12.2 million in fixed rate
one-to-four family residential real estate loans during the nine month period.
At September 30, 2004, total consumer and commercial business loans increased
$3.1 million to $70.7 million from $67.6 December 31, 2003. The increase in
consumer and commercial loans for the nine months ending September 30, 2004 is a
result of increased demand due to the continued low interest rate environment.
The loans were funded by the sales and maturities of investments since December
31, 2003.
The allowance for loan losses increased $225,000 from $2.1 million at
December 31, 2003 to $2.3 million as of September 30, 2004. The allowance is
established through a provision for loan losses based upon management's
evaluation of the probable and estimable losses in the loan portfolio, the
composition of the loan portfolio, current economic conditions and other
quantitative and qualitative factors. Management's evaluation of the adequacy of
the allowance is based on the Bank's past loan loss experience, known and
inherent risks in the portfolio, adverse circumstances that may affect the
borrower's ability to repay the loan in accordance with its terms, the estimated
value of any underlying collateral, and an analysis of the levels and trends of
delinquencies, charge-offs, and the risk ratings of the various loan categories.
Quarterly, management evaluates the adequacy of the allowance and determines the
appropriate level of 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 adjustment related to impaired loans, since the prior quarter. 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. 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. 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 potential loan losses. Loans are charged
against the allowance for credit losses when management believes that the
collectibility of principal is unlikely. At September 30, 2004 the allowance for
loan losses as a percentage of net loans receivable was 1.10% as compared to
1.05% on December 31, 2003.
Impaired loans increased at September 30, 2004 to $2.4 million as compared
to $700,000 at December 31, 2003 due to the reclassification of a $2.0 million
unsecured commercial loan to a large multinational Corporation. The
Corporation's debt was restructured during the third quarter of 2004 and as a
result, the Company calculated the potential loss on the loan based on a
liquidation value. In October 2004, the Company sold the impaired credit to
another financial institution based on the liquidation value. The allocated
allowance for loan losses was adequate to cover the value that the credit was
sold for. The Company believes that both the specific allocation for the credit
and the overall level of the allowance at September 30, 2004 are adequate.
LIABILITIES. Total liabilities decreased by $1.9 million or 0.50% to
$375.5 million at September 30, 2004 from $377.4 million at December 31, 2003.
The decrease is primarily the result of a decrease in borrowings of $1.8 million
due to maturities and paydowns of borrowings. Total deposits increased by
$800,000 since December 31, 2003. The Bank continues to emphasize core deposit
savings and checking accounts, which increased by $5.6 million since December
31, 2003. Money market and interest-bearing checking accounts increased by $5.8
million since December 31, 2003. Offsetting these increases was a decrease in
time deposits of $10.6 million since December 31, 2003.
STOCKHOLDERS' EQUITY. Total stockholders' equity at September 30, 2004 was
$51.7 million, an increase of $900,000 million from $50.8 million at December
31, 2003. The increase in stockholders' equity was primarily a result of the
contributions of net earnings of $2.7 million for the nine months period ending
September 30, 2004. Offsetting this increase were decreases in the valuation
adjustments made for the Company's available for sale investment and
mortgage-backed securities, as well management efforts to manage the Company's
capital through a combination of cash dividends and other strategies. An
increase in interest rates generally has a negative effect on the market value
of the Company's investments and mortgage-backed securities portfolios.
Accumulated other comprehensive income (loss) decreased $711,000 from December
31, 2003.
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, 2004 and 2003 and for the year ended December 31, 2003. 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.
Page 15 of 23
TABLE 1. Average Balance Sheet.
Three Months Ended September 30,
-----------------------------------------------------------------------
2004 2003
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Assets
- ------
Interest-earning Assets:
- ------------------------
Loans Receivable* $211,299 $3,252 6.16% $207,275 $3,353 6.47%
Investment Securities 159,665 1,589 3.98% 154,844 1,791 4.63%
Federal Funds 2,616 8 1.22% 7,160 15 0.84%
Equity Securities 6,327 19 1.20% 6,325 46 2.91%
-------- ------ ---- -------- ------ ----
Total Interest-earning Assets 379,907 4,868 5.13% 375,604 5,205 5.54%
-------- ------ ---- -------- ------ ----
Non interest-earning assets:
- ----------------------------
Cash and due from banks 10,676 11,221
Other assets 40,143 39,962
Total assets $430,726 $426,787
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing Liabilities:
- -----------------------------
Money Market Deposits $ 39,072 80 0.81% $ 39,835 $ 120 1.20%
Savings Accounts 75,964 88 0.46% 73,005 119 0.65%
Interest-bearing Checking 27,393 31 0.45% 18,038 24 0.53%
Time Deposits 113,990 780 2.71% 126,315 956 3.00%
Borrowings 66,998 732 4.33% 66,019 836 5.02%
-------- ------ ---- -------- ------ ----
Total Interest-bearing Liabs 323,417 1,711 2.10% 323,212 2,055 2.52%
-------- ------ ---- -------- ------ ----
Non interest-bearing liabilities:
- ---------------------------------
Demand deposits $ 50,571 47,203
Other liabilities 8,423 6,455
-------- --------
Total liabilities $382,411 $376,870
-------- --------
Stockholders' equity 48,315 49,917
-------- --------
Total liabilities and stockholders'
equity $430,726 $426,787
======== ========
Net Interest Income $3,157 $3,150
====== ======
Net Interest Spread 3.03% 3.02%
==== ====
Net Earning Assets $ 56,490 $ 52,392
======== ========
Net yield on average
Interest-earning assets 3.32% 3.35%
====== ======
Average interest-earning
assets to average
Interest-bearing liabs 117.47% 116.21%
====== ======
Year Ended December 31,
-----------------------------------
2003
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
(Dollars in Thousands)
Assets
- ------
Interest-earning Assets:
- ------------------------
Loans Receivable* $204,119 $13,592 6.66%
Investment Securities 153,136 6,956 4.54%
Federal Funds 8,767 94 1.07%
Equity Securities 6,459 152 2.35%
-------- ------- ----
Total Interest-earning Assets 372,481 20,794 5.58%
-------- ------- ----
Non interest-earning assets:
- ----------------------------
Cash and due from banks 11,156
Other assets 39,625
--------
Total assets $423,262
========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing Liabilities:
- -----------------------------
Money Market Deposits $ 38,818 $ 481 1.24%
Savings Accounts 71,342 440 0.63%
Interest-bearing Checking 15,982 78 0.49%
Time Deposits 127,094 3,942 3.10%
Borrowings 68,757 3,282 4.77%
-------- ------- ----
Total Interest-bearing Liabs 321,993 8,223 2.55%
-------- ------- ----
Non interest-bearing liabilities:
- ---------------------------------
Demand deposits 47,884
Other liabilities 4,226
--------
Total liabilities $374,103
--------
Stockholders' equity 49,159
--------
Total liabilities and stockholders'
equity $423,262
========
Net Interest Income $12,571
=======
Net Interest Spread 3.03%
====
Net Earning Assets $ 50,488
========
Net yield on average
Interest-earning assets 3.37%
=======
Average interest-earning
assets to average
Interest-bearing liabs 115.68%
=======
Page 16 of 23
Nine Months Ended September 30,
--------------------------------------------------------------------------
2004 2003
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
-------- ------- ---- -------- ------- ----
(Dollars in Thousands)
Assets
- ------
Interest-earning Assets:
- ------------------------
Loans Receivable* $206,387 $ 9,650 6.23% $204,664 $10,341 6.74%
Investment Securities 162,582 4,991 4.09% 150,905 5,264 4.65%
Federal Funds 1,806 20 1.48% 9,774 80 1.09%
Equity Securities 6,530 46 0.94% 6,481 149 3.07%
-------- ------- ---- -------- ------- ----
Total Interest-earning Assets 377,305 14,707 5.20% 371,824 15,834 5.68%
-------- ------- ---- -------- ------- ----
Non interest-earning assets:
- ----------------------------
Cash and due from banks 10,146 10,670
Other assets 40,904 39,972
-------- --------
Total assets $428,355 $422,466
======== ========
Liabilities and Stockholders' Equity
- ------------------------------------
Interest-bearing Liabilities:
- -----------------------------
Money Market Deposits $ 38,799 $ 227 0.78% $ 37,864 $ 378 1.33%
Savings Accounts 74,235 246 0.44% 70,949 342 0.64%
Interest-bearing Checking 24,077 76 0.42% 14,975 55 0.49%
Time Deposits 119,063 2,448 2.75% 128,118 3,036 3.17%
Borrowings 66,127 2,122 4.29% 69,928 2,543 4.86%
-------- ------- ---- -------- ------- ----
Total Interest-bearing Liabs 322,301 5,119 2.12% 321,834 6,354 2.64%
-------- ------- ---- -------- ------- ----
Non interest-bearing liabilities:
- ---------------------------------
Demand deposits $ 50,097 46,327
Other liabilities 5,734 5,116
-------- --------
Total liabilities $378,132 $373,277
-------- --------
Stockholders' equity 50,223 49,189
-------- --------
Total liabilities and stockholders'
equity $428,355 $422,466
-------- --------
Net Interest Income $ 9,588 $ 9,480
======= =======
Net Interest Spread 3.08% 3.04%
==== ====
Net Earning Assets $ 55,004 $ 49,990
-------- --------
Net yield on average
Interest-earning assets 3.39% 3.40%
======= =======
Average interest-earning
assets to average
Interest-bearing liabs 117.07% 115.53%
======= =======
* 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, 2004
increased by $335,000 or 44.6% to $1.1 million from $751,000 for the three
months ended September 30, 2003. Net income for the nine months ended September
30, 2004 increased by $210,000 or 8.4% to $2.7 million compared to $2.5 million
for the nine months ended September 30, 2003. The increase in net income for the
three month and nine month periods ended September 30, 2004 as compared with the
same periods in 2003 was primarily the result of increases in net interest
income and non-interest income partially offset by increased non-interest
expenses and the provision for loan losses.
INTEREST INCOME. Interest and dividend income decreased by $337,000 to
$4.9 million for the three months ended September 30, 2004 from $5.2 million for
the three months ended September 30, 2003. For the nine months ended September
30, 2004, interest and dividend income was $14.7 million, a decrease of $1.1
million or 7.1% as compared with the same period in 2003. The decrease in
interest and dividend income was primarily a result of a decrease in interest
income on loans receivable of $101,000 for the three months ended September 30,
2004 and $691,000 for the nine months ended September 30, 2004 and a decrease in
interest income on investment and mortgage-backed securities of $202,000 for the
quarter and $273,000 year-to-date. Interest on federal funds sold also decreased
$7,000 for the three months ended September 30, 2004 compared with 2003 and
$60,000 year-to-date. Dividend income on equity securities decreased $27,000 for
the third quarter 2004 as compared to the same period in 2003 and $103,000
year-to-date.
The decrease in interest income on loans is a result of a decrease of 31
basis points in the average yield to 6.16% on September 30, 2004 from 6.47% on
September 30, 2003 partially offset by an increase of $4.0 million in the
average balance of loans receivable for the three months ended September 30,
2004 as compared with the same period in 2003. For the nine months ended
September 30, 2004, the average balance increased $1.7 million with the average
yield decreasing 51 basis points from 6.74% during the nine month period in 2003
to 6.23% during the 2004 period. The decrease in average yield reflects the
decline in market interest rates since the third quarter of 2003.
Investment income decreased as a result of a decrease in the average yield
of investment securities and mortgage-backed securities of 65 basis points to
3.98% at September 30, 2004 from 4.63% at September 30, 2003 partially offset by
an increase of $4.8 million in the average balance of investment and
mortgage-backed securities for the three month period ended September 30, 2004
as compared with the same period in 2003. For the nine months ended September
30, 2004, the
Page 17 of 23
average balance of investment and mortgage-backed securities increased $11.7
million with the average yield decreasing 56 basis points from 4.65% during the
nine month period in 2003 to 4.09% during the 2004 period.
Interest income from federal funds decreased during the three months ended
September 30, 2004 to $8,000 as compared with $15,000 for the 2003 period. The
decrease in interest income is due to a decrease in the average balance of $4.5
million.
INTEREST EXPENSE. Interest expense was $1.7 million for the three months
ended September 30, 2004, a decrease of $344,000 or 16.7% from the same period
in 2003. The decrease in interest expense is due to a decrease in interest paid
on borrowed funds and deposit accounts. Interest expense on borrowed funds
totaled $732,000 for the third quarter of 2004 compared with $836,000 for the
2003 period. The average cost of borrowed funds decreased 69 basis points to
4.33% as of September 30, 2004 from 5.02% for the three months ended September
30, 2003. Partially offsetting the decrease in yield was that the average
balance outstanding of borrowings increased during the three months ended
September 30, 2004 to $67.0 million compared to $66.0 million for the same
period in 2003. For the nine months ended September 30, 2004, the average
balance of borrowings decreased $3.8 million with the average yield decreasing
57 basis points from 4.86% during the nine month period in 2003 to 4.29% during
the 2004 period. Interest expense on deposits decreased by $240,000 for the
three months ended September 30, 2004 to $1.0 million, a decrease of 19.7%. The
decrease in interest expense on deposits was due to a 37 basis point decrease in
the average cost of deposits for the third quarter 2004 and a decrease in the
average balance on interest-bearing deposit accounts of $774,000. The average
balance of interest-bearing deposits for the nine months ended September 30,
2004 increased $4.3 million as compared with the same period of 2003. This
increase partially offset a decrease in the average rate paid of 46 basis points
on deposits resulting in a decrease in interest expense for the nine months of
$814,000 compared with the prior year. The decrease in average yield is
reflective of the decline in market interest rates since the third quarter of
2003.
PROVISION FOR LOAN LOSSES. Total provisions for loan losses for the three
months ended September 30, 2004 were $150,000 as compared to $106,000 during the
same period of 2003. The allowance for loan losses was $2.3 million or 1.10% of
loans receivable at September 30, 2004 as compared with $2.1 million or 1.05% of
loans receivable at December 31, 2003. 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 losses that are probable and reasonably
estimable. Impaired loans increased at September 30, 2004 to $2.4 million as
compared to $700,000 at December 31, 2003 due to the reclassification of a $2.0
million unsecured commercial loan to a large multinational Corporation. The
Corporation's debt was restructured during the third quarter of 2004 and as a
result, the Company calculated the potential loss on the loan based on a
liquidation value requiring the increase in the provision for loan losses during
the third quarter. In October 2004, the Company sold the impaired credit to
another financial institution based on the liquidation value. The allocated
allowance for loan losses was adequate to cover the value that the credit was
sold for. The Company believes that both the specific allocation for the credit
and the overall level of the allowance at September 30, 2004 are adequate. At
September 30, 2004 the allowance for loan losses as a percentage of net loans
receivable was 1.10% as compared to 1.05% on December 31, 2003.
OTHER INCOME. Other operating income was $3.1 million, an increase of
$701,000, during the third quarter of 2004 compared with the same period in
2003. The increase in non-interest income was primarily due to increases in
revenue derived from the Company's insurance agency subsidiary activities and
deposit account service fee income. Insurance revenue increased $538,000 or
35.5% for the three months ended September 30, 2004 as compared with the same
period in 2003. Revenue derived from deposit account activity increased $98,000,
or 21.8%, during the third quarter of 2004 as compared with the third quarter of
2003. Net security gains realized during the three months ended September 30,
2004 increased by $62,000 as compared with the 2003 period.
For the nine months ended September 30, 2004, other operating income
increased $679,000 to $8.5 million as of September 30, 2004 from $7.8 million as
of September 30, 2003. The increase is primarily due to an increase in
commission income received from the insurance agency of $5.9 million for the
nine months ended September 30, 2004 as compared with $4.9 million for the same
period during 2003 and an increase in revenue derived from deposit account
activity increasing to $1.5 million for the nine months ended September 30, 2004
as compared with $1.2 million for the same period during 2003. Partially
offsetting this increase is a decrease of $382,000 in income associated with the
sale and servicing of fixed-rate residential real estate loans during the nine
months of 2004 as compared to the same period of 2003.
The Bank continues to expand the visibility of its Trust Department.
Management expects that fees generated by the Trust Department will increase as
assets under management grow. The Trust Department income increased 19.8% to
$151,000 for the nine months ended September 30, 2004 from $126,000 for the nine
months ended September 30, 2003. At September 30, 2004, the Bank maintained 479
trust/fiduciary accounts, with total assets of $79.6 million under management as
compared with 435 trust/fiduciary accounts with $79.9 million total assets as of
December 31, 2003.
Page 18 of 23
OTHER EXPENSES. Other expenses increased by $193,000 or 4.4%, to $4.6
million for the three months ended September 30, 2004 from $4.4 million for the
same period in 2003. Compensation expense increased $223,000 or 8.4% due to
increases in employee benefit expenses as well as additional expenses associated
with the insurance agency subsidiary. Other expenses decreased $75,000 primarily
the result of as a decrease in operating expenses incurred associated with our
advertising expense related to a checking account promotion for the third
quarter of 2004.
For the nine months ended September 30, 2004, operating expenses increased
$561,000 to $13.9 million from $13.3 million for the nine months ended September
30, 2003. The increase is primarily the result of expenses associated with the
insurance agency subsidiary and an increase in advertising expense related to
the checking account promotion in the first three quarters of 2004.
INCOME TAX. Income tax expense was $412,000 for the three months ended
September 30, 2004, an increase of $136,000 from the third quarter of 2003
expense of $276,000. The effective tax rate increased to 27.5% for the third
quarter 2004 from 26.9% for the same period of 2003. For the nine months ended
2004 and 2003, the income tax expense was $1.0 million. The decrease in the
effective tax rate is primarily due to the integration of SBC.
LIQUIDITY AND CAPITAL RESOURCES. In addition to the Company's primary
funding sources of cash flow from 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. 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 third quarter
of 2004, loan originations totaled $35.1 million compared to $40.9 million for
the third quarter of 2003. A decrease in loan originations during 2004 as
compared to 2003 is due to lower residential mortgage refinancing in 2004
partially offset by higher commercial mortgage and commercial business loan
originations. The purchases of investment securities totaled $11.6 million
during the third quarter of 2004 as compared to $26.2 million during the third
quarter of 2003. The decrease in the purchases of investment securities is due
to the increase in loans during the quarter as well as a decline in deposit
growth during the third quarter 2004.
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 third quarter of 2004 cash flows
provided by the sale, principal payments and maturity of securities available
for sale remained stable at $25.7 million compared to $24.6 million for the same
period in 2003.
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 customers' creditworthiness. Commitments to extend credit may
be written on a fixed rate basis exposing the Company to interest rate risk
given the possibility that market rates may change between the commitment date
and the actual extension of credit. As of September 30, 2004, the Company had
outstanding commitments to originate loans of approximately $8.6 million, which
generally have an expiration period of less than 120 days. Commitments to sell
residential mortgages amounted to $6.4 million at September 30, 2004.
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 $33.8 million at September 30, 2004 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-bearing 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
Page 19 of 23
in overnight federal funds sold. In the event that funds beyond those generated
internally are required due to higher than expected loan commitment fundings,
deposit outflows or the amount of debt being called, additional sources of funds
are available through the use of repurchase agreements, the sale of loans or
investments or the Company's various lines of credit. As of September 30, 2004,
the total of cash, interest-bearing demand accounts and federal funds sold was
$12.7 million. At September 30, 2004, the Bank exceeded all regulatory capital
requirements. The current requirements and the actual levels for the Bank are
detailed in the following table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- -------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
(In
thousands)
As of September 30, 2004:
Total Capital
(to Risk Weighted Assets) $36,948 14.26% $20,726 8% $25,907 10%
Tier I Capital
(to Risk Weighted Assets) $34,608 13.36% $10,363 4% $15,544 6%
Tier I Capital
(to Average Assets) $34,608 8.31% $16,651 4% $20,813 5%
ONEIDA FINANCIAL CORP.
SELECTED FINANCIAL RATIOS
At and for the Three Months Ended and Nine Months Ended September 30, 2004
and September 30, 2003 (unaudited)
(Annualized where appropriate)
Three Months Ending Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Performance Ratios:
Return on average assets 1.01% 0.70% 0.84% 0.79%
Return on average equity 8.99% 6.02% 7.18% 6.76%
Net interest margin 3.32% 3.35% 3.39% 3.40%
Efficiency Ratio 73.23% 78.94% 76.44% 76.69%
Ratio of operating expense
to average total assets 4.26% 4.14% 4.32% 4.20%
Ratio of average interest-earning assets
to average interest-bearing liabilities 117.47% 116.21% 117.07% 115.53%
Asset Quality Ratios:
Non-performing assets to total assets 0.57% 0.11% 0.57% 0.11%
Allowance for loan losses
to non-performing loans 95.51% 745.14% 95.51% 745.14%
Allowance for loan losses
to loans receivable, net 1.10% 1.05% 1.10% 1.05%
Capital Ratios:
Total stockholders' equity to total assets 12.11% 11.49% 12.11% 11.49%
Average equity to average assets 11.72% 11.53% 11.72% 11.53%
Page 20 of 23
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, 2004, 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 2003 Annual Report to Stockholders.
There has been no material change in the Company's risk profile since December
31, 2003.
ITEM 4. 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(e) and 15d - 15(e) under the
Securities Exchange Act of 1934) 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 21 of 23
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 and Use of Proceeds
The following table summarizes our share repurchase activity during
the three months ended and nine months ended September 30, 2004 and
additional information regarding our share repurchase program. The
shares purchased during the current quarter and for the six months
ended were received in exchange for the exercise of options or to
satisfy tax withholding obligations that arose on the vesting of
restricted stock. Our current repurchase plan of 250,000 was
announced on June 8, 2004. The plan has no expiration date.
- -----------------------------------------------------------------------------------------------------
Period Total Average Price Paid Total Number of Maximum
Number of per Share Shares Purchased Number of
Shares as Part of Publicly Shares that
Purchased Announced Plans May Yet Be
Purchased
Under the Plan
- -----------------------------------------------------------------------------------------------------
January 1, 2004 -
January 31, 2004 -- -- --
- -----------------------------------------------------------------------------------------------------
February 1, 2004 -
February 29, 2004 150 $15.673 -- --
- -----------------------------------------------------------------------------------------------------
March 1, 2004 -
March 31, 2004 -- -- --
- -----------------------------------------------------------------------------------------------------
April 1, 2004 -
April 30, 2004 -- -- --
- -----------------------------------------------------------------------------------------------------
May 1, 2004 -
May 31, 2004 9,115 $12.828 -- --
- -----------------------------------------------------------------------------------------------------
June 1, 2004 -
June 30, 2004 576 $ 12.28 -- 250,000
- -----------------------------------------------------------------------------------------------------
July 1, 2004 -
July 31, 2004 -- -- --
- -----------------------------------------------------------------------------------------------------
August 1, 2004 -
August 31, 2004 -- -- --
- -----------------------------------------------------------------------------------------------------
September 1, 2004 -
September 30, 2004 -- -- --
- -----------------------------------------------------------------------------------------------------
Total 9,841 -- 250,000
- -----------------------------------------------------------------------------------------------------
Page 22 of 23
Item 3 Default Upon Senior Securities
Not applicable.
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.
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
(b) Reports on Form 8-k
On July 16, 2004 , the Company filed a Current Report on Form
8-K, which disclosed that it issued a press release reporting
first quarter 2004 financial results. Such Current report, as
an Item 99.1 exhibit, included the Company's press release
dated July 16, 2004
Page 23 of 23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
ONEIDA FINANCIAL CORP.
Date: November 12, 2004 By: /s/ Michael R. Kallet
--------------------------------------
Michael R. Kallet
President and Chief Executive Officer
Date: November 12, 2004 By: /s/ Eric E. Stickels
--------------------------------------
Eric E. Stickels
Executive Vice President and Chief
Financial Officer