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EX-31.1 - EXHIBIT 31.1 - Oneida Financial Corp.ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - Oneida Financial Corp.ex31_2.htm
EX-32.1 - EXHIBIT 32.1 - Oneida Financial Corp.ex32_1.htm


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC  20549


FORM 10-Q


x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

OR

o
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 001-34813
ONEIDA FINANCIAL CORP.
(Exact name of registrant as specified in its charter)

Maryland
 
80-0632920
     
(State or other jurisdiction of
 
(IRS Employer)
incorporation or organization)
 
Identification Number)

182 Main Street, Oneida, New York 13421
 
(Address of Principal Executive Offices)
 
(315) 363-2000
 
Registrant’s telephone number, including area code
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o  No o

Indicate by check mark whether the Registrant is a large accelerated file, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
£ Large accelerated filer £ Accelerated filer £ Non-accelerated filer T Smaller reporting company

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).  Yes o  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 7,162,273 shares of the Registrant’s common stock outstanding as of August 1, 2011.
 


 
 

 
 
ONEIDA FINANCIAL CORP.


   
Page
     
PART I. FINANCIAL INFORMATION
 
     
Item 1.
1
     
 
2
   
     
 
3
   
     
 
4
   
     
 
5
   
     
 
6
   
     
 
8
     
Item 2.
30
   
     
Item 3.
43
     
Item 4.
43
     
PART II.
44
     
Item 1.
44
     
Item 1a.
45
     
Item 2.
45
     
Item 3.
45
     
Item 4.
45
     
Item 5.
45
     
Item 6.
45

 
 


PART I.                      FINANCIAL INFORMATION
    Item I.    Financial Statements
 

 
 
Page 1 of 45

 
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
At June 30, 2011 (unaudited) and December 31, 2010 (unaudited)

   
At June 30,
   
At December 31,
 
   
2011
   
2010
 
ASSETS
 
(in thousands, except share data)
 
Cash and due from banks
  $ 11,069     $ 15,608  
Federal funds sold
    9,358       18,133  
                 
TOTAL CASH AND CASH EQUIVALENTS
    20,427       33,741  
Trading securities
    7,635       7,691  
Securities, available for sale
    207,962       227,478  
Securities, held to maturity (fair value $57,814
               
and $25,070 respectively)
    56,325       24,143  
                 
Mortgage loans held for sale
    283       857  
                 
Loans receivable
    283,964       286,850  
Allowance for loan losses
    (3,070 )     (4,276 )
                 
LOANS RECEIVABLE, NET
    280,894       282,574  
                 
Federal Home Loan Bank stock
    2,168       2,109  
Bank premises and equipment, net
    20,055       19,903  
Accrued interest receivable
    2,488       2,455  
Bank owned life insurance
    16,609       16,332  
Other assets
    18,166       19,777  
Goodwill
    23,983       23,301  
Other intangible assets
    1,156       1,218  
TOTAL ASSETS
  $ 658,151     $ 661,579  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Liabilities:
               
Interest bearing deposits
  $ 478,360     $ 486,985  
Non-interest bearing deposits
    67,340       65,179  
Borrowings
    12,000       12,000  
Other liabilities
    9,703       11,495  
TOTAL LIABILITIES
    567,403       575,659  
Oneida Financial Corp. Stockholders’ equity:
               
Preferred stock, 10,000,000 shares authorized
    -       -  
Common stock ($.01 par value; 30,000,000 shares authorized
               
7,164,794 issued)
    72       72  
Additional paid-in capital
    45,642       45,636  
Retained earnings
    46,206       44,816  
Accumulated other comprehensive loss
    (2,841 )     (6,198 )
Treasury stock (at cost, 2,521 and 2,521 shares)
    (20 )     (20 )
Unallocated ESOP
    (870 )     (946 )
                 
Total Oneida Financial Corp stockholders’ equity
    88,189       83,360  
Noncontrolling interest
    2,559       2,560  
                 
TOTAL STOCKHOLDERS’ EQUITY
    90,748       85,920  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 658,151     $ 661,579  

The accompanying notes are an integral part of the consolidated financial statements  
 
 
Page 2 of 45


ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2011 (unaudited) and 2010 (unaudited)


   
Three Months Ended
   
Six Months Ended
 
   
June 30,
2011
   
June 30,
2010
   
June 30,
2011
   
June 30,
2010
 
   
(in thousands, except share and per share data)
 
                         
INTEREST INCOME:
                       
Interest and fees on loans
  $ 3,852     $ 4,183     $ 7,783     $ 8,501  
Interest on investment securities
    2,117       1,654       4,115       3,092  
Dividends on equity securities
    60       78       122       152  
Interest on federal funds sold and
                               
interest-earning deposits
    5       9       13       17  
Total interest and dividend income
    6,034       5,924       12,033       11,762  
INTEREST EXPENSE:
                               
Core deposits
    349       538       806       1,069  
Time deposits
    537       659       1,108       1,357  
Borrowings
    133       279       263       607  
Note payable
    2       -       4       -  
Total interest expense
    1,021       1,476       2,181       3,033  
NET INTEREST INCOME
    5,013       4,448       9,852       8,729  
Less: Provision for loan losses
    550       300       950       700  
Net interest income after provision for loan losses
    4,463       4,148       8,902       8,029  
INVESTMENT GAINS (LOSSES):
                               
Total other-than-temporary impairment losses
    (108 )     (61 )     (286 )     (1,051 )
Portion of loss recognized in OCI (before taxes)
     27        -        -        -  
Net impairment losses
    (81 )     (61 )     (286 )                      (1,051)   
Net gains on sale of securities, net
    97       442       78       751  
Changes in fair value of trading securities
    393       (863 )     823       (724 )
Total investment gains (losses)
    409       (482 )     615       (1,024 )
NON-INTEREST INCOME:
                               
Commissions and fees on sales of
                               
non-banking products
    5,084       4,435       10,029       9,097  
Other operating income
    1,222       1,271       2,314       2,438  
Total non-interest income
    6,306       5,706       12,343       11,535  
NON-INTEREST EXPENSES:
                               
Compensation and employee benefits
    5,793       5,196       11,380       10,433  
Occupancy expenses, net
    1,204       1,251       2,418       2,525  
Other operating expense
    1,784       1,815       3,788       3,583  
Total non-interest expenses
    8,781       8,262       17,586       16,541  
INCOME BEFORE INCOME TAXES
    2,397       1,110       4,274       1,999  
Provision for income taxes
    637       233       1,037       429  
NET INCOME
    1,760       877       3,237       1,570  
Less: net income attributable to noncontrolling interest
    64       63       128       128  
NET INCOME attributable
                               
to Oneida Financial Corp.
  $ 1,696     $ 814     $ 3,109     $ 1,442  
EARNINGS PER SHARE – BASIC
  $ 0.24     $ 0.11     $ 0.44     $ 0.20  
EARNINGS PER SHARE – DILUTED
  $ 0.24     $ 0.11     $ 0.44     $ 0.20  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
Page 3 of 45


ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
For the Three and Six Months Ended June 30, 2011 (unaudited) and 2010 (unaudited)
 
     
Three Months Ended
     
Six Months Ended
 
     
June 30,
2011
     
June 30,
2010
     
June 30,
2011
     
June 30,
2010
 
     
(In thousands)
 
Net income
  $ 1,760     $ 877     $ 3,237     $ 1,570  
                                 
Other comprehensive income (loss), net of tax:
                               
                                 
Net change in unrealized gains (losses):
                               
Other-than-temporary impaired securities
                               
Available for sale:
                               
Unrealized gains (losses) on securities
                               
arising during period
    (75 )     56       (103 )     350  
Reclassification adjustment for
                               
losses included in net income
    81        61       286        1,051  
Net unrealized gains (losses)
    6       117       183       1,401  
Income tax effect
    (2 )      (47 )      (73 )     (560 )
      4       70       110       841  
Securities available for sale:
                               
Unrealized gains on securities
                               
arising during period
    5,120       1,279       5,430       1,446  
Reclassification adjustment for
                               
losses (gains) included in net income
    (97 )      (442 )      (78 )      (751 )
Net unrealized gains
    5,023       837       5,352       695  
Income tax effect
    (2,009 )      (334 )      (2,141 )      (278 )
      3,014        503        3,211        417  
Unrealized holding gains on securities.
                               
net of tax
    3,018       573       3,321       1,258  
                                 
Change in unrealized loss on pension benefits
     31        32        61        64  
Income tax effect
     (13 )      (13 )     (24 )      (26 )
      18        19        36       38  
                                 
Other comprehensive gain , net of tax
    3,036       592       3,357       1,296  
                                 
Comprehensive Income
    4,796       1,469       6,594       2,866  
Comprehensive income attributable to the
                               
Noncontrolling interest
     (64 )      (63 )      (128 )     (128 )
                                 
Comprehensive income attributable to
                               
Oneida Financial Corp.
  $ 4,732     $ 1,406     $ 6,466     $ 2,738  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
Page 4 of 45

 
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Six Months Ended June 30, 2011 (unaudited)
 
         
Additional
         
Accumulated
Other
         
Common Stock
Employee
   
Total Equity
Attributable
To Oneida
             
   
Common Stock
   
Paid-In
   
Retained
   
Comprehensive
   
Treasury
   
Stock Plans
   
Financial
   
Non-controlling
       
   
Shares
   
Amount
   
Capital
   
Earnings
   
Loss
   
Stock
   
Unearned
   
Corp.
   
Interest
   
Total
 
   
(In thousands, except number of shares)
 
                                                             
Balance as of January 1, 2011
    7,164,794     $ 72     $ 45,636     $ 44,816     $ (6,198 )   $ (20 )   $ (946 )   $ 83,360     $ 2,560     $ 85,920  
Net income
    -       -       -       3,109       -       -       -       3,109       128       3,237  
Distributions to non-controlling interest
    -       -       -       -       -       -       -       -       (128 )     (128 )
Other comprehensive income,
                                                                               
net of tax
    -       -       -       -       3,357       -       -       3,357       -       3,357  
Common stock dividends: $0.24 per share
    -       -       -       (1,719 )     -       -       -       (1,719 )     -       (1,719 )
Shares issued under ESOP plans
    -       -       6       -       -       -       76       82       -       82  
Stock issued
    -       -       -       -       -       -       -       -       (1 )     (1 )
                                                                                 
Balance as of June 30, 2011
    7,164,794     $ 72     $ 45,642     $ 46,206     $ (2,841 )   $ (20 )   $ (870 )   $ 88,189     $ 2,559     $ 90,748  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
Page 5 of 45

 
ONEIDA FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2011 (unaudited) and 2010 (unaudited)
 
   
Six Months Ended
June 30,
 
   
2011
   
2010
 
Operating Activities:
 
(in thousands)
 
Net income
  $ 3,237     $ 1,570  
Adjustments to reconcile net income to net
               
cash provided by operating activities:
               
Depreciation and amortization
    893       995  
Amortization of premiums/discounts on securities, net
    364       170  
Net change in fair value of trading securities
    (823 )     724  
Provision for loan losses
    950       700  
Loss on disposal of premises and equipment
    -       15  
Loss on sale of foreclosed property
    80       4  
Stock compensation earned
    -       103  
Loss on impairment of securities
    286       1,051  
ESOP share earned
    82       -  
Gain on sale of securities, net
    (78 )     (751 )
Gain on sale of loans, net
    (127 )     (153 )
Income tax payable
    (430 )     (633 )
Accrued interest receivable
    (33 )     180  
Other assets
    7       437  
Other liabilities
    (2,091 )     (3,645 )
Earnings on bank owned life insurance
    (277 )     (291 )
Origination of loans held for sale
    (6,811 )     (13,824 )
Proceeds from sales of loans
    7,512       13,078  
                 
Net cash provided by (used in) operating activities
    2,741       (270 )
                 
Investing Activities:
               
Purchase of securities available for sale
    (27,512 )     (97,163 )
Proceeds from sale of securities available for sale
    27,403       18,988  
Maturities and calls of securities available for sale
    18,412       16,242  
Principal collected on securities available for sale
    6,264       11,483  
Purchase of securities held to maturity
    (35,025 )     -  
Maturities and call of securities held to maturity
    1,027       14,016  
Principal collected on securities held to maturity
    1,760       2,136  
Proceeds from sale of trading securities
    845       -  
Purchase of FHLB stock
    (384 )     (146 )
Redemption of FHLB stock
    325       429  
Net decrease in loans
    243       4,531  
Purchase of bank premises and equipment
    (847 )     (986 )
Proceeds from the sale of foreclosed property
    202       38  
Purchase of employee benefits company
    (94 )     (117 )
Purchase of insurance company
    (362 )     -  
                 
Net cash used in investing activities
    (7,743 )     (30,549 )
                 
Financing Activities:
               
Net (decrease) increase in demand deposit, savings,
               
money market, super now and escrow
    (1,037 )     35,835  
Net decrease in time deposits
    (5,427 )     (3,881 )
Dividends on preferred stock of subsidiary held by minority interest
    (128 )     (128 )
Proceeds from borrowings
    -       110  
Repayment of borrowings
    -       (7,610 )
Cash dividends
    (1,719 )     (844 )
Stock issued/repurchase – noncontrolling interest
    (1 )     1  
Exercise of stock options (using treasury stock)
    -       170  
Purchase of treasury stock
    -       (136 )
                 
Net cash (used in) provided by financing activities
    (8,312 )     23,517  
Decrease in cash and cash equivalents
    (13,314 )     (7,302 )
Cash and cash equivalents at beginning of period
    33,741       39,537  
Cash and cash equivalents at end of period
  $ 20,427     $ 32,235  
                 
Supplemental disclosures of cash flow information:
               
Cash paid for interest
    2,188       3,053  
Cash paid for income taxes
    1,465       1,060  
                 
Supplemental noncash disclosures:
               
Transfer of loans to other real estate
    487       241  
Dividends declared and unpaid
    860       423  
Notes payable issued in connection with acquisition
    362       -  
 
The accompanying notes are an integral part of the consolidated financial statements.

 
Page 6 of 45


ONEIDA FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2011
Note A – Basis of Presentation

The accompanying unaudited consolidated financial statements include Oneida Financial Corp. (the “Company”), a Maryland corporation and its wholly owned subsidiary, Oneida Savings Bank (the “Bank”) as of June 30, 2011 and December 31, 2010 and for the three and six month periods ended June 30, 2011 and 2010.  All inter-company accounts and transactions have been eliminated in consolidation.  The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.  Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.  Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, the fair value of trading securities and investment securities and the evaluation of other-than-temporary impairment on securities whose fair value is less than amortized cost to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.  Actual results could differ from those estimates.  In the opinion of management, the unaudited consolidated financial statements include all necessary adjustments, consisting of normal recurring accruals, necessary for a fair presentation for the periods presented.  The results of operations for the three months and six months ended June 30, 2011 are not necessarily indicative of the results to be achieved for the remainder of 2011.  On July 7, 2010, Oneida Financial MHC completed its second step conversion to stock form (the “Conversion”).  At that date, Oneida Financial Corp., a Maryland corporation, became the stock holding company of the Bank.  Oneida Financial Corp., a Federal corporation, was merged with and into Oneida Financial Corp., a Maryland corporation.  As a result of the second-step conversion, all share and per share information have been restated giving retroactive recognition to the second-step conversion ratio of 0.9136.  See Note H for more information.

The data in the consolidated statements of condition for December 31, 2010 was derived from the audited financial statements included in the Company’s 2010 Annual Report on Form 10-K.  That data, along with the interim financial information presented in the consolidated statement of condition, statements of operations, comprehensive income, changes in stockholders’ equity and cash flows should be read in conjunction with the 2010 consolidated financial statements, including the notes thereto included in the Company’s Annual Report on Form 10-K.

Amounts in the prior period’s consolidated financial statements are reclassified when necessary to conform with the current period’s presentation.  Reclassifications did not impact prior period’s net income or stockholders’ equity.

Note B – Earnings per Share

The Company had stock compensation awards with non-forfeitable rights which are considered participating securities prior to 2011.  All compensation awards were vested as of December 31, 2010.  As such, earnings per share is computed using the two-class method.   Basic earnings per share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period, excluding outstanding participating securities. Diluted earnings per common share includes the dilutive effect of additional potential common shares from stock-based compensation plans, but excludes awards considered participating securities.

Earnings per common share have been computed based on the following for the three months and six months ended June 30, 2011 and 2010:

   
Three Months Ended
   
Six Months Ended
 
   
June 30,
 2011 
   
June 30,
2010
   
June 30,
 2011 
   
June 30,
2010
 
Net income attributable to Oneida Financial Corp.
  $ 1,696,050     $ 814,452     $ 3,109,037     $ 1,441,537  
Net earnings allocated to participating securities
     -        (2,613 )      -        (6,267 )
Net earnings allocated to common stock
  $ 1,696,050     $ 811,839     $ 3,109,037     $ 1,435,270  
Note B – Earnings per Share (Continued)
                               
                                 
Basic
                               
Distributed earnings allocated to common stock
  $ 859,775     $ 422,158     $ 1,719,248     $ 1,261,908  
Undistributed  earnings allocated
                               
to common stock
     836,275       389,681        1,389,789       173,362  
Net earnings allocated to common stock
  $ 1,696,050     $ 811,839     $ 3,109,037     $ 1,435,270  
                                 
Weighted average common shares outstanding
                               
including shares considered participating securities
    7,048,950       7,164,682       7,046,616       7,158,104  
Less:  Average participating securities
     -       (14,973 )     -        (14,973 )
Weighted average shares
    7,048,950       7,149,709       7,046,616        7,143,131  
                                 
Basic earnings per share
  $ 0.24     $ 0.11     $ 0.44     $ 0.20  
                                 
Diluted
                               
Net earnings allocated to common stock
  $ 1,696,050     $ 811,839     $ 3,109,037     $   1,435,270  
                                 
Weighted average common shares outstanding
                               
for basic earnings per common share
    7,048,950       7,149,709       7,046,616       7,143,131  
Add: Dilutive effects of assumed
                               
exercise of stock options
     -        -        -        -  
Weighted average shares and dilutive
                               
potential common shares
    7,048,950       7,149,709       7,046,616       7,143,131  
                                 
Diluted earnings per common share
  $ 0.24     $ 0.11     $ 0.44     $ 0.20  

 
Page 7 of 45

 
There were no stock options considered in computing diluted earnings per common share for 2011 and 2010 as all options expired April 25, 2010.  Dividends of $5,904 as of June 30, 2010 were declared on unvested shares with non-forfeitable dividend rights none of which was included in net income as compensation expense because all the awards are expected to vest.

Note C – Investment Securities and Mortgage-Backed Securities

Investment securities and mortgage-backed securities consist of the following at June 30, 2011 and December 31, 2010:

   
June 30, 2011
 
    Amortized    
Gross Unrealized
    Fair  
Available-for-sale portfolio:                                            
 
Cost
   
Gains
   
Losses
   
Value
 
Investment Securities
 
(In thousands)
 
Debt securities:
                       
U. S. Agencies
  $ 53,118     $ 206     $ (60 )   $ 53,264  
Corporate
    25,119       454       (920 )     24,653  
Trust preferred securities
    6,613       -       (3,006 )     3,607  
State and municipal
    43,277       885       (276 )     43,886  
Small business administration
     2,888       9       (28 )     2,869  
    $ 131,015     $ 1,554     $ (4,290 )   $ 128,279  
Mortgage-Backed Securities
                               
Fannie Mae
  $ 37,981     $ 699     $ (71 )   $ 38,609  
Freddie Mac
    12,695       266       (1 )     12,960  
Government National Mortgage Assoc.
    25,432       453       (112 )     25,773  
Collateralized Mortgage Obligations
    2,442       20       (121 )     2,341  
    $ 78,550     $ 1,438     $ (305 )   $ 79,683  
Total available-for-sale
  $ 209,565     $ 2,992     $ (4,595 )   $ 207,962  
 
 
Page 8 of 45


 Note C – Investment Securities and Mortgage-Backed Securities (Continued)

Held-to-maturity portfolio
                       
Investment Securities
                       
Debt securities:
                       
U. S. Agencies
  $ 19,623     $ 224     $ -     $ 19,847  
State and municipal
    8,211       705       -       8,916  
Small business administration
     621       -       -       621  
    $ 28,455     $ 929     $ -     $ 29,384  
Mortgage-Backed Securities
                               
Fannie Mae
  $ 16,066     $ 320     $ -     $ 16,386  
Freddie Mac
    5,300       99       -       5,399  
Government National Mortgage Assoc.
    6,504        141       -       6,645  
    $ 27,870     $ 560     $ -     $ 28,430  
Total held-to-maturity
  $ 56,325     $ 1,489     $ -     $ 57,814  
 
   
December 31, 2010
 
   
Amortized
   
Gross Unrealized
   
Fair
 
Available-for-sale portfolio:
 
Cost
   
Gains
   
Losses
   
Value
 
Investment Securities
 
(In thousands)
 
Debt securities:
                       
U. S. Agencies
  $ 70,214     $ 136     $ (1,205 )   $ 69,145  
Corporate
    25,139       157       (1,043 )     24,253  
Trust preferred securities
    6,858       -       (3,454 )     3,404  
State and municipal
    50,249       529       (1,708 )     49,070  
Small business administration
     3,027       -       (91 )     2,936  
    $ 155,487     $ 822     $ (7,501 )   $ 148,808  
Mortgage-Backed Securities
                               
Fannie Mae
  $ 38,331     $ 288     $ (511 )   $ 38,108  
Freddie Mac
    14,928       173       (151 )     14,950  
Government National Mortgage Assoc.
    22,164       277       (307 )     22,134  
Collateralized Mortgage Obligations
    3,701       9       (232 )     3,478  
    $ 79,124     $ 747     $ (1,201 )   $ 78,670  
Total available-for-sale
  $ 234,611     $ 1,569     $ (8,702 )   $ 227,478  
                                 
Held-to-maturity portfolio
                               
Investment Securities
                               
Debt securities:
                               
U. S. Agencies
  $ 3,998     $ 140     $ -     $ 4,138  
State and municipal
    8,270       484       -       8,754  
Small business administration
     663       -       -       663  
    $ 12,931     $ 624     $ -     $ 13,555  
Mortgage-Backed Securities
                               
Fannie Mae
  $ 5,567     $ 177     $ -     $ 5,744  
Freddie Mac
    1,306       27       -       1,333  
Government National Mortgage Assoc.
    4,339       99       -       4,438  
    $ 11,212     $ 303     $ -     $ 11,515  
Total held-to-maturity
  $ 24,143     $ 927     $ -     $ 25,070  

The amortized cost and fair value of the investment securities portfolio at June 30, 2011 are shown by contractual maturities.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Available for Sale
   
Held to Maturity
 
   
Amortized
Cost
   
Fair
Value
   
Amortized
Cost
   
Fair
Value
 
   
(In thousands)
 
                         
Within one year
  $ 8,652     $ 8,662     $ 7     $ 7  
After one year through five years
    15,042       15,303       5,096       5,322  
After five years through ten years
    56,126       57,045       11,706       12,080  
After ten years
    51,195       47,269       11,646        11,975  
Total
  $ 131,015     $ 128,279     $ 28,455     $ 29,384  

 
Page 9 of 45


Note C – Investment Securities and Mortgage-Backed Securities (Continued)

Sales of securities were as follows:

   
Three Months Ended
   
Six Months Ended
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
   
June 30, 2010
 
   
(In thousands)
 
Proceeds
  $ 21,724     $ 10,648     $ 27,403     $ 18,988  
Gross Gains
  $ 376     $ 442     $ 382     $ 751  
Gross Losses
  $ (279 )   $ -     $ (304 )   $ -  

Securities with unrealized losses at June 30, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

   
Less than 12 Months
   
More than 12 Months
   
Total
       
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
 
   
(In thousands)
 
U.S. Agency
  $ 11,940     $ (60 )   $ - $       -     $ 11,940     $ (60 )
Corporate
    8,461       (38 )     1,609       (882 )     10,070       (920 )
Trust preferred securities
    -       -       3,607       (3,006 )     3,607       (3,006 )
State and municipal
    12,278       (276 )     -       -       12,278       (276 )
Small business administration
    1,878       (28 )     -       -       1,878        (28
Fannie Mae
    5,575       (71 )     -       -       5,575        (71
Freddie Mac
    2,466       (1 )     -       -       2,466       (1 )
Government National Mortgage Assoc.
    5,913       (112 )     -       -       5,913       (112 )
Collateralized mortgage obligations
     -        -        1,697        (121 )        1,697        (121 )
                                                 
Total securities available-for-sale in
                                               
an unrealized loss position
  $ 48,511     $ (586 )   $ 6,913     $ (4,009 )   $ 55,424     $ (4,595 )
 
   
Less than 12 Months
   
More than 12 Months
   
Total
       
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Loss
   
Fair
Value
   
Unrealized
Value
 
                                     
U.S. Agency
  $ 50,289     $ (1,205 )   $ -     $ -     $ 50,289     $ (1,205 )
Corporate
    9,033       (97 )     4,043       (946 )     13,076       (1,043 )
Trust preferred securities
    -       -       3,404       (3,454 )     3,404       (3,454 )
State and municipals
    32,162       (1,708 )     -       -       32,162       (1,708 )
Small business administration
    2,930       (91 )     -       -       2,930       (91 )
Fannie Mae
    22,786       (511 )     -       -       22,786       (511 )
Freddie Mac
    10,256       (151 )     -       -       10,256       (151 )
Ginnie Mae
    11,531       (307 )     -       -       11,531       (307 )
Collateralized mortgage obligations
    -       -       2,746       (232 )     2,746       (232 )
Total securities available-for-sale in
                                               
     an unrealized loss position
  $ 138,987     $ (4,070 )   $ 10,193     $ (4,632 )   $ 149,180     $ (8,702 )

Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses.  The Company evaluates securities for other-than-temporary impairment (“OTTI”) at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.  For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis.  If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through

 
Page 10 of 45


Note C – Investment Securities and Mortgage-Backed Securities (Continued)

earnings.  For debt securities that do not meet the aforementioned criteria, the amount of the impairment is split into two components as follows:  1) OTTI related to credit loss, which must be recognized in the income statement and 2) other-than temporary impairment (OTTI) related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows to be collected and the amortized cost basis.

In order to determine OTTI for purchased beneficial interests, that on the purchase date, were not highly rated, the Company compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows.  OTTI is deemed to have occurred if there is an adverse change in the remaining expected future cash flows.

As of June 30, 2011, the Company’s security portfolio consisted of 368 securities, 66 of which were in an unrealized loss position. The majority of the unrealized losses are related to the Company’s agency, mortgage-backed securities, state and local municipalities, and corporate and trust preferred securities as discussed below.

U.S. Agency and Agency Mortgage-Backed Securities

Fannie Mae, Freddie Mac, Ginnie Mae and the Small Business Administration guarantee the contractual cash flows of our agency and mortgage-backed securities. Fannie Mae and Freddie Mac are institutions which the government has affirmed its commitment to support.  Our Ginnie Mae mortgage-backed securities are backed by the full faith and credit of the U.S. Government.  All of the agency mortgage-backed securities are residential mortgage-backed securities. At June 30, 2011, of the twenty-six U.S. Government sponsored enterprise agency and mortgage-backed securities in an unrealized loss position in our available-for-sale and held-to-maturity portfolios, there were no securities that were in a continuous unrealized loss position for 12 months or more.  The unrealized losses at June 30, 2011 were primarily attributable to changes in interest rates and illiquidity, and not credit quality.  The Company does not have the intent to sell these agency and mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2011.
 
Non-Agency Collateralized Mortgage Obligations.

All of our non-agency collateralized mortgage obligations carry various amounts of credit enhancement and none are collateralized with subprime loans.  These securities were purchased based on the underlying loan characteristics such as loan to value ratio, credit scores, property type, location and the level of credit enhancement.  Current characteristics of each security are reviewed regularly by management.  If the level of credit loss coverage is sufficient, it indicates that we will receive all of the originally scheduled cash flows.

At June 30, 2011, of the two non-agency collateralized mortgage obligations in an unrealized loss position; all were in a continuous unrealized loss position of 12 months or more. All were rated above investment grade at time of purchase.  Both are currently rated below investment grade.  We have assessed these securities in an unrealized loss position at June 30, 2011 and determined that the decline in fair value was other than temporary.  The Bank currently has two obligations totaling $1.8 million that based on expected cash flows, delinquencies and credit support the Company has considered impaired.  The unrealized losses at June 30, 2011 and December 31, 2010 were $70,000 and $144,000 respectively.  The securities were in a gross loss position of $121,000 of which $51,000 was recorded as expense for the three and six months ended June 30, 2011. These securities remain available for sale at June 30, 2011.

Corporate Debt and Municipal Securities

At June 30, 2011, of the twenty-nine corporate debt and municipal securities in an unrealized loss position, one was in a continuous unrealized loss position of 12 months or more.  We have assessed this security and determined that the decline in fair value was temporary.  In making this determination, we considered the period of time the security was in a loss position, the percentage decline in comparison with the securities’ amortized cost, the financial condition of the issuer, and the delinquency or default rates based on the applicable bond ratings.  In addition, we do not have the intent to sell this security and it is not more likely than not that we will be required to sell this security before the recovery of their amortized cost basis, which may be at maturity.  The securities whose unrealized loss position exceeds 12 months was a $2.5 million Strats-Goldman Sachs corporation obligation, maturing February 15, 2034 which is a variable rate note based on the 6 month libor.  The current rate on the security is 1.39%.  The unrealized loss at June 30, 2011 and December 31, 2010 was $882,000 and $914,000 respectively.  In addition to the items noted above, we reviewed capital ratios, public filings of the issuer and related trust documents in the review of the unrealized loss.  The security is paying as agreed.

 
Page 11 of 45


Note C – Investment Securities and Mortgage-Backed Securities (Continued)
 
Trust Preferred Securities

The Company currently has $6.6 million invested in nine trust preferred securities as of June 30, 2011 whose unrealized losses have been in a continuous loss position exceeding 12 months or more.  All of the trust preferred securities are pooled issuances. Of the $6.6 million, $3.1 million have variable rates of interest.  All of the securities are on nonaccrual as of June 30, 2011.  The unrealized losses at June 30, 2011 and December 31, 2010 on the nine securities totaled $3.0 million and $3.5 million respectively.

The following table provides detailed information related to the trust preferred securities held as of June 30, 2011:
 
Description
 
Class
   
Book
Value (2)
   
Fair
Value
   
Unrealized
Loss
   
Realized
Loss (2) (3)
   
Lowest
Rating (1)