ITEM 1. BUSINESS
Oneida Financial Corp.
Oneida Financial Corp. (sometimes herein referred to as the “Company”) is a Maryland corporation. Oneida Financial Corp. is a stock-owned savings and loan holding company. The Oneida Savings Bank (“Oneida Savings Bank”) is 100% owned by the Company and the Company is 100% owned by public stockholders.
The Company’s only significant assets are our investment in Oneida Savings Bank and cash. At December 31, 2013, Oneida Financial Corp. had consolidated assets of $742.5 million, total deposits of $637.2 million, and stockholders’ equity of $90.7 million.
Oneida Financial Corp.’s executive offices are located at 182 Main Street, Oneida, New York 13421. Its telephone number at this address is (315) 363-2000 and its website address is www.oneidafinancial.com. Information on this website is not and should not be considered to be a part of this annual report and Form 10-K.
Oneida Savings Bank
Oneida Savings Bank is a New York chartered savings bank headquartered in Oneida, New York. Oneida Savings Bank was originally founded in 1866 as a mutual (meaning no stockholders) savings bank. In 1998, Oneida Savings Bank converted to a New York chartered stock savings bank and reorganized from the mutual to the two-tiered mutual holding company form of organization. In 2010, Oneida Financial Corp. completed its conversion from the mutual holding company structure to stock ownership. Since 1998 the Bank has grown its traditional community banking franchise organically and through acquisitions of banks and nonbank companies that offer insurance sales, financial services, employee benefits consulting and other risk management products and services. The expansion into insurance and other financial services businesses has enabled Oneida Savings Bank to evolve from a traditional savings bank to a full-service financial services organization.
Oneida Savings Bank’s deposits are insured by the FDIC up to the maximum amount permitted by law. Oneida Savings Bank is a community bank engaged primarily in the business of accepting deposits from customers through its main office and 10 full service branch offices and using those deposits, together with funds generated from operations and borrowings to make one-to-four family residential and commercial real estate loans, consumer loans and commercial business loans and to invest in mortgage-backed and other securities. Municipal deposit banking services are provided through a limited purpose commercial bank subsidiary, The State Bank of Chittenango. Oneida Savings Bank also sells insurance and other commercial services and products, provides employee benefit services and offers risk management services to help mitigate and prevent work related injuries through Bailey & Haskell Associates, Inc., a wholly owned subsidiary, and provides financial and investment advisory services through Oneida Wealth Management Inc., a wholly owned subsidiary. Oneida Savings Bank is subject to comprehensive regulation and examination by the Federal Deposit Insurance Corporation and the New York State Department of Financial Services.
The State Bank of Chittenango
The State Bank of Chittenango is a New York chartered limited purpose commercial bank headquartered in Chittenango, New York. Oneida Savings Bank acquired State Bank of Chittenango in 2002 and retained the municipal banking operations of State Bank of Chittenango in a limited purpose wholly owned subsidiary. New York State law prohibits a savings bank from directly soliciting and servicing public funds (deposits of counties, cities, towns, school districts, etc.). Holding State Bank of Chittenango as a limited purpose commercial bank subsidiary has enabled us to offer municipal deposit banking services throughout our market area. At December 31, 2013, State Bank of Chittenango held $185.0 million in assets, consisting primarily of U.S. Government obligations, mortgage-backed securities and tax exempt securities. The investment securities maintained at State Bank of Chittenango are used to collateralize $145.4 million in municipal deposits. All disclosures in this annual report and Form 10-K relating to Oneida Financial Corp.’s investments and deposits include the investments and deposits that are held by State Bank of Chittenango.
Bailey & Haskell Associates
Bailey & Haskell Associates, Inc. is the wholly owned insurance agency, risk management and employee benefit subsidiary of Oneida Savings Bank and is headquartered in Oneida, New York. It has six other offices in New York State and one office in South Carolina. Oneida Savings Bank completed the acquisition of Bailey & Haskell Associates in 2000. Bailey &
Haskell Associates is a full-service insurance, risk management and employee benefits firm with over 130 employees providing services to over 19,000 customers. Bailey & Haskell Associates offers personal and commercial property insurance and other risk management products and services. In addition, Bailey & Haskell Associates offers employee benefit related services. Bailey & Haskell Associates represents many leading insurance companies, including Travelers, CNA, Hartford, Progressive, Cincinnati and Utica National. We have acquired seven insurance agencies in the years following the acquisition of Bailey & Haskell Associates, including Schenectady Insuring Agency, Inc. which was added during 2012. All of the acquired insurance agencies were merged into Bailey & Haskell Associates.
The risk management services provided by Bailey & Haskell Associates were those previously provided through the wholly owned risk management subsidiary Workplace Health Solutions. Workplace Health Solutions was established in January 2008 as a risk management company with services to help mitigate and prevent work related injuries. Specifically, Workplace Health Solutions works with employers to develop informed hiring programs, coordinates employee training programs and consults with and advises employers relative to workers’ compensation coverage and incidents. In addition, this subsidiary develops a network of medical professionals to evaluate injured workers and arrange for proper treatment of and recovery from workplace injuries from a risk management perspective. Workplace Health Solutions was developed to complement and refer the products and services offered by our other subsidiaries with an overall philosophy of providing innovative risk management services. Effective January 1, 2013, Workplace Health Solutions was merged with Bailey & Haskell Associates to better align services provided to customers. The combination of acquired agencies and organic growth has resulted in total revenue for the year ended December 31, 2013 of $19.7 million, an increase of 11.9% or $2.1 million, from $17.6 million for the year ended December 31, 2012. All disclosures in this annual report and Form 10-K relating to Oneida Financial Corp. are consolidated to include the activities of Bailey & Haskell Associates.
Oneida Wealth Management
Benefit Consulting Group, Inc., originally acquired in 2006, was the wholly owned employee benefits consulting and retirement plan administration subsidiary of Oneida Savings Bank. Effective January 1, 2013, the subsidiary was reorganized to better align services provided to customers. The employee benefits services were moved to Bailey & Haskell Associates. The retirement plan administration and financial planning services were moved to Oneida Savings Bank. The financial and investment advisory services remained a part of Benefit Consulting Group. Benefit Consulting Group changed it's name to Oneida Wealth Management Inc. in June 2013. Oneida Wealth Management is headquartered in North Syracuse, New York and operates from offices in Oneida, New York and satellite offices in several branch offices of Oneida Savings Bank. Oneida Wealth Management had total revenue of $2.5 million for the year ended December 31, 2013, an increase of 22.5% or $458,000 from $2.0 million for the year ended December 31, 2012. All disclosures in this annual report and Form 10-K relating to Oneida Financial Corp. are consolidated to include the activities of Oneida Wealth Management.
Oneida Preferred Funding Corp.
Oneida Savings Bank established Oneida Preferred Funding Corp. in 1999 as a wholly owned real estate investment trust subsidiary. At December 31, 2013, Oneida Preferred Funding Corp. held $42.1 million in mortgage and mortgage related assets. All disclosures in this Form 10-K relating to Oneida Financial Corp.’s loans and investments include loans and investments that are held by Oneida Preferred Funding Corp.
Market Area
We conduct business from our headquarters and ten full service branch offices throughout Madison and Oneida Counties. Our primary lending area is Madison and Oneida Counties in New York and the surrounding counties and most of our deposit customers reside in the same area. The City of Oneida is located approximately 30 miles east of Syracuse and 20 miles west of Utica. Our market area is characterized as rural and serves as a bedroom community to the cities of Syracuse and Utica, New York. The economy in our market area is relatively diverse with health care, college/university, financial/insurance and tourism/recreation being the most prominent sectors as well as light manufacturing and technology related industries. The largest employers in our market area includes Oneida Nation’s Turning Stone Casino and Resort, Oneida Healthcare Center and other local and regional medical facilities, Colgate University and Morrisville College. There are also many small to mid-sized businesses that employ fewer than 100 persons and support the local economy.
Our primary market area has remained a stable banking market. As of December 2013, the unemployment rates in Madison and Oneida Counties in New York were 7.0% and 6.6%, respectively, compared to the State of New York’s average of 6.6% and the national average of 6.5%, according to the United States Department of Labor. As of June 30, 2013, median household income levels ranged from $45,988 to $52,189 in the two counties where we maintain branch offices.
Competition
Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we do and may offer certain services that we do not or cannot provide. Moreover, credit unions which offer substantially the same services as we offer are not subject to federal or state income taxation. Trends toward consolidation of the financial services industry and the removal of restrictions on interstate branching and banking powers may make it more difficult for smaller institutions such as Oneida Savings Bank to compete effectively with large national and regional banking institutions. Our profitability depends upon the ability to successfully compete in our market area.
Lending Activities
General. Our principal lending activity has been the origination of one-to-four family residential real estate located within our primary market area. We have originated adjustable-rate mortgage (“ARM”) loans for retention in our portfolio. As a result of the continuation of relatively low market interest rates in recent periods, borrowers have shown a preference for fixed-rate loans. Consequently, in recent periods we have originated more fixed-rate one-to-four family loans. We generally sell our fixed-rate one-to-four family loan originations with maturities exceeding fifteen years and such loans are sold without recourse and on a servicing retained basis. In order to complement our traditional emphasis of one-to-four family residential real estate lending, management has sought to increase the number of higher yielding commercial real estate loans, consumer loans and commercial business loans. To a limited extent, we will originate loans secured by multi-family properties.
Loan Portfolio Composition. Set forth below is selected information concerning the composition of our loan portfolio (included loans held for sale) in dollar amounts and in percentages (before deductions for allowance for loan losses) as of the dates indicated.
The following table sets forth the composition of our loan portfolio (including loans held for sale) by fixed and adjustable rates at the dates indicated.
One-To-Four Family Residential Loans. One of our primary lending activities is the origination of one-to-four family residential mortgage loans secured by property located in our primary lending area. Generally, one-to-four family residential mortgage loans are made in amounts up to 80% of the lesser of the appraised value or purchase price of the property. However, we will originate one-to-four family loans with loan-to-value ratios of up to 97%, provided the borrower obtains private mortgage insurance. Fixed-rate loans are originated for terms of up to 30 years. One-to-four family fixed-rate loans are offered with a monthly payment feature. We do not originate and have not originated sub-prime, Alt-A, negative amortization or other higher risk residential mortgage loans.
We originate both adjustable-rate and fixed-rate one-to-four family loans. As a result of the continued low interest rate environment during the past year, a greater percentage of our one-to-four family loan originations consisted of fixed-rate one-to-four family mortgage loans. Our practice in recent years has been to sell in the secondary market substantially all of our fixed-rate one-to-four family loan originations with maturities exceeding fifteen years on a servicing retained basis without recourse to Oneida Savings Bank. Currently, we have no intention of changing our practice of selling our fixed-rate loan originations, although we may determine to change this practice in the future. In a rising interest rate environment, we expect that a greater percentage of our loan originations will consist of adjustable-rate loans, which we generally retain in our portfolio. At December 31, 2013, loans serviced by Oneida Savings Bank for others totaled $107.8 million. During the years ended December 31, 2013 and December 31, 2012, we sold $12.4 million and $22.9 million, respectively, in fixed-rate one-to-four family loans. As of December 31, 2013, we had $1.8 million of mortgage loan forward sale commitments. The fair value of these commitments is not material.
The interest rate on ARM loans is indexed to the one year Treasury bill rate. Our ARM loans currently provide for maximum rate adjustments of 200 basis points per year and either 500 or 600 basis points over the term of the loan depending on the length of the adjustable portion of the loan. In the current rate environment the fully indexed equivalent loan rate is less than the initial interest rate on the ARM loans. Residential ARM loans amortize over a maximum term of up to 30 years. In addition to one year ARM loans, we offer certain hybrid ARM loans which provide for an initial fixed term of three or five years and then are converted into a one year ARM loan after the fixed time period. ARM loans are originated for retention in our portfolio.
ARM loans decrease the risk associated with changes in market interest rates by periodically repricing, but involve other risks. As interest rates increase, the underlying required periodic payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustment permitted by the terms of the ARM loans, and therefore, is potentially limited in effectiveness during periods of rapidly rising interest rates. Decreasing interest rates could result in a downward adjustment of the contractual interest rates resulting in lower interest income. At December 31, 2013, $52.0 million, or 15.4% of our loan portfolio consisted of one-to-four family residential loans with adjustable interest rates.
All one-to-four family residential mortgage loans originated by Oneida Savings Bank include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid.
At December 31, 2013, approximately $117.4 million, or 34.7% of our loan portfolio, consisted of one-to-four family residential loans.
Home Equity Loans. We offer home equity loans that are secured by the borrower’s primary residence. We offer a home equity line of credit under which the borrower is permitted to draw on the home equity line of credit during the first ten years after it is originated and repay the outstanding balance over a term not to exceed 25 years from the date the line of credit is originated. The interest rates on home equity lines of credit adjust monthly a margin over the prime interest rate. We also offer a home equity product providing for a fixed-rate of interest. Both adjustable-rate and fixed-rate home equity loans are underwritten under the same criteria that we use to underwrite one-to-four family fixed-rate loans. Fixed-rate home equity loans are originated with terms up to fifteen years. Home equity loans may be underwritten with a loan to value ratio of 90% when combined with the principal balance of the existing mortgage loan. The maximum amount of a home equity loan may not exceed $1.0 million unless approved by the Board of Directors. We generally require an appraisal on the property securing loans in excess of $75,000 at the time of the loan application (but not thereafter) in order to determine the value of the property securing the home equity loans. We utilize alternative methods in determining the value of properties of loans less than $75,000 such as a limited appraisal or review of tax bills. At December 31, 2013, the outstanding balance of home equity loans totaled $49.4 million, or 14.7% of our loan portfolio.
Commercial Real Estate Loans. At December 31, 2013, $82.4 million, or 24.4% of the total loan portfolio consisted of commercial real estate and multi-family loans. Commercial real estate and multi-family residential loans are secured by office buildings, medical facilities, mixed-use properties, religious facilities, other commercial properties and multi-family residential
properties. We originate adjustable rate commercial mortgage loans with terms of up to 20 years. The maximum loan-to-value ratio of commercial real estate loans is 80%. At December 31, 2013, the largest commercial real estate loan had a principal balance of $3.0 million and was secured by an office building and fixtures. This loan was performing in accordance with its terms at December 31, 2013.
In underwriting commercial real estate and multi-family residential loans, we review the expected net operating income generated by the real estate to ensure that it is at least 110% of the amount of the monthly debt service; the age and condition of the collateral; the financial resources and income level of the borrower; and the borrower’s business experience. Personal guarantees are routinely obtained from all commercial real estate borrowers.
Loans secured by commercial real estate and multi-family residential properties generally are larger than one-to-four family residential loans and involve a greater degree of risk. Commercial and multi-family residential mortgage loans often involve large loan balances to single borrowers or groups of related borrowers. Payments on these loans depend to a large degree on the results of operations and management of the properties or underlying businesses, and may be affected to a greater extent by adverse conditions in the real estate market or the economy in general. Accordingly, the nature of commercial real estate loans makes them more difficult for management to monitor and evaluate.
Construction and Land. At December 31, 2013, construction and land loans totaled $8.9 million, or 2.6% of the total loan portfolio. We generally do not originate speculative construction loans, and we had no such loans in our portfolio at December 31, 2013. Our construction and land loans consisted of $1.1 million of fixed-rate one-to-four family residential construction loans as well as $7.8 million of commercial new construction loans. One-to-four family residential construction loans are offered as interest-only loans at a fixed rate of interest for up to a five month construction period. Immediately following the construction period the loan begins monthly amortizing payments consistent with the terms of the one-to-four family permanent mortgage loan product. Commercial construction loans can consist of land development loans or new building construction loans as well as participation loans that include new building construction loans. Land development loans are collateralized by a mortgage on the property which is supported by an appraisal. Commercial construction loans are given for the construction phase of a building. There can be an interest only period not exceeding one year for new construction loans. Once the construction is completed, the loan is transferred into permanent financing. Draws for both residential and commercial new construction are based on the loan approval, commitment letter, and a building and loan agreement. Property inspections during the construction phase are also required.
Construction financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. In the event we make a land acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.
Consumer Lending. At December 31, 2013, consumer loans totaled $28.8 million, or 8.5% of the total loan portfolio. Our consumer loans consist primarily of automobile loans, and to a lesser extent recreational vehicle loans, secured personal loans (secured by bonds, equity securities or other readily marketable collateral), and other consumer loans (consisting of passbook loans and unsecured home improvement loans). Consumer loans are originated with terms to maturity of three to seven years. Historically, we have sought to increase the level of consumer loans primarily through increased automobile lending. We participate in a number of indirect automobile lending programs with local automobile dealerships. All indirect automobile loans must satisfy our underwriting criteria for automobile loans originated directly by us to the borrower and must be approved by one of our lending officers. At December 31, 2013, loans secured by automobiles totaled $25.8 million, of which $15.9 million were originated through our indirect automobile lending program. We have also sought to increase the level of automobile loans directly to borrowers by increasing marketing efforts with existing customers. Automobile loans generally do not have terms exceeding seven years. We do not provide financing for leased automobiles.
Consumer loans generally have shorter terms and higher interest rates than one-to-four family mortgage loans. In addition, consumer loans expand the products and services we offer to better meet the financial services needs of our customers. Consumer loans generally involve greater credit risk than residential mortgage loans because of the difference in the underlying collateral. Repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance because of the greater likelihood of damage to, loss of, or depreciation in the underlying collateral. The remaining
deficiency often does not warrant further substantial collection efforts against the borrower beyond obtaining a deficiency judgment. In addition, consumer loan collections depend on the borrower’s personal financial stability. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans.
Our underwriting procedures for consumer loans include an assessment of the applicant’s credit history and the ability to meet existing and proposed debt obligations. Although the applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the security to the proposed loan amount. We underwrite consumer loans internally, which we believe limits its exposure to credit risks associated with loans underwritten or purchased from brokers and other external sources.
Commercial Business Loans. At December 31, 2013, we had $50.9 million of commercial business loans which represented 15.1% of the total loan portfolio. Commercial business loans are originated with terms of up to ten years, at fixed rates of interest except for lines of credit which have variable rates of interest. Commercial business loans are generally originated to persons with a prior relationship with Oneida Savings Bank or referrals from persons with a prior relationship with Oneida Savings Bank. The decision to grant a commercial business loan depends primarily on the creditworthiness and cash flow of the borrower (and any guarantors) and secondarily on the value of and ability to liquidate the collateral which generally consists of receivables, inventory and equipment. We generally require annual financial statements and tax returns from our commercial business borrowers and personal guarantees from the commercial business borrowers. We also generally require an appraisal of any real estate that secures the commercial business loan. At December 31, 2013, the largest commercial business loan totaled $2.2 million, which was secured by business assets, life insurance and liquid collateral of a for-profit telecom provider. At December 31, 2013, unsecured commercial business loans totaled $814,000.
Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with residential and commercial real estate lending. Real estate lending is generally considered to be collateral based, with loan amounts based on predetermined loan to collateral values and liquidation of the underlying real estate collateral is viewed as the primary source of repayment in the event of borrower default. Although commercial business loans may be collateralized by equipment or other business assets, the liquidation of collateral in the event of a borrower default is often an insufficient source of repayment because equipment and other business assets may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the creditworthiness of the borrower (and any guarantors), while liquidation of collateral is a secondary source of repayment.
Loan Maturity Schedule. The following table sets forth certain information as of December 31, 2013, regarding the amount of loans (including loans held for sale) maturing in our portfolio. Demand loans having no stated schedule of repayment and no stated maturity and overdrafts are reported as due in one year or less. All loans are included in the period in which the final contractual repayment is due.
Fixed- and Adjustable-Rate Loan Schedule. The following table sets forth at December 31, 2013, the dollar amount of all fixed-rate and adjustable-rate loans (including loans held for sale) due after December 31, 2014. Adjustable- and floating-rate loans are included based on contractual maturities.
Loan Origination, Sales and Repayments. The following table sets forth our loan origination, sales and repayment activities for the periods indicated. Purchased loans represent individual commercial business loans and construction loans which are considered participation loans. The sales of loans represent one-to-four family fixed-rate loans that are sold in the secondary market within the normal course of business as well as commercial business loans in which a portion of the loan has been sold.
Loan Approval Procedures and Authority. The Board of Directors establishes our lending policies and loan approval limits. Loan officers generally have the authority to originate mortgage loans, consumer loans and commercial business loans up to amounts established for each lending officer. All residential loans over $500,000 must be approved by the Officer Loan Committee. The Officer Loan Committee shall consist of at least three members with at least one member being the President, Chief Executive Officer or Chief Loan Officer present to vote. The Officer Loan Committee consists of the President, the Chief Executive Officer, the Chief Loan Officer, and the Managed Assets Department Head or a Designated Bank Officer. All loan relationships in excess of $500,000 and up to $2.0 million (exclusive of residential mortgages and home equity loans secured by a lien on the borrower’s primary residence) must be approved by the Officer Loan Committee. All lending relationships in excess of $2.0 million up to $4.0 million (exclusive of residential mortgages and home equity loans secured by a lien on the borrower’s primary residence) must be approved by the Executive Committee of the Board of Directors. All lending relationships in excess of $4.0 million must be approved by the Board of Directors.
All independent appraisers are approved by the Board of Directors annually. We require an environmental site assessment for all non-residential mortgage loans. Our policy is to require hazard insurance on all mortgage loans and generally to require title insurance on all residential mortgage loans.
Loan Origination Fees and Other Income. In addition to interest earned on loans, we receive loan origination fees. Such fees and costs vary with the volume and type of loans and commitments made and purchased, principal repayments and competitive conditions in the mortgage markets, which in turn respond to the demand and availability of money.
In addition to loan origination fees, we also receive other fees, servicing income and other income that consist primarily of mortgage servicing fees and late charges.
Loans-to-One Borrower. Savings banks are subject to the same loans-to-one borrower limits as those applicable to national banks, which under current regulations restrict loans-to-one borrower to an amount equal to 15% of unimpaired net worth on an unsecured basis, and an additional 10% of unimpaired net worth in the case of loans that are fully secured by readily marketable collateral having a market value, as determined by reliable and continuously available price quotations at least equal to the amount of the loan. Our policy provides that loans-to-one borrower (or related borrowers) should not exceed 15% of our capital.
At December 31, 2013, the largest amount loaned to one borrower consisted of seven commercial real estate loans and five commercial loans with an outstanding balance totaling $4.7 million and available credit of $3.3 million. This amount was secured by commercial property including multiple office buildings and business assets as well as various one-to-four family and farm properties. The loans also carry personal guarantees. At December 31, 2013 this lending relationship was performing in accordance with its terms.
Asset Quality, Delinquencies and Classified Assets
Collection Procedures. A computer generated late notice is sent when a loan’s grace period ends. After the late notice has been mailed, accounts are assigned to collectors for follow-up to determine reasons for delinquency and explore payment options. Generally, loans that are 30 days delinquent will receive a default notice. With respect to consumer loans, we will commence efforts to repossess the collateral after the loan becomes 45 days delinquent. Loans secured by real estate that are delinquent over 60 days are turned over to our Managed Asset Manager. Generally, after 90 days we will commence legal action.
Loans Past Due and Nonperforming Assets. Loans are reviewed on a regular basis and are placed on non-accrual status when they are 90 days past due or earlier when, in the opinion of management, the collection of additional interest is doubtful. Loans are generally placed on non-accrual status when either principal or interest is 90 days or more past due. Interest accrued and unpaid at the time a loan is placed on non-accrual status is reversed from interest income.
Real estate acquired as a result of foreclosure or by deed in lieu of foreclosure is classified as Other Real Estate (“ORE”) until such time as it is sold. When real estate is acquired through foreclosure or by deed in lieu of foreclosure, it is recorded at its fair value, less estimated costs of disposal. If the value of the property is less than the loan balance, less any related specific loan loss provisions, the difference is charged against the allowance for loan losses. Any subsequent write-down of ORE is charged against earnings.
The following table sets forth certain delinquencies in our loan portfolio as of December 31, 2013. When a loan is delinquent 90 days or more or earlier when, in the opinion of management, the collection of additional interest is doubtful, we fully reverse all interest accrued and cease to accrue interest thereafter.
Nonaccrual Loans and Nonperforming Assets. The following table sets forth information regarding nonaccrual loans and other nonperforming assets.
Of our total nonperforming loans at December 31, 2013 of $529,000, $218,000 consisted of two one-to-four family loans. We believe that the two one-to-four family loans are adequately collateralized and we do not anticipate any losses on such loans. These loans are in various stages of foreclosure. In addition, $262,000 of the nonperforming loans consisted of three home equity loans which are in various stages of foreclosure. We believe that the three home equity loans are adequately collateralized and we do not anticipate any losses on these loan. In addition, $49,000 of the nonperforming loans consisted of two commercial loans, both of which are partially guaranteed by SBA. Both of the commercial loans were considered to be troubled debt restructurings and impaired at December 31, 2013 and had an allocated allowance for loan loss reserve of $12,000. We do not anticipate a material loss on either of these loans. As of December 31, 2012, $1.5 million representing six trust preferred securities were considered nonaccrual. These trust preferred securities were sold/liquidated during 2013 and a loss of $116,000 was realized.
During the years ended December 31, 2013 and 2012, respectively, gross interest income of $81,000 and $61,000 would have been recorded on nonaccruing loans under their original terms, if the loans had been current throughout the period. No interest income was recorded on nonaccruing loans during the years ended December 31, 2013 and 2012.
As of December 31, 2013, the Company has a recorded investment in troubled debt restructurings of $926,000. As of December 31, 2012, the Company had a recorded investment in troubled debt restructurings of $662,000. There were no troubled debt restructurings as of December 31, 2011, 2010 and 2009. The Company allocated $59,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2013. The Company allocated $186,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2012. As of December 31, 2013, two of the loans with a principal balance of $49,000 and a specific allowance of $12,000 were considered impaired and on nonaccrual and are included in the table presented above. The four remaining loans totaling $877,000 with a specific allowance of $46,000 were commercial lines of credit which were not paid in full at the time of maturity. The loan maturity dates were extended and the reduction in interest rates were to below market rates. All loans are currently performing in accordance with the modified loan terms.
Classification of Assets. On the basis of management’s review of our assets, at the dates indicated we had classified assets and other criticized assets as follows:
At December 31, 2013, our classified assets included loans identified by bank regulatory definitions of “substandard”. We had no assets classified as “doubtful” at December 31, 2013 that were not also considered impaired and included in the impaired assets total. We had no assets classified as “loss” at December 31, 2013. Substandard assets consisted of (i) four commercial relationships with a principal balance of $1.4 million, (ii) two one-to-four family residential loans with a principal balance of $218,000, and (iii) three home equity loans with a principal balance of $262,000. In addition to the classified assets, we have identified certain impaired assets at December 31, 2013 consisting of (i) three commercial real estate loans with a principal balance of $504,000 and (ii) six commercial loans with a principal balance of $925,000. Included as a component of criticized assets are loans identified as “special mention” as determined by management according to regulatory guidance. At December 31, 2013, we did not have any loans identified as special mention. In addition, we have a classified other asset totaling $2.0 million which represents surplus notes to an insurance company specializing in professional liability for medical malpractice. This asset is considered classified based on changes in management at the insurance company and the loss taken during 2012 related to a similar investment in an insurance company specializing in long-term care facilities. These surplus notes were performing as of December 31, 2013. We no not anticipate a loss on these notes.
Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. The general component covers non-impaired loans and is based on the historical loss experience adjusted for current factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent three years. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability and depth of lending management and other relevant staff; national and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations. Management makes appropriate provisions for loan losses on a quarterly basis. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses and valuation of real estate owned. Such agencies may require us to recognize additions to the allowance based on their judgment about information available to them at the time of their examination. At December 31, 2013, the total allowance was $3.1 million, which amounted to 0.93% of loans, net and 587.9% of nonperforming loans. For the years ended December 31, 2013 and 2012, we had net charge-offs of $166,000 and $864,000, respectively, against this allowance.
Analysis of the Allowance for Loan Losses. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.
Allocation of Allowance for Loan Losses. The following table sets forth the allocation of the allowance for loan losses by loan category for the periods indicated.
Securities Investment Activities
The securities investment policy is established by our Board of Directors. This policy dictates that investment decisions will be made based on the safety of the investment, our liquidity needs, potential returns, cash flow targets and desired risk parameters. In pursuing these objectives, management considers the ability of an investment to provide earnings consistent with factors of quality, maturity, marketability, liquidity and risk diversification.
Our current policies generally limit security investments to U.S. Government and agency securities, tax-exempt bonds, public utilities debt obligations, corporate debt obligations and corporate equity securities. In addition, our policy permits investments in mortgage related securities, including securities issued by government sponsored enterprises such as Fannie Mae, Freddie Mac and Ginnie Mae. Our investment strategy is to increase overall investment securities yields while managing interest rate risk. We will only purchase securities rated as investment grade by a nationally recognized investment rating agency. We do not engage in any hedging transactions, such as interest rate swaps or caps.
We evaluate securities for other-than-temporary impairment (“OTTI”) on at least 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 assesses 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 earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) 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 expected to be collected and the amortized cost basis. The assessment of whether an other-than-temporary impairment decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
At December 31, 2013, we had two trust preferred securities with an aggregate amortized cost of $1.0 million and aggregate unrealized gain of $1.5 million. Both of these securities have fixed rates of interest and were placed back on accrual during 2012. The issuers of these securities are banks. As of December 31, 2013, through review of the current and expected cash flow analysis based on the credit quality of the underlying collateral, the class of securities we own, default probabilities and anticipated losses given default assumptions and stress tests performed on these securities, there was no other-than-temporary impairment loss taken for the year ended December 31, 2013.
Unrealized losses on other investments have not been recognized into income because the issuer(s) securities are of investment grade (except for Strats-Goldman Sachs Corporation as indicated below and three private placement collateralized mortgage obligations), management does not intend to sell and it is more likely than not that management would not be required to sell the securities prior to their anticipated recovery, and the decline in fair value is largely due to changes in interest rates. The fair value is expected to recover as the bond(s) approach maturity.
At December 31, 2013, we had a $2.5 million Strats-Goldman Sachs Corporation obligation, maturing February 15, 2034 which had been rated below investment grade but was no longer being rated as of December 31, 2013. This is a variable rate note based on the six month LIBOR. The current rate on the security is 1.34%. The unrealized loss on this security was $1.1 million and $1.2 million as of December 31, 2013 and December 31, 2012 respectively. Strats-Goldman Sachs is paying as agreed. This loss has not been considered other-than-temporary in that we do not intend to sell the security and it is more likely than not that we will not be required to sell the security before the recovery of the cost basis, which may be at maturity.
At December 31, 2013, we had three private placement collateralized mortgage obligations totaling $1.2 million which are rated below investment grade. All were rated investment grade at the time of purchase. The net unrealized gain at December 31, 2013 was $59,000. Through review of the current and expected cash flow analysis based on the credit quality of the underlying collateral, default probabilities and anticipated losses, two of these securities had been considered impaired and other-than-temporary impairment loss taken for the year ended December 31, 2011 totaling $75,000. There was no other-than-temporary impairment loss taken for the year ended December 31, 2013 or 2012. These securities remain available for sale as of December 31, 2013.
Investment Securities. At December 31, 2013, we had $169.0 million, or 22.8% of total assets, invested in investment securities, which consisted primarily of U.S. Government obligations, tax-exempt securities and corporate debt obligations. Investment securities increased $2.5 million or 1.5% at December 31, 2013 as compared to December 31, 2012. The increase in investment securities was primarily the result of an increase in municipal deposits requiring collateralization partially offset by the growth in net loans receivable.
We are required to designate securities as held to maturity, available for sale or trading, depending on our ability and intent regarding our investments. As of November 30, 2013, the Company transferred securities totaling $98.9 million with unrealized losses of $4.3 million from available for sale to held to the held to maturity portfolio. These securities were transferred to help mitigate interest rate risk on the most price sensitive securities. As a result, the securities are carried at fair value at the date of transfer, which established a new cost basis for book, and the difference between the par value of the securities and the fair at the date of transfer will be accreted as an adjustment of yield. Investment securities in which the fair value option has been elected are considered trading assets and are recorded at fair value with changes in fair value included in earnings.
Trading securities, which consisted of common and preferred equity securities, totaled $5.1 million or 0.7% of total assets at December 31, 2013.
At December 31, 2013, our investment securities portfolio had a weighted average life of 7.46 years.
Investment Securities. The following table sets forth certain information regarding the investment securities and other interest earning assets as of the dates indicated.
Investment Portfolio Maturities. The following table sets forth the scheduled maturities and weighted average yields for our available for sale investment portfolio at December 31, 2013.
The following table sets forth the scheduled maturities and weighted average yields for our held to maturity investment portfolio at December 31, 2013.
Mortgage-Backed Securities. We purchase mortgage-backed securities in order to: (i) generate positive interest rate spreads with minimal administrative expense; (ii) lower our credit risk; and (iii) increase liquidity. At December 31, 2013, we had $99.0 million or 13.3% of total assets invested in mortgage-backed securities, of which $59.0 million were classified as held to maturity. The mortgage-backed securities portfolio had coupon rates ranging from 0.44% to 7.75%, a weighted average yield of 2.02% and a weighted average life (including payment assumption) of 5.72 years at December 31, 2013.
Mortgage-backed securities are created by the pooling of mortgages and the issuance of a security with an interest rate that is less than the interest rate on the underlying mortgages. Mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we focus our investments on mortgage-related securities backed by single-family mortgages. The issuers of such securities (generally U.S. Government agencies and government sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae) pool and resell the participation interests in the form of securities to investors, such as Oneida Savings Bank, and guarantee the payment of principal and interest to these investors. Mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees and credit enhancements. In addition, mortgage-related securities are usually more liquid than individual mortgage loans and may be used to collateralize certain of our liabilities and obligations. Investments in mortgage-backed securities involve a risk that actual prepayments will be greater than estimated over the life of the security, which may require adjustments to the amortization of any
premium or accretion of any discount relating to such instruments thereby reducing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities or in the event such securities are redeemed by the issuer. In addition, the market value of such securities may be adversely affected by changes in interest rates. Management reviews prepayment estimates periodically to ensure that prepayment assumptions are reasonable considering the underlying collateral for the securities at issue and current interest rates and to determine the yield and estimated maturity of our mortgage-backed securities portfolio. Of our $99.0 million mortgage-backed securities portfolio at December 31, 2013, $3.0 million with a weighted average yield of 1.29% had contractual maturities within five years, $14.0 million with a weighted average yield of 2.99% had contractual maturities of five to ten years and $82.0 million with a weighted average yield of 2.36% had contractual maturities of over ten years. However, the actual maturity of a mortgage-backed security may be less than its stated maturity due to prepayments of the underlying mortgages or significant defaults of the underlying mortgages. Prepayments that are faster than anticipated may shorten the life of the security and may result in a loss of any premiums paid and thereby reduce the net yield on such securities. Although prepayments of underlying mortgages depend on many factors, the difference between the interest rates on the underlying mortgages and the prevailing mortgage interest rates generally is the most significant determinant of the rate of prepayments. Historically, during periods of declining mortgage interest rates, refinancing generally increases and accelerates the prepayment of the underlying mortgages and the related security. Under such circumstances, we may be subject to reinvestment risk because, to the extent that our mortgage related securities prepay faster than anticipated, we may not be able to reinvest the proceeds of such repayments and prepayments at a comparable rate of return. During 2013, mortgage interest rates began to increase coming off of historical low levels. The impact on our mortgage-backed securities portfolio is to decrease the prepayments slightly. Should interest rates continue to rise prepayments may decline, thereby extending the estimated life of the security and depriving us of the ability to reinvest cash flows at the increased rates of interest.
Collateralized Mortgage Obligations (“CMOs”) are debt securities issued by a special-purpose entity that aggregates pools of mortgages and mortgage-backed securities and creates different classes of securities with varying maturities and amortization schedules, as well as a residual interest, with each class possessing different risk characteristics. The cash flows from the underlying collateral are generally divided into “tranches” or classes that have descending priorities with respect to the distribution of principal and interest cash flows, while cash flows on pass-through mortgage-backed securities are distributed pro rata to all security holders.
Mortgage-Backed Securities. Set forth below is information relating to our mortgage-backed securities for the periods indicated.
Sources of Funds
General. Our primary sources of funds for use in lending, investing and for other general purposes are deposits, repayments and prepayments of loans and securities, proceeds from sales of loans and securities, proceeds from maturing securities and cash flows from operations.
Deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of savings, interest-bearing demand accounts, non-interest-bearing checking accounts, money market accounts and certificates of deposit. We also offer IRAs and other qualified plan accounts. Through our limited purpose subsidiary, State Bank of Chittenango, we held $145.4 million in municipal deposits at December 31, 2013.
At December 31, 2013, deposits totaled $637.2 million and increased $68.9 million, or 12.1%, from $568.3 million at December 31, 2012. The increase in deposits was distributed throughout our existing retail banking branch network including an increase in municipal deposits. At December 31, 2013, we had a total of $141.9 million in certificates of deposit, of which $97.4 million had maturities of one year or less. Although we have a significant portion of deposits in shorter term certificates of deposit, management monitors activity on these accounts. Based on historical experience and our current pricing strategy, management believes it will retain a large portion of such accounts upon maturity. At December 31, 2013 certificates of deposit with balances of $100,000 or more totaled $55.0 million.
The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates, internal pricing decisions and competition. Deposits are obtained predominantly from the areas in which our branch offices are located. We rely primarily on competitive pricing of deposit products and customer service and long-standing relationships with customers to attract and retain these deposits; however, market interest rates and rates offered by competing financial institutions significantly affect our ability to attract and retain deposits. We use traditional means of advertising our deposit products, including radio and print media and generally do not solicit deposits from outside our market area. While we accept certificates of deposit in excess of $100,000, and may be subject to preferential rates, we do not actively solicit such deposits as they are more difficult to retain than core deposits. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance to $250,000 per account. Historically, we have not used brokers to obtain deposits. We participate in the Certificate of Deposit Account Registry Service (“CDARs”) that enables the institution to provide customers with access to up to $50 million in FDIC insurance on CD investments.
The following table sets forth our deposit activities for the periods indicated.
The following table indicates the amount of our certificates of deposit by time remaining until maturity as of December 31, 2013.
The following tables set forth information, by various rate categories, regarding the dollar balance of deposits by types of deposit for the periods indicated.
The following table sets forth the amount and remaining maturities of our certificates of deposit accounts at December 31, 2013.
Borrowed Funds. Our borrowings consist of term advances and repurchase agreements borrowed under agreements with the Federal Home Loan Bank of New York. In addition we have access to overnight advances with the FHLBNY and other correspondent banks under line of credit facilities accessed from time to time. At December 31, 2013, we had access to additional FHLBNY advances of up to $87.8 million. The following table sets forth information concerning balances and interest rates on our borrowings at the dates and for the periods indicated.
Trust Activities
Oneida Savings Bank provides trust and investment services, acts as executor or administrator of estates and as trustee or custodian for various types of trusts. Trust services are offered through Oneida Savings Bank’s Trust Department. Services include fiduciary services for trusts and estates, money management and custodial services. At December 31, 2013, Oneida Savings Bank maintained 530 trust/fiduciary accounts, with total assets of $186.8 million under management as compared to 477 trust/fiduciary accounts, with total assets of $112.9 million at December 31, 2012. Management anticipates that in the future the Trust Department will become a more significant component of Oneida Savings Bank’s business.
Personnel
As of December 31, 2013, we had 337 full-time employees and 29 part-time employees. The employees are not represented by a collective bargaining unit. Management believes that we have a good relationship with its employees.
Regulation
General. Oneida Savings Bank is a New York chartered savings bank and our deposit accounts are insured up to applicable limits by the Federal Deposit Insurance Corporation under the Deposit Insurance Fund. Oneida Savings Bank is subject to extensive regulation by the New York State Department of Financial Services (the “Department”) as its chartering agency, and by the Federal Deposit Insurance Corporation, as the insurer of its deposit accounts. Oneida Savings Bank must file reports with the Department and the Federal Deposit Insurance Corporation concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions, including acquisitions of other financial institutions. Oneida Savings Bank is examined periodically by the Department and the Federal Deposit Insurance Corporation to test Oneida Savings Bank’s compliance with various laws and regulations. This regulation and supervision, as well as federal and state law, establishes a comprehensive framework of activities in which Oneida Savings Bank may engage and is intended primarily for the protection of the Federal Deposit Insurance Corporation insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and with their examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes.
Any change in these laws or regulations, whether by the Department or the Federal Deposit Insurance Corporation could have a material adverse impact on Oneida Financial Corp. and Oneida Savings Bank and their operations.
Set forth below is a brief description of certain regulatory requirements that are applicable to Oneida Financial Corp. and Oneida Savings Bank. The description below is limited to certain material aspects of the statutes and regulations addressed, and is not intended to be a complete description of such statutes and regulations and their effects on Oneida Financial Corp. and Oneida Savings Bank.
Dodd-Frank Act. In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) which is significantly changing the bank regulatory structure and affecting the lending, investment, trading and operating activities of depository institutions and their holding companies. As of July 21, 2011, the Dodd-Frank Act authorized the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies, like Oneida Financial Corp., in addition to bank holding companies which it currently regulates. The Office of Thrift Supervision, which was Oneida Financial Corp.’s prior regulator, was eliminated. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for bank and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. Bank holding companies with assets of less than $500 million are exempt from these capital requirements. Under the Dodd-Frank Act, the proceeds of trust preferred securities will be excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directed the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Oneida Savings Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets continue to be examined for compliance by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorney generals’ the ability to enforce applicable federal consumer protection laws.
The legislation broadened the base for Federal Deposit Insurance Corporation insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a depository institution. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000. The Dodd-Frank Act also provided for regulations requiring that originators of securitized loans retain a percentage of the risk for transferred credits, directed the Federal Reserve Board to regulate pricing of certain debit card interchange fees, repealed restrictions on paying interest on commercial checking accounts and contained a number of reforms related to mortgage origination.
The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.
The Dodd-Frank Act contained the so-called "Volcker Rule" which generally prohibits banking organizations from engaging in proprietary trading and from investing in, sponsoring or having certain relationships with hedge or private equity funds ("covered funds"). On December 13, 2013, federal agencies issued a final rule implementing the Volcker Rule which, among other things, requires banking organizations to restructure and limit certain of their investments in and relationships with covered funds.
In addition, the Consumer Financial Protection Bureau has finalized a rule implementing the "Ability to Pay" requirements of the Dodd-Frank Act. The regulations generally require creditors to make a reasonable, good faith determination as to a borrower's ability to repay most residential mortgage loans. The final rule establishes a safe harbor for certain "Qualified Mortgages," which contain certain features deemed less risky and omit certain other characteristics considered to enhance risk. The Ability to Repay final rules were effective January 2, 2014.
New York Bank Regulation. Oneida Savings Bank derives its lending, investment, branching and other authority primarily from the applicable provisions of New York State Banking Law and the regulations of the Department, as limited by federal laws and regulations. Under these laws and regulations, savings banks, including Oneida Savings Bank, may invest in real estate
mortgages, consumer and commercial loans, certain types of debt securities, including certain corporate debt securities and obligations of federal, state and local governments and agencies, certain types of corporate equity securities and certain other assets. Under the statutory authority for investing in equity securities, a savings bank may invest up to 7.5% of its assets in corporate stock, with an overall limit of 5% of its assets invested in common stock. Investment in the stock of a single corporation is limited to the lesser of 2% of the outstanding stock of such corporation or 1% of the savings bank’s assets, except as set forth below. Such equity securities must meet certain earnings ratios and other tests of financial performance. A savings bank’s lending powers are not subject to percentage of assets limitations, although there are limits applicable to single borrowers. A savings bank may also, pursuant to the “leeway” power, make investments not otherwise permitted under the New York State Banking Law. This power permits investments in otherwise impermissible investments of up to 1% of assets in any single investment, subject to certain restrictions and to an aggregate limit for all such investments of up to 5% of assets. Additionally, in lieu of investing in such securities in accordance with and reliance upon the specific investment authority set forth in the New York State Banking Law, savings banks are authorized to elect to invest under a “prudent person” standard in a wider range of investment securities as compared to the types of investments permissible under such specific investment authority. However, in the event a savings bank elects to utilize the “prudent person” standard, it will be unable to avail itself of the other provisions of the New York State Banking Law and regulations which set forth specific investment authority. Oneida Savings Bank has not elected to conduct its investment activities under the “prudent person” standard. A savings bank may also exercise trust powers upon approval of the Department.
New York State chartered savings banks may also invest in subsidiaries under their service corporation investment authority. A savings bank may use this power to invest in corporations that engage in various activities authorized for savings banks, plus any additional activities that may be authorized by the Banking Board. Investment by a savings bank in the stock, capital notes and debentures of its service corporations is limited to 3% of the bank’s assets, and such investments, together with the bank’s loans to its service corporations, may not exceed 10% of the savings bank’s assets. Furthermore, New York banking regulations impose requirements on loans which a bank may make to its executive officers and directors and to certain corporations or partnerships in which such persons have equity interests. These requirements include that (i) certain loans must be approved in advance by a majority of the entire board of directors and the interested party must abstain from participating directly or indirectly in voting on such loan, (ii) the loan must be on terms that are not more favorable than those offered to unaffiliated third parties, and (iii) the loan must not involve more than a normal risk of repayment or present other unfavorable features.
Under the New York State Banking Law, the Superintendent may issue an order to a New York State chartered banking institution to appear and explain an apparent violation of law, to discontinue unauthorized or unsafe practices and to keep prescribed books and accounts. Upon a finding by the Department that any director, trustee or officer of any banking organization has violated any law, or has continued unauthorized or unsafe practices in conducting the business of the banking organization after having been notified by the Superintendent to discontinue such practices, such director, trustee or officer may be removed from office after notice and an opportunity to be heard. Oneida Savings Bank does not know of any past or current practice, condition or violation that may lead to any proceeding by the Superintendent or the Department against Oneida Savings Bank or any of its directors, trustees or officers.
Insurance of Deposit Accounts. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institution and credit unions to $250,000 per depositor. Non-interest bearing transaction accounts had unlimited deposit insurance through December 31, 2012.
Under the FDIC’s risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other risk factors. An institution is assigned an assessment rate based upon the supervisory risk category to which it is assigned and certain possible risk-based adjustments, with institutions perceived as less risky, paying lower rates. The Dodd-Frank Act required the FDIC to revise its risk-based assessment procedures to base it on average total assets less tangible capital, rather than deposits. In response, the FDIC issued a final rule that took effect April 1, 2011. The assessment scale now ranges from 2½ basis points of total assets less tangible capital (generally defined as Tier 1 capital) to 45 basis points.
The FDIC is authorized to set the reserve ratio for the Deposit Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits. The Dodd-Frank Act mandated that the statutory minimum reserve ratio of the Deposit Insurance Fund increase from 1.15% to 1.35% of insured deposits by September 30, 2020. Banks with assets of less than $10 billion are exempt from any additional assessments necessary to increase the reserve fund above 1.15%.
Insurance of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
In addition to the Federal Deposit Insurance Corporation assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2013, the annualized FICO assessment was equal to 0.64 basis points of total assets less tangible capital.
Regulatory Capital Requirements. The FDIC has adopted risk-based capital guidelines which are applicable to Oneida Savings Bank. The guidelines establish a systematic analytical framework that makes regulatory capital requirements more sensitive to differences in risk profiles among banking organizations. Oneida Savings Bank is required to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of such regulatory capital to regulatory risk-weighted assets is referred to as Oneida Savings Bank’s “risk-based capital ratio.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to risk-weighted categories ranging from 0% to 200%, with higher levels of capital being required for the categories perceived as representing greater risk.
These guidelines divide a savings bank’s capital into two tiers. The first tier (“Tier I”) includes common equity, retained earnings, certain non-cumulative perpetual preferred stock (excluding auction rate issues) and minority interests in equity accounts of consolidated subsidiaries, less goodwill and other intangible assets (except mortgage servicing rights and purchased credit card relationships subject to certain limitations). Supplementary (“Tier II”) capital includes, among other items, cumulative perpetual and long-term limited-life preferred stock, mandatory convertible securities, certain hybrid capital instruments, term subordinated debt and the allowance for loan and lease losses, subject to certain limitations, less required deductions. Savings banks are required to maintain a total risk-based capital ratio of at least 8%, of which at least 4% must be Tier I capital.
In addition, the FDIC has established regulations prescribing a minimum Tier I leverage ratio (Tier I capital to adjusted total assets as specified in the regulations). These regulations provide for a minimum Tier I leverage ratio of 3% for banks that meet certain specified criteria, including that they have the highest examination rating and are not experiencing or anticipating significant growth. All other banks are required to maintain a Tier I leverage ratio of at least 4%. The FDIC may, however, set higher leverage and risk-based capital requirements on individual institutions when particular circumstances warrant. Savings banks experiencing or anticipating significant growth are expected to maintain capital ratios, including tangible capital positions, well above the minimum levels.
In July 2013, the FDIC and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a uniform leverage ratio requirement of 4% of total assets, provides for a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain "available-for-sale" securities holdings to be included for purposes of calculating regulatory capital requirements unless a one-time opt-in or opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule also implements the Dodd-Frank Act's directive to apply to savings and loan holding companies consolidated capital requirements that are not less stringent than those applicable to their subsidiary institutions. The final rule is effective January 1, 2015. The "capital conservation buffer" will be phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer will be effective.
Limitations on Dividends and Other Capital Distributions. The FDIC has the authority to use its enforcement powers to prohibit a savings bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. New York law also restricts Oneida Savings Bank from declaring a dividend which would reduce its capital below (i) the amount required to be maintained under state law and regulation or (ii) the amount of Oneida Savings Bank’s liquidation account established in connection with its reorganization from mutual form.
Prompt Corrective Action. The federal banking agencies have promulgated regulations to implement the system of prompt corrective action required by federal law. Under the regulations, a bank shall be deemed to be (i) “well capitalized” if it has total risk-based capital of 10.0% or more, has a Tier I risk-based capital ratio of 6.0% or more, has a Tier I leverage capital ratio of 5.0% or more and is not subject to any written capital order or directive; (ii) “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or more, a Tier I risk-based capital ratio of 4.0% or more and a Tier I leverage capital ratio of 4.0% or
more (3.0% under certain circumstances) and does not meet the definition of “well capitalized”; (iii) “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier I risk-based capital ratio that is less than 4.0% or a Tier I leverage capital ratio that is less than 4.0% (3.0% under certain circumstances); (iv) “significantly undercapitalized” if it has a total risk-based capital ratio that is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a Tier I leverage capital ratio that is less than 3.0%; and (v) “critically undercapitalized” if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. Federal law and regulations also specify circumstances under which a federal banking agency may reclassify a well-capitalized institution as adequately capitalized and may require an adequately capitalized institution to comply with supervisory actions as if it were in the next lower category (except that the FDIC may not reclassify a significantly undercapitalized institution as critically undercapitalized).
Based on the foregoing, Oneida Savings Bank is currently classified as a well-capitalized savings institution.
The recently proposed rules that will increase regulatory capital requirements will adjust the prompt corrective action categories accordingly.
Activities as Principal and Investments of Insured State-Chartered Banks. Federal law generally limits the activities as principal and equity investments of FDIC-insured state-chartered banks to those that are permissible for national banks, notwithstanding state laws. Under federal regulations dealing with equity investments, an insured state bank generally may not, directly or indirectly, acquire or retain any equity investment of a type, or in an amount, that is not permissible for a national bank. An insured state bank is not prohibited from, among other things, (i) acquiring or retaining a majority interest in a subsidiary, the activities of which are limited to those permissible for a subsidiary of a national bank; (ii) investing as a limited partner in a partnership the sole purpose of which is the direct or indirect investment in the acquisition, rehabilitation, or new construction of a qualified housing project, provided that such limited partnership investments may not exceed 2% of the bank’s total assets; (iii) acquiring up to 10% of the voting stock of a company that solely provides or reinsures directors’, trustees’, and officers’ liability insurance coverage or bankers’ blanket bond group insurance coverage for insured depository institutions; and (iv) acquiring or retaining the voting shares of a depository institution if certain requirements are met.
Federal law and FDIC regulations permit certain exceptions to the foregoing limitation. For example, certain state-chartered banks, such as Oneida Savings Bank, may continue to invest in common or preferred stock listed on a National Securities Exchange, and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. As of December 31, 2013, the Bank had $1.1 million of securities pursuant to this exception. As a savings bank, Oneida Savings Bank may also continue to sell savings bank life insurance. The FDIC may also permit otherwise prohibited activities for banks and their subsidiaries if applicable capital requirements are met and the activity is not deemed significantly risky to the insurance fund.
Transactions With Affiliates. Under current federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act and its implementing regulations. An affiliate of a savings bank is any company or entity that controls, is controlled by, or is under common control with the savings bank, other than a subsidiary of the savings bank. In a holding company context, at a minimum, the parent holding company of a savings bank and any companies which are controlled by such parent holding company are affiliates of the savings bank. Generally, Section 23A limits the extent to which the savings bank or its subsidiaries may engage in “covered transactions” with any one affiliate to an amount equal to 10% of such savings bank’s capital stock and surplus and contains an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such capital stock and surplus. The term “covered transaction” includes the making of loans or other extensions of credit to an affiliate; the purchase of assets from an affiliate, the purchase of, or an investment in, the securities of an affiliate; the acceptance of securities of an affiliate as collateral for a loan or extension of credit to any person; or issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate. Section 23A also establishes specific collateral requirements for loans or extensions of credit to, or guarantees, acceptances on letters of credit issued on behalf of an affiliate. Section 23B requires that covered transactions, and a broad list of other specified transactions, be on terms substantially the same, or no less favorable, to the savings bank or its subsidiary as similar transactions with nonaffiliates.
Further, the Federal Reserve Act and its implementing regulation restricts a savings bank with respect to loans to directors, executive officers, principal stockholders, and their related interests. Under these regulations, loans to directors, executive officers and stockholders who control, directly or indirectly, 10% or more of voting securities of a savings bank and certain related interests of any of the foregoing, may not exceed, together with all other outstanding loans to such persons and affiliated entities, the savings bank’s total capital and surplus. In addition, federal law also prohibits loans above amounts prescribed by the appropriate federal banking agency to directors, executive officers, and stockholders who control 10% or more of voting securities of a stock savings bank, and their respective related interests, unless such loan is approved in advance by a majority of the disinterested directors on the board of directors of the savings bank. Any “interested” director may not participate in the voting. The loan amount (which includes all other outstanding loans to such person) as to which such prior board of director approval is required, is the greater of
$25,000 or 5% of capital and surplus or any loans over $500,000. Further, loans to directors, executive officers and principal stockholders must generally be made on terms substantially the same as offered in comparable transactions to other persons. Additional limitations are also imposed on loans to executive officers.
Federal Community Reinvestment Regulation. Under the Community Reinvestment Act, as amended (the “CRA”), and its implementing regulations, a savings bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the FDIC, in connection with its examination of a savings institution, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. Oneida Savings Bank’s latest CRA rating was “satisfactory.”
New York State Community Reinvestment Regulation. Oneida Savings Bank is also subject to provisions of the New York State Banking Law which imposes continuing and affirmative obligations upon banking institutions organized in New York State to serve the credit needs of its local community (“NYCRA”) which are substantially similar to those imposed by the CRA. Pursuant to the NYCRA, a bank must file an annual NYCRA report and copies of all federal CRA reports with the Department. The NYCRA requires the Department to make a biennial written assessment of a bank’s compliance with the NYCRA, utilizing a four-tiered rating system and make such assessment available to the public. The NYCRA also requires the Superintendent to consider a bank’s NYCRA rating when reviewing a bank’s application to engage in certain transactions, including mergers, asset purchases and the establishment of branch offices or automated teller machines, and provides that such assessment may serve as a basis for the denial of any such application. Oneida Savings Bank’s NYCRA rating as of its latest examination was “outstanding.”
Federal Home Loan Bank System. Oneida Savings Bank is a member of the FHLB of New York, which is one of 12 regional FHLBs, that administers the home financing credit function of savings institutions. Each FHLB serves as a reserve or central bank for its members within its assigned region. It is funded primarily from proceeds derived from the sale of consolidated obligations of the FHLB System. It makes loans to members (i.e., advances) in accordance with policies and procedures established by the board of directors of the FHLB. These policies and procedures are subject to the regulation and oversight of the Federal Housing Finance Board. All advances from the FHLB are required to be fully secured by sufficient collateral as determined by the FHLB. In addition, all long-term advances are required to provide funds for residential home financing.
As a member, Oneida Savings Bank is required to purchase and maintain stock in the FHLB of New York. As of December 31, 2013, Oneida Savings Bank had $1.6 million of FHLB stock. The dividend yield from FHLB stock was 4.75% at December 31, 2013. No assurance can be given that the FHLB will pay any dividends in the future.
Under federal law, the FHLBs are required to provide funds for the resolution of troubled savings institutions and to contribute to low and moderately priced housing programs through direct loans or interest subsidies on advances targeted for community investment and low- and moderate-income housing projects. These contributions have affected adversely the level of FHLB dividends paid and could continue to do so in the future. These contributions could also have an adverse effect on the value of FHLB stock in the future. A reduction in value of Oneida Savings Bank’s FHLB stock may result in a corresponding reduction in the Bank’s capital.
Federal Holding Company Regulation
General. Federal law allows a state savings bank that qualifies as a “Qualified Thrift Lender,” as discussed below, to elect to be treated as a savings association for purposes of the savings and loan holding company provision of the Home Owners’ Loan Act of 1933, as amended. Such election results in its holding company being regulated as a savings and loan holding company by the Federal Reserve Board rather than as a bank holding company. Oneida Savings Bank has made such an election. Accordingly, Oneida Financial Corp. is registered as a savings and loan holding company and is subject to Federal Reserve Board regulations, examinations, supervision and reporting requirements. In addition, the Federal Reserve Board has enforcement authority over Oneida Financial Corp. and any non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. The powers and duties of the Office of Thrift Supervision relating to savings and loan holding companies, including rulemaking and supervision authority, were transferred to the Federal Reserve Board on July 21, 2011.
Permissible Activities. Under present law, the business activities of Oneida Financial Corp. are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in
nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. The Dodd-Frank Act added the requirement that a savings and loan holding company seeking to engage in financial holding company activities must meet that qualitative criteria for bank holding companies seeking to engage in such activities. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Federal Reserve Board, and certain additional activities authorized by Federal Reserve Board regulations.
Federal law prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings association or holding company thereof, without prior written approval of the Federal Reserve Board. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider factors such as the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Qualified Thrift Lender Test. To be regulated as a savings and loan holding company by the Federal Reserve Bank rather than as a bank holding company, Oneida Savings Bank must qualify as a Qualified Thrift Lender. To qualify as a Qualified Thrift Lender, Oneida Savings Bank must be a “domestic building and loan association,” as defined in the Internal Revenue Code, or comply with the Qualified Thrift Lender test under Federal Reserve Board regulations. Under the Qualified Thrift Lender test, a savings institution is required to maintain at least 65% of its “portfolio assets” (total assets less: (1) specified liquid assets up to 20% of total assets; (2) intangibles, including goodwill; and (3) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed and related securities) in at least nine months out of each 12-month period. As of December 31, 2013 Oneida Savings Bank met the Qualified Thrift Lender test.
Capital. Savings and loan holding companies are not currently subject to specific regulatory capital requirements. The Dodd-Frank Act, however, requires the Federal Reserve Board to promulgate consolidated capital requirements for depository institution holding companies that are no less stringent, both quantitatively and in terms of components of capital, than those applicable to their subsidiary depository institutions. Instruments such as cumulative preferred stock and trust preferred securities which are currently includable within Tier 1 capital by bank holding companies within certain limits, would no longer be includable as Tier 1 capital, subject to certain grandfathering. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act as to savings and loan holding companies. Consolidated regulatory capital requirements identical to those applicable to the subsidiary depository institutions will apply to savings and loan holding companies as of January 1, 2015. As is the case with institutions themselves, the capital conservation buffer will be phased in between 2016 and 2019.
Source of Strength and Dividends. The Dodd-Frank Act also extends the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board issued regulations requiring that all bank and savings and loan holding companies serve as a source of strength to their subsidiary depository institutions by providing capital, liquidity and other support in times of financial stress. The Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies that it has suggested is applicable to savings and loan holding companies as well. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. Prior regulatory consultation is also required for certain stock repurchases or redemptions. The ability of a holding company to pay dividends may also be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of Oneida Financial Corp. to pay dividends, repurchase its stock or otherwise engage in capital distributions.
Change in Control Regulations
Under the Change in Bank Control Act, no person may acquire control of a savings and loan holding company, such as Oneida Financial Corp. unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the company’s directors, or a determination by the regulator that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable presumption of control under the regulations under certain circumstances including where, as is the case with Oneida Financial Corp., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.
New York State Bank Holding Company Regulation
General. In addition to the federal regulation, a holding company controlling a state chartered savings bank organized or doing business in New York State also may be subject to regulation under the New York State Banking Law. The term “bank holding company,” for the purposes of the New York State Banking Law, is defined generally to include any person, company or trust that directly or indirectly either controls the election of a majority of the directors or owns, controls or holds with power to vote more than 10% of the voting stock of a bank holding company or, if the company is a banking institution, another banking institution, or 10% or more of the voting stock of each of two or more banking institutions. In general, a bank holding company controlling, directly or indirectly, only one banking institution will not be deemed to be a bank holding company for the purposes of the New York State Banking Law. Under New York State Banking Law, the prior approval of the Banking Board is required before: (1) any action is taken that causes any company to become a bank holding company; (2) any action is taken that causes any banking institution to become or be merged or consolidated with a subsidiary of a bank holding company; (3) any bank holding company acquires direct or indirect ownership or control of more than 5% of the voting stock of a banking institution; (4) any bank holding company or subsidiary thereof acquires all or substantially all of the assets of a banking institution; or (5) any action is taken that causes any bank holding company to merge or consolidate with another bank holding company. Additionally, certain restrictions apply to New York State bank holding companies regarding the acquisition of banking institutions, which have been chartered five years or less and are located in smaller communities. Officers, directors and employees of New York State bank holding companies are subject to limitations regarding their affiliation with other bank holding companies and limitations regarding loans obtained from its subsidiaries.
Federal Securities Laws
General. Our common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. We are subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
Shares of common stock held by persons who are not affiliates (generally officers, directors and principal stockholders) of Oneida Financial Corp. may be resold without registration. Shares held by persons who are affiliates are subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If Oneida Financial Corp. meets specified current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of Oneida Financial Corp. that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of the outstanding shares of Oneida Financial Corp., or the average weekly volume of trading in the shares during the preceding four calendar weeks.
The USA PATRIOT Act
General. The USA PATRIOT Act gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. Title III of the USA PATRIOT Act amended the Bank Secrecy Act to encourage information sharing among bank regulatory agencies and law enforcement bodies. Moreover, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, savings associations, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.
Sarbanes-Oxley Act of 2002
General. The Sarbanes-Oxley Act of 2002 addresses, among other issues corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporation information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer will be required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rule adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: (1) they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; (2) they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; (3) and they have included information in our quarterly and annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.
Federal Reserve System
General. The Federal Reserve Board requires all depository institutions to maintain noninterest-bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts). At December 31, 2013, Oneida Savings Bank was in compliance with these reserve requirements.
Federal Taxation
General. Oneida Financial Corp. and Oneida Savings Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to Oneida Financial Corp. or Oneida Savings Bank.
Oneida Savings Bank’s most recent IRS audit was relative to Oneida Savings bank’s 2008 and 2009 federal and state income tax returns.
Method of Accounting. For federal income tax purposes, Oneida Financial Corp. currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its consolidated federal income tax returns.
Alternate Minimum Tax. The Internal Revenue Code of 1986, as amended (the “Code”) imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (“alternative minimum taxable income” or “AMTI”). The AMT is payable to the extent such AMTI is in excess of regular income tax. Net operating losses can offset no more than 90% of AMTI. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. Oneida Financial Corp. and Oneida Savings Bank are subject to AMT. Alternate minimum tax carry forwards approximate $19,000 at December 31, 2013.
Net Operating Loss Carryovers. Generally, a financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. However, as a result of legislation, subject to certain limitations, the carry back period for net operating losses incurred in 2009 and 2010 (but not both years) has been expanded to five years. At December 31, 2013, Oneida Financial Corp. and Oneida Savings Bank had no net operating loss carry forward for federal income tax purposes.
Corporate Dividends-Received Deduction. Oneida Financial Corp. may exclude from its federal taxable income 100% of dividends received from Oneida Savings Bank as a member of the same affiliated group of corporations.
State Taxation
General. Oneida Financial Corp. and Oneida Savings Bank report income on a combined calendar year basis to New York State. New York State Franchise Tax on corporations is imposed in an amount equal to the greater of (a) 7.1% of “entire net income” allocable to New York State (b) 3% of “alternative entire net income” allocable to New York State (c) 0.01% of the average value of assets allocable to New York State or (d) nominal minimum tax. Entire net income is based on federal taxable income, subject to certain modifications. Alternative entire net income is equal to entire net income without certain modifications.
Audit of Tax Returns. New York State Department of Taxation’s most recent audit was of the Company’s 2008 state income tax return.
Executive Officers of the Registrant
Listed below is information, as of December 31, 2013, concerning the Company’s executive officers. There are no arrangements or understandings between the Registrant and any of the persons named below with respect to which he or she was or is to be selected as an officer.
A COPY OF THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2013 IS AVAILABLE FOR REVIEW ON OUR WEBSITE AT WWW.ONEIDAFINANCIAL.COM AND WILL BE FURNISHED WITHOUT CHARGE TO STOCKHOLDERS UPON WRITTEN OR TELEPHONIC REQUEST TO ERIC E. STICKELS, SECRETARY, ONEIDA FINANCIAL CORP., 182 MAIN STREET, ONEIDA, NEW YORK 13421, OR CALL (315) 363-2000.
ITEM 1A.
ITEM 1A. RISK FACTORS
Concentration of loans in our primary market area may increase risk.
Our success depends primarily on the general economic conditions in upstate New York, as nearly all of our loans are to customers in this market. Accordingly, the local economic conditions in upstate New York have a significant impact on the ability of borrowers to repay loans. As such, a decline in real estate valuations in this market would lower the value of the collateral securing those loans. In addition, a significant weakening in general economic conditions such as inflation, recession, unemployment, or other factors beyond our control could negatively affect our financial results.
Changes in interest rates could adversely affect our results of operations and financial condition.
Our results of operations and financial condition are significantly affected by changes in interest rates. Our financial results depend substantially on net interest income, which is the difference between the interest income that we earn on interest-earning assets, such as loans and securities, and the interest expense we pay on interest-bearing liabilities, such as deposits and borrowings. Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would tend to result in a decrease in our net interest income. We have taken steps to mitigate this risk such as holding fewer longer-term residential mortgages as well as investing excess funds in shorter-term investments.
Changes in interest rates also affect the value of our interest-earning assets and in particular our investment securities available for sale. Generally, the value of our investment securities fluctuates inversely with changes in interest rates. At December 31, 2013, our investment securities available for sale totaled $131.1 million. Unrealized losses on our securities available for sale totaled $1.7 million and are reported in other comprehensive income as a separate component of our stockholders’ equity. Decreases in the fair value of our securities available for sale, therefore, could have an adverse effect on our stockholders’ equity or our earnings if the decrease in fair value is deemed to be other than temporary.
Changes in interest rates may also affect the average life of our loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on our existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans.
A majority of our real estate loans held for investment are adjustable-rate loans. Any rise in market interest rates may result in increased payments for borrowers who have adjustable rate mortgage loans, increasing the possibility of default. In addition, although adjustable-rate mortgage loans help make our loan portfolio more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits. At December 31, 2013, approximately 52.7% of our total loans had adjustable rates of interest.
We could record future losses on our securities portfolio.
During the year ended December 31, 2013, we recognized no impairment losses on securities. At December 31, 2013, we held corporate debt securities with unrealized losses of $2.4 million. A number of factors or combinations of factors could require us to conclude in one or more future reporting periods that an unrealized loss that exists with respect to these securities constitutes an impairment that is other than temporary, which could result in material losses to us. These factors include, but are not limited to, continued failure by the issuer to make scheduled interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value. In addition, the fair values of securities could decline if the overall economy and the financial condition of some of the issuers continue to deteriorate and there remains limited liquidity for these securities.
We also hold investment securities for which the fair value option has been elected, which are considered trading securities. Changes in the fair value of these securities are recorded in earnings and may result in higher volatility in our earnings.
If our non-performing assets increase, our earnings will suffer.
At December 31, 2013, our non-performing assets (which consist of non-accrual loans, loans 90 days or more delinquent, foreclosed real estate assets and non-accruing investment securities) totaled $600,000, which is a decrease of $1.6 million over non-performing assets at December 31, 2012. Our non-performing assets adversely affect our net income in various ways. We do not record interest income on non-accrual loans or investments or on real estate owned. We must reserve for probable losses, which are established through a current period charge to income in the provision for loan losses, and from time to time, write down the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our other real estate owned. Further, the resolution of non-performing assets requires the active involvement of management, which can distract us from the overall supervision of operations and other income-producing activities of Oneida Savings Bank. Finally, if our estimate of the allowance for loan losses is inadequate, we will have to increase the allowance accordingly.
Increases to the allowance for loan losses would cause our earnings to decrease.
Our customers may not repay their loans according to the original terms, and the collateral securing the payment of these loans may be insufficient to repay the remaining principal balance of the loan. Hence, we may experience significant loan losses, which could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the amount of the allowance for loan losses, we rely on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, which would require us to make additions to the allowance. Material additions to the allowance would materially decrease our net income.
Our emphasis on the origination of commercial real estate and business loans is one of the more significant factors in determining the amount of our allowance for loan losses. As we continue to emphasize the origination of these loans, additional provisions for loan losses may be necessary which would decrease our earnings.
Bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities would have an adverse effect on our results of operations and/or financial condition.
Commercial real estate and business loans increase our exposure to credit risks.
At December 31, 2013, our portfolio of commercial real estate and multi-family loans totaled $82.4 million, or 24.4% of total loans, and our commercial business loans totaled $50.9 million, or 15.1% of total loans. We plan to continue to emphasize the origination of these types of loans. Commercial real estate and commercial business loans generally expose us to a greater risk of nonpayment and loss than one-to-four family residential real estate lending because repayment of such loans often depends on the successful business operations and income stream of the borrowers. Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Many of our borrowers have more than one commercial loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship may expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential real estate loan. Finally, if we foreclose on a commercial real estate or commercial business loan, our holding
period for the collateral, if any, typically is longer than for one-to-four family residential mortgage loans because there are fewer potential purchasers of the collateral.
We target our business lending and marketing strategy towards small to medium-sized businesses. These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these businesses, our results of operations and financial condition may be adversely affected.
Our loan portfolio has greater risk due to the substantial number of home equity loans and consumer loans.
At December 31, 2013, our home equity loans totaled $49.4 million, or 14.7% of our total loan portfolio. Our home equity loans are primarily secured by second mortgages, and the combined loan-to-value ratio (first and second mortgage liens) for home equity loans may have been as high as 90% at the time of origination and may be higher at present. At December 31, 2013, our consumer loans totaled $28.8 million, or 8.5% of our total loan portfolio, of which $25.8 million consisted of automobile loans. Our automobile loans include a substantial number of automobile loans that are referred to us by participating automobile dealerships located in our market area, although our lending staff underwrites and approves such loans. Our consumer loan portfolio also includes automobile loans originated directly by us, as well as unsecured loans and loans secured by other personal property. Home equity loans and consumer loans generally have greater risk than one-to-four family residential mortgage loans, particularly in the case of loans that are secured by second mortgages or by rapidly depreciable assets, such as automobiles, or that are unsecured. In these cases, we face the risk that collateral, when we have it, for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Particularly with respect to our home equity loans, any decrease in real estate values that adversely affect the value of the property serving as collateral for our loans would have a greater effect on the value of collateral securing a second mortgage. Thus, the recovery of such property could be insufficient to compensate us for the value of these loans.
As a result of our large portfolio of home equity loans and consumer loans, it may become necessary to increase our provision for loan losses, which could reduce our profits.
Municipal deposits are price sensitive and could result in an increase in interest expense or funding fluctuations.
In recent years we have had significant growth in our municipal deposits from sources within our market area. These deposits are price sensitive source of funds from both an interest and service charge perspective. We may experience a sudden increase in interest expense if market interest rates rise suddenly or risk the possibility of deposit outflow if we are unwilling to price these deposits as aggressively as our competition. This liquidity risk may require us to sell the investment securities collateralizing the municipal deposits at a loss or to access higher cost borrowings which would result in an increase in our interest expense.
Our operations may be adversely affected if we are unable to hire and retain qualified employees.
Our performance is largely dependent on the talents and efforts of our employees. Our continued ability to compete effectively in our businesses, and to expand into new businesses and geographic regions depends on our ability to attract retain and motivate our employees. Competition for qualified employees is often intense. Moreover, future laws or regulations limiting the amount of compensation financial institutions may pay to senior management may adversely affect our ability to hire and retain qualified employees.
We have continued to increase total revenue and net income from non-banking sources such as insurance commissions and employee benefit consulting and services. Key employees provide expertise in the management of these business lines and develop and maintain customer relationships. The loss of those key employees would adversely affect the growth of our non-banking businesses and their continued profitability.
Conditions in insurance markets could adversely affect our earnings.
As we have diversified our sources of income, we have become increasingly reliant on non-interest income, particularly insurance fees and commissions. Revenue from these sources could be negatively affected by fluctuating premiums in the insurance markets or other factors beyond our control. Other factors that affect our insurance revenue are the profitability and growth of our clients, continued development of new products and services, as well as our access to new markets. Our insurance revenues and profitability may also be adversely affected by regulatory developments impacting the healthcare and insurance markets, possibly including recent legislative proposals relating to national health insurance.
We hold certain intangible assets that in the future could be classified as either partially or fully impaired, which would reduce our earnings and the book values of these assets.
We test our intangible assets for impairment at least annually. Our impairment testing incorporates the current market price of our common stock, the estimated fair value of our assets and liabilities, and certain information of similar companies. It is possible that future impairment testing could result in a decline in value of our intangible assets which would adversely affect our financial condition. If we determine an impairment exists at a given point in time, our earnings and the book value of the related intangibles would be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our shares of common stock or our regulatory capital levels. If we acquire additional financial institutions or financial services companies, it is likely that the amount of goodwill included in our intangible assets will increase.
We hold certain other assets representing an investment in a risk retention group that in the future could be classified as either partially or fully impaired, which would reduce our earnings and the book values of these assets.
During 2012, the Company recorded an impairment charge related to an asset held by the Bank supporting sales activities in its insurance agency subsidiary. The asset represented surplus notes to an insurance company specializing in professional liability for long-term care facilities. At December 31, 2013, the Bank had surplus notes to an insurance company specializing in professional liability for medical malpractice of $2.0 million. These surplus notes were performing as of December 31, 2013 and were not considered impaired. A number of factors or combination of factors could require us to conclude in one or more future reporting periods that an impairment exists with respect to this asset and require us to realize the impairment which would reduce earnings.
Strong competition may limit our growth and profitability.
Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than we have and may offer certain services that we do not or cannot provide. Our profitability depends upon our ability to successfully compete in our market area.
Financial reform legislation recently enacted by Congress has, among other things, eliminated the Office of Thrift Supervision, tightened capital standards, created a new Consumer Financial Protection Bureau and may result in new laws and regulations that are expected to increase our costs of operations.
In 2010, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which is significantly changing the bank regulatory structure and affecting the lending, investment, trading and operating activities of depository institutions and their holding companies. The Dodd-Frank Act provided for the elimination of the Office of Thrift Supervision and authorized the Board of Governors of the Federal Reserve System to supervise and regulate all savings and loan holding companies, like Oneida Financial Corp., in addition to bank holding companies which it currently regulates. The Dodd-Frank Act also required the Federal Reserve Board to set minimum capital levels for bank and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries; the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directed the federal banking regulators to implement new leverage and capital requirements within 18 months that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Oneida Savings Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets will continue to be examined for compliance by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorney generals' the ability to enforce applicable federal consumer protection laws.
The legislation broadened the base for Federal Deposit Insurance Corporation insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a depository institution. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000. The Dodd-Frank Act also provided for regulations requiring that originators of securitized loans retain a percentage of the risk for
transferred credits, directed the Federal Reserve Board to regulate the pricing of certain debit card interchange fees, repealed restrictions on paying interest on commercial checking accounts and contained a number of reforms related to mortgage originations.
The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments, and authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.
It is difficult to predict at this time the effect that the legislation and implementing regulations will have on community banks. Many of the provisions of the Dodd-Frank Act have delayed effective dates and the legislation requires various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. Although the substance and scope of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations, particularly those relating to the new Consumer Financial Protection Bureau, will increase our operating and compliance costs.
Changes in laws and regulations and the cost of regulatory compliance with new laws and regulations may adversely affect our operations and our income.
In response to the financial crisis of 2008 and early 2009, Congress took various actions that were intended to strengthen confidence and encourage liquidity in depository institutions, and the Federal Deposit Insurance Corporation took various actions, including increasing insurance coverage on deposit accounts. In addition, there have been proposals made by members of Congress and others that would reduce the amount delinquent borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral.
The potential exists for additional federal or state laws and regulations, or changes in policy, affecting lending and funding practices and liquidity standards. Moreover, bank regulatory agencies have been active in responding to concerns and trends identified in examinations, and have issued many formal enforcement orders requiring capital ratios in excess of regulatory requirements. Bank regulatory agencies, such as the New York State Department of Financial Services, the Federal Deposit Insurance Corporation and the Federal Reserve Board, govern the activities in which we may engage, primarily for the protection of depositors, and not for the protection or benefit of potential investors. In addition, new laws and regulations may increase our costs of regulatory compliance and of doing business, and otherwise affect our operations. New laws and regulations may significantly affect the markets in which we do business, the markets for and value of our loans and investments, the fees we can charge, and our ongoing operations, costs and profitability. Further, legislative proposals limiting our rights as a creditor could result in credit losses or increased expense in pursuing our remedies as a creditor.
We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by the Federal Deposit Insurance Corporation, the New York State Department of Financial Services and the Federal Reserve Board. Such regulation and supervision govern the activities in which an institution and its holding companies may engage and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, new regulations or legislation or additional deposit insurance premiums could have a material impact on our operations. Because our business is highly regulated, the laws and applicable regulations are subject to frequent change. Any new laws, rules and regulations could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.
If our investment in the Federal Home Loan Bank of New York becomes impaired, our earnings and stockholders’ equity could decrease.
We are required to own common stock of the Federal Home Loan Bank of New York to qualify for membership in the Federal Home Loan Bank System and to be eligible to borrow funds under the Federal Home Loan Bank’s advance program. The aggregate carrying value of our Federal Home Loan Bank common stock as of December 31, 2013 was $1.6 million. Federal Home Loan Bank common stock is not a marketable security and can only be redeemed by the Federal Home Loan Bank.
Federal Home Loan Banks may be subject to accounting rules and asset quality risks that could materially lower their regulatory capital. In an extreme situation, it is possible that the capitalization of a Federal Home Loan Bank, including the Federal Home Loan Bank of New York, could be substantially diminished or reduced to zero. Consequently, we believe that there is a risk
that our investment in Federal Home Loan Bank of New York common stock could be deemed impaired at some time in the future, and if this occurs, it would cause our earnings and stockholders’ equity to decrease by the amount of the impairment charge.
System failure or breaches of our information systems could subject us to increased operating costs as well as litigation and other liabilities.
We rely heavily on communications and information systems to conduct business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our general ledger, deposit, loan and other systems, including risk to data integrity. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
ITEM 1.B UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
Oneida Savings Bank conducts its business through its main office located in Oneida, New York, and 10 additional full service branch offices. The following table sets forth certain information concerning our property and equipment at December 31, 2013. The aggregate net book value of our premises and equipment was $19.8 million at December 31, 2013. Bailey & Haskell Associates conducts its business through five facilities set forth in the table below. In addition, Bailey & Haskell Associates uses designated office space in Oneida Savings Bank’s branch office in Cazenovia, New York. Further, Bailey & Haskell Associates conducts business from two home offices maintained by Bailey & Haskell Associates sales representatives in Buffalo and New York City, New York. Oneida Wealth Management Inc. conducts its business through one facility and also uses designated office space in Oneida Savings Bank’s main office in Oneida and branch offices in Cazenovia, Chittenango and Rome, New York.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Largely as a result of legal actions commenced by the Oneida Indian Nation of New York ("OIN") and other Indian tribes, New York State and the Counties of Madison and Oneida have for some years been involved in litigation with such tribes, and in some cases the United States, with respect to Indian land claims, tax and regulatory disputes, and the OIN's application to have certain lands taken into trust for its benefit. Much of the Bank’s market area is included in the approximately 300,000-acre land claim of the OIN. The land claim area is held primarily by private persons. The State and Counties have successfully defended against the OIN's land claims, with those claims finally dismissed by the United States Court of Appeals, Second Circuit, in 2010. Oneida Indian Nation of New York vs. County of Oneida, 617 F.3d 114 (2d Dir.2010), cert. denied S.Ct (2011). The Counties currently have a petition for certiorari pending in the Supreme Court of the United States challenging the "not disestablished" Oneida reservation, which the OIN and United States claim is extant in Central New York.
An extensive agreement to settle all disputes between the OIN, on the one hand, and New York State, Madison County and Oneida County, on the other hand, was announced by Governor Cuomo on May 16, 2013 subject to legislative approvals by the two Counties and New York States. Oneida County voted to approve the settlement on May 28; Madison County on May 30. The New York Legislature voted to approve the settlement on June 22. In light of the terms and conditions of the Settlement Agreement, and approvals obtained to date, the Settlement Agreement may resolve all pending litigation in state court (involving tax assessments) and federal court (challenging the Secretary of the Interior's record of decision in 2008 to take 13,000 acres of land into trust for the benefit of OIN and seeking Supreme Court review of the "not disestablished" reservation). The settlement is complex and numerous entities (tribal and non-tribal) have expressed opposition to some or all of its terms. Various legal challenges to the Settlement Agreement are possible, with two such challenges having been recently commenced. Given the complexity of the agreement and possible legal challenges to it, the ultimate outcome of the settlement cannot yet be determined. All or some of the pending state and federal litigation could resume. If so, the outcome of the various legal proceedings will be uncertain.
To date, none of the pending litigation and Settlement Agreement 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. Oneida Savings Bank requires title insurance on all residential real estate loans, excluding home equity loans. Both the State of New York and the OIN have indicated in their respective communications that individual landowners will not be adversely affected by the ongoing litigation. Oneida Financial Corp. continues to monitor the situation.
We and our subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on our financial position or results of operations.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
For information concerning the market for the Company’s common stock, the section captioned “Stockholder Information” in the Company’s Annual Report to Stockholders for the Year Ended December 31, 2013 (the “Annual Report to Stockholders”) is incorporated herein by reference.
The Company did not repurchase any shares of its common stock during the fourth quarter of 2013.
Equity Compensation Plans
Set forth below is certain information as of December 31, 2013 regarding equity compensation to directors and executive officers of Oneida Financial Corp. approved by stockholders. Other than the employee stock ownership plan, Oneida Financial Corp. did not have any equity plans in place that were not approved by stockholders.
Stock Performance Graph
Set forth hereunder is a stock performance graph comparing (a) the cumulative total return on the Common Stock for the period beginning December 31, 2008, as reported by the NASDAQ Market, through December 31, 2013, (b) the cumulative total return on stocks included in the S&P 500 Index over such period, (c) the cumulative total return on stocks included in the NASDAQ Bank Index over such period, and (d) the cumulative total return of publicly traded thrifts or thrift holding companies located in the Mid-Atlantic region over such period. Cumulative return assumes the reinvestment of dividends, and is expressed in dollars based on an assumed investment of $100. The graph reflects stock price information for the Company since July 7, 2010, and for the Company’s predecessor prior to that date, and reflects the impact of the exchange ratio used in the conversion for the period prior to July 7, 2010.
Assuming an initial investment in the Common Stock of Oneida Financial Corp. of $100.00 at December 31, 2008, the cumulative total value with dividends reinvested would be $198.43 at December 31, 2013.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated historical financial data of the Company as of and for each of the years in the five-year period ended December 31, 2013. The historical “Selected Financial Condition Data” and historical “Selected Operating Data” are derived from the audited financial statements. The “Summary Quarterly Data”, “Selected Financial Ratios” and other data for all periods are unaudited. All per share amounts from prior periods have been adjusted to reflect the Company’s stock offering and conversion which occurred on July 7, 2010, and the exchange ratio used in the conversion. All financial information in these tables should be read in conjunction with the information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with the Consolidated Financial Statements and the related notes thereto.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report to Stockholders is incorporated herein by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The “Quantitative and Qualitative Disclosures about Management of Market Risk and Other Risks” section of the Company’s Annual Report to Stockholders is incorporated herein by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements identified in Item 15(a)(1) hereof are incorporated by reference hereunder.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the fiscal year (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective in timely alerting them to the material information relating to us (or our consolidated subsidiaries) required to be included in our periodic SEC filings.
(b) Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting, as defined in Rules 13a-15(f) and 15d - 15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
All internal control systems have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management assessed the Company’s internal control over financial reporting as of December 31, 2013. This assessment was based on criteria for effective internal control over financial reporting established in Internal Control - Integrated Framework issues by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, we have concluded that, as of December 31, 2013, the Company’s internal control over financial reporting is effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.
Oneida Financial Corp.
By:
/s/ Michael R. Kallet
Michael R. Kallet,
President and Chief Executive Officer
By:
/s/ Eric E. Stickels
Eric E. Stickels
Executive Vice President and Chief Financial Officer
(c) Changes in internal controls.
There were no significant changes made in our internal controls during the period covered by this report or, to our knowledge, in other factors that has materially affected or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning Directors of the Company is incorporated by reference from the Company’s definitive Proxy Statement for the 2014 Annual Meeting of Stockholders (the “Proxy Statement”), specifically the section captioned “Proposal I-Election of Directors.” In addition, see Item 1. “Executive Officers of the Registrant” for information concerning the Company’s executive officers. Information concerning corporate governance matters is incorporated by reference from the Company’s Proxy Statement, specifically the section captioned “Meetings and Committees of the Board of Directors.”
The Company has adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer or controller or persons performing similar functions. The Code of Ethics may be accessed on the Company’s website at www.oneidafinancial.com.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated by reference from the Registrant’s Proxy Statement, specifically the sections captioned “Proposal I-Election of Directors,” “-Executive Compensation,” “-Directors’ Compensation,” and “-Benefits.”
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership and equity compensation of certain owners and management is incorporated by reference from the Company’s Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information concerning relationships and transactions, and director independence, is incorporated by reference from the Company’s Proxy Statement.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information concerning principal accountant fees and services is incorporated by reference from the Company’s Proxy Statement.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The exhibits and financial statement schedules filed as a part of this Form 10-K are as follows:
(a)(1) Financial Statements
· Report of Independent Registered Public Accounting Firm
· Consolidated Statements of Condition,
December 31, 2013 and 2012
· Consolidated Statements of Income,
Years Ended December 31, 2013, 2012 and 2011
· Consolidated Statements of Comprehensive Income,
Years Ended December 31, 2013, 2012 and 2011
· Consolidated Statements of Changes in Stockholders’ Equity,
Years Ended December 31, 2013, 2012 and 2011
· Consolidated Statements of Cash Flows,
Years Ended December 31, 2013, 2012 and 2011
· Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedules
No financial statement schedules are filed because the required information is not applicable or is included in the consolidated financial statements or related notes.
(a)(3) Exhibits
(*) As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.
(1) Incorporated by reference to Exhibit 3.1 and 3.2 to the Company’s Registration Statement of Form S-1 filed with the Securities and Exchange Commission on March 12, 2010. (File No. 333-165458).
(2) Incorporated by reference to Exhibit 4 to the Company’s Registration Statement of Form S-1 filed with the Securities and Exchange Commission on March 12, 2010. (File No. 333-165458).
(3) Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Oneida Financial Corp., a Maryland corporation, filed with the Securities and Exchange Commission on March 1, 2012 (File No. 001-34813).
(4) Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K of Oneida Financial Corp., a Maryland corporation, filed with the Securities and Exchange Commission on March 1, 2012 (File No. 001-34813).
(5) Incorporated by reference to Exhibit 10.3 to the Current Report on Form 8-K of Oneida Financial Corp., a Maryland corporation, filed with the Securities and Exchange Commission on March 1, 2012 (File No. 001-34813).
(6) Incorporated by reference to the Annual Report on Form 10-K of Oneida Financial Corp., a Maryland corporation, filed with the Securities and Exchange Commission on March 20, 2013 (File No. 001-34813)
(7) Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K of Oneida Financial Corp., a Maryland corporation, filed with Securities and Exchange Commission on March 7, 2011 (File No. 001-34813).
(8) Incorporated by reference to Appendix A of the Proxy Statement of Oneida Financial Corp., a Maryland corporation, filed with the Securities and Exchange Commission on March 22, 2012 (File No. 001-34813).
(9) Incorporated by reference to the Annual Report on Form 10-K of Oneida Financial Corp., a Federal corporation, for the year ended December 31, 2003 (File No. 000-25101).
(10) Incorporated by reference to the Current Report on Form 8-K, Item 4. Changes in Registrant’s Certifying Accountant, of Oneida Financial Corp., a Federal corporation, filed on September 3, 2003 (File No. 000-25101).
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.