SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

____________________________________________

FORM 10-Q

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

For the quarterly period ended June 30, 2013

OR

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

For the transition period from                       to                 

Securities Exchange Act Number 001-34813

ONEIDA FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

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

182 Main Street, Oneida, New York 13421

(Address of Principal Executive Offices)

(315) 363-2000

Registrant’s telephone number, including area code

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

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

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

Large accelerated filer o	Accelerated filer o
Non-accelerated filer o	Smaller reporting company x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).  Yes o No x

 APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: There were 7,024,596 shares of the Registrant’s common stock outstanding as of August 1, 2013.

ONEIDA FINANCIAL CORP.

INDEX

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Consolidated Statements of Condition (unaudited) At June 30, 2013 and December 31, 2012	1
	Consolidated Statements of Operations (unaudited) For the three and six months ended June 30, 2013 and 2012	2
	Consolidated Statements of Comprehensive Income (Loss) (unaudited) For the three and six months ended June 30, 2013 and 2012	3
	Consolidated Statements of Changes in Stockholders’ Equity (unaudited) For the six months ended June 30, 2013	4
	Consolidated Statements of Cash Flows (unaudited) For the six months ended June 30, 2013 and 2012	5
	Notes to Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition And Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	46
Item 4.	Controls and Procedures	47
PART II.	OTHER INFORMATION	48
Item 1.	Legal Proceedings	48
Item 1a.	Risk Factors	48
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3.	Defaults Upon Senior Securities	49
Item 4.	Mine Safety Disclosures	49
Item 5.	Other Information	49
Item 6.	Exhibits	49

PART I. FINANCIAL INFORMATION

 Item I.    Financial Statements

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

At June 30, 2013 (unaudited) and December 31, 2012

	June 30, 2013			December 31, 2012
	In thousands, except share data)
ASSETS
Cash and due from banks	$	11,421		$	16,481
Federal funds sold	185			3,322
TOTAL CASH AND CASH EQUIVALENTS	11,606			19,803
Trading securities	4,252			5,630
Securities, available-for-sale	227,819			228,369
Securities, held-to-maturity (fair value $42,604 and $30,780 respectively)	42,129			29,077
Mortgage loans held for sale	552			1,029
Loans receivable	326,218			312,569
Deferred fees	831			881
Allowance for loan losses	(2,942		)	(2,776		)
LOANS RECEIVABLE, NET	324,107			310,674
Federal Home Loan Bank stock	1,656			1,936
Bank premises and equipment, net	20,229			20,669
Accrued interest receivable	2,221			2,065
Bank owned life insurance	17,820			17,576
Other assets	19,284			17,546
Goodwill	25,479			25,463
Other intangible assets	1,319			1,554
TOTAL ASSETS	$	698,473		$	681,391
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Interest bearing deposits	$	519,010		$	492,455
Non-interest bearing deposits	74,678			75,810
Borrowings	1,000			6,000
Other liabilities	12,611			14,086
TOTAL LIABILITIES	607,299			588,351
Oneida Financial Corp. Stockholders’ equity:
Preferred stock, 10,000,000 shares authorized; 0 issued and outstanding	—			—
Common stock ($.01 par value; 30,000,000 shares authorized 7,024,596 issued at June 30, 2013 and December 31, 2012)	70			70
Additional paid-in capital	43,026			42,684
Retained earnings	51,432			49,676
Accumulated other comprehensive (loss) income	(3,129		)	911
Unallocated ESOP (44,965 and 44,965 shares)	(284		)	(360		)
Total Oneida Financial Corp stockholders’ equity	91,115			92,981
Noncontrolling interest	59			59
TOTAL STOCKHOLDERS’ EQUITY	91,174			93,040
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	698,473		$	681,391

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

1

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three and Six Months Ended June 30, 2013 (unaudited) and 2012 (unaudited)

	Three Months Ended				Six Months Ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
	(In thousands, except share and per share data)
INTEREST AND DIVIDEND INCOME:
Interest and fees on loans	$	3,754	$	3,760	$	7,481	$	7,568
Interest on investment securities	1,772		1,903		3,495		3,710
Dividends on equity securities	22		70		46		140
Interest on federal funds sold and interest-earning deposits	6		7		10		13
Total interest and dividend income	5,554		5,740		11,032		11,431
INTEREST EXPENSE:
Core deposits	256		293		488		574
Time deposits	380		408		753		834
Borrowings	14		117		42		235
Note payable	6		2		14		3
Total interest expense	656		820		1,297		1,646
NET INTEREST INCOME	4,898		4,920		9,735		9,785
Less: Provision for loan losses	100		150		200		300
Net interest income after provision for loan losses	4,798		4,770		9,535		9,485
INVESTMENT GAINS:
Net gains on sales of securities	263		60		267		157
Changes in fair value of trading securities	305		241		1,124		677
Total investment gains	568		301		1,391		834
NON-INTEREST INCOME:
Commissions and fees on sales of non-banking products	5,998		5,420		11,968		10,923
Other operating income	1,246		1,115		2,498		2,439
Total non-interest income	7,244		6,535		14,466		13,362
NON-INTEREST EXPENSES:
Compensation and employee benefits	6,790		5,830		13,414		11,864
Occupancy expenses, net	1,337		1,128		2,622		2,334
Other operating expense	2,443		2,074		4,719		4,213
Total non-interest expenses	10,570		9,032		20,755		18,411
INCOME BEFORE INCOME TAXES	2,040		2,574		4,637		5,270
Provision for income taxes	548		675		1,192		1,367
NET INCOME	1,492		1,899		3,445		3,903
Less: net income attributable to noncontrolling interest	—		—		3		3
NET INCOME attributable to Oneida Financial Corp.	$	1,492	$	1,899	$	3,442	$	3,900
EARNINGS PER SHARE — BASIC	$	0.22	$	0.28	$	0.50	$	0.57
EARNINGS PER SHARE — DILUTED	$	0.21	$	0.28	$	0.49	$	0.57

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

2

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the Three and Six Months Ended June 30, 2013 (unaudited) and 2012 (unaudited)

	Three Months Ended						Six Months Ended
	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012
	(In thousands)
Net income	$	1,492		$	1,899		$	3,445		$	3,903
Other comprehensive income (loss), net of tax:
Net change in unrealized gains (losses):
Securities available-for-sale:
Unrealized holding (losses) gains on securities arising during period	(5,719		)	2,349			(6,527		)	1,997
Reclassification adjustment for gains realized in income	(263		)	(60		)	(267		)	(157		)
Net unrealized (losses) gains	(5,982		)	2,289			(6,794		)	1,840
Income tax effect	2,393			(916		)	2,717			(736		)
Net change in securities available-for-sale	(3,589		)	1,373			(4,077		)	1,104
Defined benefit pension plans:
Change in unrealized loss on pension benefits	30			35			61			70
Income tax effect	(12		)	(14		)	(24		)	(28		)
Net change in pension benefits	18			21			37			42
Other comprehensive (loss) income, net of tax	(3,571		)	1,394			(4,040		)	1,146
Comprehensive (loss) income:	(2,079		)	3,293			(595		)	5,049
Comprehensive income attributable to the noncontrolling interest	—			—			(3		)	(3		)
Comprehensive (loss) income attributable to Oneida Financial Corp.	$	(2,079	)	$	3,293		$	(598	)	$	5,046

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

3

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Six Months EndedJune 30, 2013 (unaudited)

	Common Stock			Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Unallocated Employee Stock Ownership Plans			Total Equity Attributable to Oneida Financial Corp.			Non-Controlling Interest			Total
	Shares	Amount
	(In thousands, except number of shares)
Balance as of January 1, 2013	7,024,596	$	70	$	42,684	$	49,676		$	911		$	(360	)	$	92,981		$	59		$	93,040
Net income	—	—		—		3,442			—			—			3,442			3			3,445
Distributions to non-controlling interest	—	—		—		—			—			—			—			(3		)	(3		)
Other comprehensive income, net of tax	—	—		—		—			(4,040		)	—			(4,040		)	—			(4,040		)
Common stock dividends: $0.24 per share	—	—		—		(1,686		)	—			—			(1,686		)	—			(1,686		)
Shares earned under stock plans	—	—		297		—			—			—			297			—			297
Shares committed to be released under ESOP plans	—	—		45		—			—			76			121			—			121
Balance as of June 30, 2013	7,024,596	$	70	$	43,026	$	51,432		$	(3,129	)	$	(284	)	$	91,115		$	59		$	91,174

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

4

ONEIDA FINANCIAL CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

For the Six Months EndedJune 30, 2013 (unaudited) and 2012 (unaudited)

	Six Months Ended June 30,
	2013			2012
	(In thousands)
Operating Activities:
Net income	$	3,445		$	3,903
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	976			910
Amortization of premiums/discounts on securities, net	216			406
Net change in fair value of trading securities	(1,124		)	(677		)
Provision for loan losses	200			300
ESOP shares earned	121			95
Stock compensation earned	297			—
Loss on write down or sale of foreclosed assets	18			66
Gain on securities, net	(267		)	(157		)
Gain on sale of loans, net	(196		)	(289		)
Income tax payable	(115		)	(211		)
Accrued interest receivable	(156		)	(99		)
Other assets	1,165			1,638
Other liabilities	(2,415		)	(3,827		)
Earnings on bank owned life insurance	(244		)	(218		)
Origination of loans held for sale	(5,724		)	(11,505		)
Proceeds from sales of loans	6,397			11,649
Proceeds on the sale of trading securities	2,502			—
Net cash provided by operating activities	5,096			1,984
Investing Activities:
Purchase of securities available-for-sale	(49,133		)	(91,697		)
Proceeds from sale of securities available-for-sale	18,999			6,913
Maturities and calls of securities available-for-sale	15,070			35,753
Principal collected on securities available-for-sale	10,005			8,278
Purchase of securities held-to-maturity	(17,674		)	(3,302		)
Maturities and call of securities held-to-maturity	292			11,655
Principal collected on securities held-to-maturity	4,196			4,024
Purchase of FHLB stock	(1,342		)	(862		)
Redemption of FHLB stock	1,622			600
Net increase in loans	(13,780		)	(7,607		)
Purchase of bank premises and equipment	(300		)	(362		)
Proceeds from the sale of foreclosed property	35			71
Purchase of insurance agency	(17		)	—
Net cash used in investing activities	(32,027		)	(36,536		)
Financing Activities:
Net increase in demand deposit, savings, money market, super now and escrow	21,832			12,076
Net increase (decrease) in time deposits	3,591			(2,059		)
Repayment of borrowings	(5,000		)	—

5

Proceeds from borrowings	—			3,000
Dividends on preferred stock of subsidiary held by noncontrolling interest	(3		)	(3		)
Repurchase and retirement of common shares	—			(1,039		)
Cash dividends	(1,686		)	(1,659		)
Net cash provided by financing activities	18,734			10,316
Decrease in cash and cash equivalents	(8,197		)	(24,236		)
Cash and cash equivalents at beginning of period	19,803			40,572
Cash and cash equivalents at end of period	$	11,606		$	16,336
Supplemental disclosures of cash flow information:
Cash paid for interest	$	1,318		$	1,647
Cash paid for income taxes	1,306			1,575
Supplemental noncash disclosures:
Transfer of loans to other real estate	147			151
Dividends declared and unpaid	843			817
Purchase of securities not settled	1,000			1,000

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

6

ONEIDA FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

June 30, 2013

Note A — Basis of Presentation

The accompanying unaudited consolidated financial statements include Oneida Financial Corp. (the “Company”), a Maryland corporation and its wholly owned subsidiary, Oneida Savings Bank (the “Bank”) as of June 30, 2013 and December 31, 2012 and for the three month and six month periods ended June 30, 2013 and 2012.  All inter-company accounts and transactions have been eliminated in consolidation.  The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes.  These estimates, assumptions, and judgments are based on information available through the date of the filing of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments.  Certain policies inherently have a greater reliance on the use of estimates, assumptions, and judgments and as such have a greater possibility of producing results that could be materially different than originally reported.  Based on the valuation techniques used and the sensitivity of financial statement amounts to the methods, assumptions, and estimates underlying those amounts, management has identified the determination of the allowance for loan losses, the fair value of trading securities and investment securities and the evaluation of other-than-temporary impairment on securities whose fair value is less than amortized cost to be the accounting areas that require the most subjective or complex judgments, and as such could be most subject to revision as new information becomes available.  Actual results could differ from those estimates.  In the opinion of management, the unaudited consolidated financial statements include all necessary adjustments, consisting of normal recurring accruals, necessary for a fair presentation for the periods presented.  The results of operations for the three months and six months ended June 30, 2013 are not necessarily indicative of the results to be achieved for the remainder of 2013. 

The data in the consolidated statements of condition for December 31, 2012 was derived from the audited financial statements included in the Company’s 2012 Annual Report on Form 10-K.  That data, along with the interim financial information presented in the consolidated statement of condition, statements of operations, comprehensive income, changes in stockholders’ equity and cash flows should be read in conjunction with the 2012 consolidated financial statements, including the notes thereto included in the Company’s Annual Report on Form 10-K.

During the quarter ended March 31, 2013, the Bank received regulatory approval to reorganize the business functions of its wholly-owned subsidiaries. While the reorganization will result in changes in the net income and operations of the subsidiaries, it will not have an impact in the basis of presentation contained in this Form 10-Q report. For more information, see Note E - Segment Information.

At December 31, 2012, the Company completed its acquisition of Schenectady Insuring Agency, Inc., an insurance agency operating in Schenectady, New York. The Company paid $795,149 in cash and established a note payable for $1.0 million to be paid monthly over 24 months with interest at 3.00% per annum to acquire 100% of the capital stock of the Schenectady Insuring Agency, Inc. Goodwill in the amount of $1.5 million and intangible assets in the amount of $929,000 were recorded in conjunction with the acquisition. Schenectady Insuring Agency, Inc. was merged into Bailey and Haskell Associates, Inc. effective December 31, 2012. The Company began payment on the note in 2013.

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

Note B — Earnings per share

Basic earnings per share is net income available to common shareholders divided by the weighted average number of common shares outstanding during the period excluding outstanding participating securities. ESOP shares are considered outstanding for the calculation unless unearned.  Diluted earnings per common share includes the dilutive effect of additional potential common shares issuable using the treasury stock method.  All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities and are included in the computation of earnings per share pursuant to a two-class method.  The Company has determined that 130,000 of its 215,000 outstanding non-vested stock awards are participating securities.

7

Earnings per common share have been computed based on the following for the three months and six months ended June 30, 2013 and 2012:

	Three Months Ended					Six Months Ended
	June 30, 2013			June 30, 2012		June 30, 2013			June 30, 2012
Net income attributable to Oneida Financial Corp.	$	1,491,892		$	1,898,792	$	3,442,391		$	3,900,420
Net earnings allocated to participating securities	(25,908		)	—		(59,935		)	—
Net earnings allocated to common stock	$	1,465,984		$	1,898,792	$	3,382,456		$	3,900,420

	Three Months Ended				Six Months Ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
Basic
Distributed earnings allocated to common stock	$	827,352	$	817,152	$	1,654,703	$	1,646,717
Undistributed earnings allocated to common stock	638,632		1,081,640		1,727,753		2,253,703
Net earnings allocated to common stock	$	1,465,984	$	1,898,792	$	3,382,456	$	3,900,420
Weighted average common shares outstanding including shares considered participating securities	6,961,644		6,882,354		6,958,134		6,897,702
Less: Average unallocated ESOP shares	40,164		74,156		42,525		76,530
Less: Average participating securities	109,943		—		113,135		—
Weighted average shares	6,811,537		6,808,198		6,802,474		6,821,172
Basic earnings per share	$	0.22	$	0.28	$	0.50	$	0.57
Diluted
Net earnings allocated to common stock	$	1,465,984	$	1,898,792	$	3,382,456	$	3,900,420
Weighted average common shares outstanding for basic earnings per common share	6,811,537		6,808,198		6,802,474		6,821,172
Add: Dilutive effects of assumed exercise of stock options and nonparticipating shares	53,070		—		44,638		—
Weighted average shares and dilutive potential common shares	6,864,607		6,808,198		6,847,112		6,821,172
Diluted earnings per common share	$	0.21	$	0.28	$	0.49	$	0.57

There were no anti-dilutive stock options considered in the computation of diluted earnings per common share for the three months and six months ended June 30, 2013.   There were no potentially dilutive securities outstanding for the three months and six months ended June 30, 2012 as the shares were awarded in July 2012.

8

Note C — Investment Securities and Mortgage-Backed Securities

Investment securities and mortgage-backed securities classified as available-for-sale and held-to-maturity consist of the following at June 30, 2013 and December 31, 2012:

Available-for-sale portfolio:	June 30, 2013
	Amortized  Cost		Gross  Gains		Unrealized  Loss			Fair  Value
	(In thousands)
Investment Securities
Debt securities:
U. S. Agencies	$	59,159	$	28	$	(2,323	)	$	56,864
Corporate	43,670		818		(2,164		)	42,324
Agency asset backed securities	3,699		30		—			3,729
Trust preferred securities	4,674		1,469		(1,224		)	4,919
State and municipal	45,858		1,218		(262		)	46,814
Small business administration	14,081		144		(41		)	14,184
	$	171,141	$	3,707	$	(6,014	)	$	168,834
Mortgage-Backed Securities
Fannie Mae	$	23,557	$	314	$	(476	)	$	23,395
Freddie Mac	12,606		67		(171		)	12,502
Government National Mortgage Assoc.	21,083		641		(39		)	21,685
Collateralized mortgage obligations	1,316		87		—			1,403
	$	58,562	$	1,109	$	(686	)	$	58,985
Total available-for-sale	$	229,703	$	4,816	$	(6,700	)	$	227,819

Held-to-maturity portfolio:	June 30, 2013
	Amortized  Cost		Gross  Gains		Unrecognized Loss			Fair  Value
	(In thousands)
Investment Securities
Debt securities:
U. S. Agencies	$	1,000	$	27	$	—		$	1,027
State and municipal	9,999		593		(73		)	10,519
Small business administration	323		2		—			325
	$	11,322	$	622	$	(73	)	$	11,871
Mortgage-Backed Securities
Fannie Mae	$	18,970	$	225	$	(409	)	$	18,786
Freddie Mac	7,500		66		(80		)	7,486
Government National Mortgage Assoc.	4,337		124		—			4,461
	$	30,807	$	415	$	(489	)	$	30,733
Total held-to-maturity	$	42,129	$	1,037	$	(562	)	$	42,604

9

Available-for-sale portfolio:	December 31, 2012
	Amortized Cost		Gross Gains		Unrealized Loss			Fair Value
	(In thousands)
Investment Securities
Debt securities:
U. S. Agencies	$	47,210	$	151	$	(77	)	$	47,284
Corporate	40,740		1,006		(1,602		)	40,144
Agency asset backed securities	5,800		29		—			5,829
Trust preferred securities	5,583		1,568		(1,530		)	5,621
State and municipal	39,924		2,797		—			42,721
Small business administration	13,304		463		—			13,767
	$	152,561	$	6,014	$	(3,209	)	$	155,366
Mortgage-Backed Securities
Fannie Mae	$	20,698	$	831	$	(5	)	$	21,524
Freddie Mac	24,806		214		(27		)	24,993
Government National Mortgage Assoc.	23,821		1,018		(19		)	24,820
Collateralized mortgage obligations	1,574		92		—			1,666
	$	70,899	$	2,155	$	(51	)	$	73,003
Total available-for-sale	$	223,460	$	8,169	$	(3,260	)	$	228,369

Held-to-maturity portfolio:	December 31, 2012
	Amortized Cost		Gross Gains		Unrecognized Loss		Fair Value
	(In thousands)
Investment Securities
Debt securities:
U. S. Agencies	$	1,000	$	39	$	—	$	1,039
State and municipal	9,779		938		—		10,717
Small business administration	394		3		—		397
	$	11,173	$	980	$	—	$	12,153
Mortgage-Backed Securities
Fannie Mae	$	9,723	$	405	$	—	$	10,128
Freddie Mac	3,142		107		—		3,249
Government National Mortgage Assoc.	5,039		211		—		5,250
	$	17,904	$	723	$	—	$	18,627
Total held-to-maturity	$	29,077	$	1,703	$	—	$	30,780

The amortized cost and fair value of the investment securities portfolio at June 30, 2013 are shown by contractual maturities.  Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately.

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	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Within one year	$	578	$	584	$	1,721	$	1,753
After one year through five years	23,188		23,952		2,387		2,521
After five years through ten years	71,429		70,883		6,791		7,080
After ten years	75,946		73,415		423		517
Mortgage-backed securities	58,562		58,985		30,807		30,733
Total	$	229,703	$	227,819	$	42,129	$	42,604

 Sales of available-for-sale securities were as follows for the three and six months ended: 

	Three months ended June 30,					Six months ended June 30,
	2013			2012		2013			2012
	(In thousands)
Proceeds	$	4,464		$	—	$	18,999		$	6,913
Gross gains	$	276		$	60	$	363		$	157
Gross losses	$	(13	)	$	—	$	(96	)	$	—

Securities with unrealized losses at June 30, 2013 and December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are as follows:

	Less than 12 Months					More than 12 Months					Total
June 30, 2013	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Description of Securities
Available-for-sale	(In thousands)
U.S. Agencies	$	52,484	$	(2,323	)	$	—	$	—		$	52,484	$	(2,323	)
Corporate	14,666		(790		)	7,117		(1,374		)	21,783		(2,164		)
Trust preferred securities	—		—			724		(1,224		)	724		(1,224		)
State and municipal	5,281		(262		)	—		—			5,281		(262		)
Small business administration	3,150		(41		)	4		—			3,154		(41		)
Fannie Mae	15,153		(476		)	—		—			15,153		(476		)
Freddie Mac	7,825		(170		)	961		(1		)	8,786		(171		)
Government National Mortgage Assoc.	3,104		(21		)	2,544		(18		)	5,648		(39		)
Total securities available-for-sale in an unrealized loss position	$	101,663	$	(4,083	)	$	11,350	$	(2,617	)	$	113,013	$	(6,700	)
Held-to-maturity
State and municipal	$	1,547	$	(73	)	$	—	$	—		$	1,547	$	(73	)
Fannie Mae	11,045		(409		)	—		—			11,045		(409		)
Freddie Mac	4,901		(80		)	—		—			4,901		(80		)
Total securities held-to-maturity in an unrecognized loss position	$	17,493	$	(562	)	$	—	$	—		$	17,493	$	(562	)

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	Less than 12 Months					More than 12 Months					Total
December 31, 2012	Fair Value		Unrealized Loss			Fair Value		Unrealized Loss			Fair Value		Unrealized Loss
Description of Securities
Available-for-sale	(In thousands)
U.S. Agencies	$	17,431	$	(77	)	$	—	$	—		$	17,431	$	(77	)
Corporate	10,923		(137		)	9,526		(1,465		)	20,449		(1,602		)
Trust preferred securities	—		—			1,174		(1,530		)	1,174		(1,530		)
Small business administration	—		—			942		—			942		—
Fannie Mae	3,543		(5		)	—		—			3,543		(5		)
Freddie Mac	5,909		(27		)	—		—			5,909		(27		)
Government National Mortgage Assoc.	2,702		(19		)	—		—			2,702		(19		)
Total securities available-for-sale in an unrealized loss position	$	40,508	$	(265	)	$	11,642	$	(2,995	)	$	52,150	$	(3,260	)

Declines in the fair value of securities below their cost that are other-than-temporary are reflected as realized losses.  The Company evaluates securities for other-than-temporary impairment (“OTTI”) 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 the impairment is split into two components as follows:  1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income.  The credit loss is defined as the difference between the present value of the cash flows to be collected and the amortized cost basis.

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

As of June 30, 2013, the Company’s security portfolio consisted of 354 securities, 99 of which were in an unrealized loss position. The majority of the unrealized losses are related to the Company’s agency, mortgage-backed securities, state and municipal, corporate and trust preferred securities as discussed below.

U.S. Agency and Agency Mortgage-Backed Securities

Fannie Mae, Freddie Mac, Ginnie Mae and the Small Business Administration guarantee the contractual cash flows of our agency and mortgage-backed securities. Fannie Mae and Freddie Mac are institutions which the government has affirmed its commitment to support.  Our Ginnie Mae mortgage-backed securities are backed by the full faith and credit of the U.S.  Government.  All of the agency mortgage-backed securities are residential mortgage-backed securities. At June 30, 2013, of the 66 U.S. Government sponsored enterprise agency and mortgage-backed securities in an unrealized loss position, four were in a continuous unrealized loss position for 12 months or more.  The unrealized losses at June 30, 2013 were primarily attributable to changes in interest rates and illiquidity, and not credit quality.  The Company does not have the intent to sell these agency and mortgage-backed securities and it is likely that it will not be required to sell the securities before their anticipated recovery. The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2013.

Corporate Debt and Municipal Securities

At June 30, 2013, of the 29 corporate debt and municipal securities in an unrealized loss position, six were in a continuous unrealized loss position of 12 months or more.  We have assessed these securities and determined that the decline in fair value was temporary. In making this determination, we considered the period of time the securities were in a loss position, the percentage decline in comparison with the securities’ amortized cost, the financial condition of the issuer, and the delinquency or default rates based on the applicable bond ratings.  In addition, we do not have the intent to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost basis, which may be at maturity.  Included in the six securities whose unrealized loss position exceeds 12 months was a $2.5 million Strats-Goldman Sachs Corporation obligation, maturing February 15, 2034 which is a variable rate note based on the 6 month libor. The current rate on the security is 1.42%.  The

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unrealized loss was $1,216,000 and $1,190,000 at June 30, 2013 and December 31, 2012, respectively.  In addition to the items noted above, we reviewed capital ratios, public filings of the issuer and related trust documents in the review of the unrealized loss.  The Strats-Goldman Sachs Corporation obligation is paying as agreed.  The other five securities in a continuous unrealized loss position were finance sector corporate debt securities all rated above investment grade at June 30, 2013, with variable interest rates that have maturities ranging from 2015 to 2021.  The Company does not consider these securities to be other-than-temporarily impaired at June 30, 2013.

Trust Preferred Securities

The Company has $4.9 million invested in eight trust preferred securities as of June 30, 2013. Four of the trust preferred securities totaling $724,000 as of June 30, 2013 had unrealized losses that have been in a continuous loss position exceeding 12 months or more. The unrealized loss on these four securities was $1.2 million as of June 30, 2013. As of December 31, 2012, there were five securities totaling $1.2 million that had been in a continuous loss position exceeding 12 months. The unrealized loss on these five securities was $1.5 million as of December 31, 2012. During the second quarter 2013, Preferred Term X which had a principal balance of $681,000 was sold and a gain of $209,000 was realized on the sale. Four of the trust preferred securities totaling $4.2 million were in an unrealized gain position of $1.5 million as of June 30, 2013. The unrealized gain on these four securities was $1.6 million as of December 31, 2012. Five of the eight securities have variable rates of interest and are on nonaccrual status.  Three of the securities have fixed rates of interest and are considered accruing as of June 30, 2013. Prior to September 30, 2012, these three securities were also considered to be on nonaccrual. Payments received on the trust preferred securities totaling $452,000 and $350,000 for the six months ended June 30, 2013 and 2012, respectively, were applied to principal. The Company realized $125,000 and $251,000 of interest income on these securities for three and six months ended June 30, 2013.  There was no interest income realized on these securities for the six months endedJune 30, 2012. The interest income realized was based on estimated cash flows using assumptions that are considered as part of our OTTI analysis for the three trust preferred securities that are considered accruing. All of the trust preferred securities are pooled issuances.

The following table provides detailed information related to the trust preferred securities held as June 30, 2013:

Description	Class	Book Value (2)		Fair Value		Unrealized Gain (Loss)			Realized Loss (2) (3)			Lowest Rating (1)	Number of Banks and Insurance Companies Currently Performing	Actual Deferrals and Defaults as % of Original Collateral		Expected Additional Deferrals and Defaults as % of Performing Collateral		Excess Subordination Defaults as % of Performing Collateral
				(Dollars In thousands)
Preferred Term Ltd.	Mezz	$	576	$	926	$	350		$	(337	)	C	9	43.20	%	16.11	%	(13.90	)%
Preferred Term Ltd.	Mezz	1,169		1,779		610			(683		)	C	9	43.20	%	16.11	%	(13.90	)%
Preferred Term Ltd.	Mezz	781		1,185		404			(456		)	C	9	43.20	%	16.11	%	(13.90	)%
Preferred Term XV	B-2	634		277		(357		)	(366		)	C	49	30.80	%	9.95	%	(31.31	)%
Preferred Term XV	B-3	641		282		(359		)	(359		)	C	49	30.80	%	9.95	%	(31.31	)%
Preferred Term XXVI	C-1	673		165		(508		)	(312		)	C	47	30.20	%	17.98	%	(19.83	)%
Preferred Term XXVI	D-1	—		—		—			(497		)	C	47	30.20	%	17.98	%	(31.39	)%
MMCF IX	B-2	200		305		105			(710		)	CC	14	44.40	%	15.74	%	(60.27	)%
		$	4,674	$	4,919	$	245		$	(3,720	)

 _________________________________________________

(1)The table represents ratings information as of June 30, 2013.  The securities had “investment grade” ratings by Moody’s (Baa2 or better) at time of purchase, but have since been downgraded by the rating agencies.

(2) Book value has been reduced by realized losses to reflect a new amortized cost basis.

(3) Represents life to date cumulative loss recognized in the income statement.

The structuring of trust preferred securities generally provide for a waterfall approach to absorbing losses whereby lower tranches are initially impacted and more senior tranches are impacted after lower tranches can no longer absorb losses.  Likewise, the waterfall approach also applies to principal and interest payments received, as senior tranches have priority over lower tranches in the receipt of payments.  In addition, there may be multiple classes within a single tranche that react differently to assumptions utilized in cash

13

flow models due to the different features of the class such as fixed rate, floating rate, or a combination of both.  In determining the amount of “currently performing” collateral for purposes of the table above, the total amount of issuers’ balances outstanding have been reduced by the amount in deferral and default.  Also, for some of the securities, management has further reduced the total performing balance for the effects of issuers’ subsequent announcements of their intent to defer on the next applicable payment, and for other relevant circumstances through the date of issuance of the financial statements.  Management considered all such announcements and circumstances known to us in evaluating the pooled trust preferred securities for OTTI as of June 30, 2013.

In the table above, “Excess Subordination Defaults as % of Performing Collateral” (Excess Subordination Ratio) was calculated as follows:  total face value of performing collateral minus face value of all outstanding note balances not subordinate to our investment, divided by total face value of performing collateral.  The Excess Subordination Ratio measures the extent to which there may be tranches within each pooled trust preferred structure available to absorb credit losses before the Company’s securities would be adversely impacted.  In 2008, 2009 and 2010, the amount of deferrals and defaults on the pools described above rose significantly, which has resulted in substantial reductions in the amounts of performing collateral. As a result, the negative Excess Subordination Ratio percentages shown in the table signify there is no support from subordinate tranches available to absorb losses before the Company’s securities would be adversely impacted.  A negative Excess Subordination Ratio is not definitive, in isolation, for determining whether or not OTTI should be recorded for a pooled trust preferred security.  Other factors affect the timing and amount of cash flows available for payments to the note holders (investors); including the excess interest paid by the issuers (the issuers typically pay higher rates of interest than are paid out to the note holders).

The Company uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimates to ensure there are no adverse changes in cash flows during the quarter.  The OTTI model considers the structure and term of the trust preferred securities and the financial condition of the underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes.  The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market information including announcements of interest payment deferrals or defaults of underlying trust preferred securities.  Assumptions used in the models are as follows:

	Significant inputs at 6/30/2013
Annual prepayment	1% annually
Projected severity of loss on current defaults	100%
Projected severity of loss on current deferrals	0% - 80%
Projected severity of loss on specific deferrals	0% - 80%
Projected additional defaults	0.375% applied annually
Projected severity of loss on additional defaults	55% - 65%
Present value discount rates for OTTI	3.99% - 9.91%
Present value discount rates for fair value	12%- 15%

The discount rate ranges can vary depending on the index the instruments are tied to as well as the spread for each instrument. The company uses market-based yield indicators as a baseline for determining appropriate discount rates, then adjusts the resulting discount rates on the basis of its credit and structural analysis of specific trust preferred securities. The Company looks principally to market yields to maturity for investment grade and non investment grade trust preferred securities for which there is an active and liquid market. The next step is to make a series of adjustments to reflect the differences that nevertheless exist between these products (both credit and structural) and, most importantly, to reflect idiosyncratic credit performance differences (both actual and projected) between these products and the underlying collateral in the specific trust preferred securities. In addition, utilization of the individual trust preferred investment’s interest crediting rate and if applicable, margin index is utilized in calculating the expected cash flows.

Prepayments can occur at the discretion of the issuer on predetermined call increments.  The call provision allows the issuer to prepay some or the entire outstanding debt obligation on the fifth year and every fifth year thereafter.  Due to the general weakness of the financial sector and the regulatory requirements to maintain and increase the capitalization of U.S. banks, the Company concluded that the issuers were unlikely to prepay their outstanding debt obligation and thereby reducing their individual capital ratios during this challenging low interest rate cycle.

The Company reviews each issuer individually for projected future deferrals and defaults.  The purpose of the individual issuer review is to determine if an individual issuer demonstrates a significant likelihood of potential deferral/default so as to require a further addition to the projected additional default percentages as outlined in the table above.  This review includes obtaining quarterly financial information and monitoring new releases and pertinent information relative to those issuers.  The Company specifically reviews certain financial ratios including Fitch Score and “Texas Ratio” as well as capital adequacy and participation

14

in the Troubled Asset Relief Program of each issuer.  The Company believes the “Texas Ratio (“TR”)” is a prominent indicator of the stress a financial institution is experiencing.  The TR is calculated by dividing nonperforming assets and loans, including past due 90 days or more, by the sum of tangible equity and loan loss reserves. Management establishes various credit criteria, and combinations of credit criteria and those issuers meeting some combination of such criteria are considered additional deferrals as of the reporting date.  Based on the results of this analysis, the Company ensures that actual deferrals/defaults as well as forecasted deferrals/defaults of specific institutions are appropriately factored into the cash flow projections for each security.  The default and recovery probabilities for each piece of collateral were formed based on the evaluation of collateral credit and a review of historical default data and current/near term operating conditions.  There is no recovery estimated for actual defaulted issuers.  Projected deferrals are modeled in a consistent manner with actual deferrals. One of these securities was fully impaired in 2009.  Upon completion of the June 30, 2013 analysis, our model indicated that there was no other-than-temporary impairment on these securities for the six months ended June 30, 2013. There was no other-than-temporary impairment recorded for the six months ended June 30, 2012.

Eight securities remain classified as available-for-sale at June 30, 2013.  It is possible that the underlying collateral of these securities will perform worse than expectations including an increase in deferrals/defaults above projections, which may lead to adverse changes in cash flows on these securities and potential future OTTI losses.  Events that may trigger material declines in fair value for these securities in the future would include, but are not limited to, deterioration of credit metrics, such as significantly higher levels of defaults, and severity of loss on the underlying collateral and further illiquidity.

The table below presents a roll-forward of the credit losses recognized in earnings for the six months endedJune 30, 2013 and 2012: 

	June 30, 2013			June 30, 2012
	(In thousands)
Beginning Balance	$	5,879		$	6,107
Reductions for previous credit losses due to an increase in cash flows expected to be collected	(252		)	—
Ending Balance	$	5,627		$	6,107

Note D — Loans Receivable

The components of loans receivable at June 30, 2013 and December 31, 2012 are as follows:

	June 30, 2013			December 31, 2012
	(In thousands)
Residential mortgages	$	111,674		$	104,237
Home equity loans	46,918			47,083
Consumer loans	27,790			29,678
Commercial real estate	87,658			84,107
Commercial loans	52,178			47,464
	326,218			312,569
Deferred fees	831			881
Allowance for loan losses	(2,942		)	(2,776		)
Net loans	$	324,107		$	310,674

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.  Allocation of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off.  The allowance consists of specific and general components.  The specific component relates to loans that are individually classified as impaired.

A loan is considered impaired,when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement.  Loans for which the terms have been modified resulting

15

in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or the fair value of collateral if repayment is expected solely from collateral.  Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.

Troubled debt restructurings are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan's effective rate at inception.  If a troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net at the fair value of the collateral.  For the troubled debt restructurings that subsequently default, the Company determines the amount of reserve in accordance with the accounting policy for the allowance for loan losses.

The general component covers non-impaired loans and is based on 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.  The following portfolio segments have been identified:  commercial real estate loans, commercial loans, consumer loans, home equity loans and residential mortgages.

Loans secured by commercial real estate and multi-family residential properties generally have larger principal balances 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.

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 and often insufficient source of repayment.

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 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.

Home equity loans are secured by a borrower’s primary residence.  Home equity loans are underwritten under the same criteria that we use to underwrite one-to-four family fixed-rate loans. Home equity loans may be underwritten with a loan to value ratio of 90% when combined with the principal balance of an existing mortgage loan.  Home equity loans generally involve greater credit risk than the primary residential mortgage loans due to the potential of declines in collateral values, collectability as a result

16

of foreclosure processes if the Bank is considered to be in a secondary position as well as the amount of expenses incurred during the process.

Residential real estate loans have as collateral a borrower’s primary residence.  The risk of loss on these loans would be due to collateral deficiencies reflecting market deterioration or location and condition of the property.  The foreclosure process of a primary residence is usually the final course of action on these types of loans. Given our underwriting criteria and the volume and balance of the loans as compared to collateral, the risk in this portfolio segment is lower than that of the other segments.

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net, due to immateriality. 

The following table sets forth the activity in the allowance for loan losses by portfolio segment:

For the Three Months Ended	Commercial Loans		Commercial Real Estate		Consumer Loans			Home Equity			Residential Mortgages			Total
June 30, 2013
	(In thousands)
Allowance for loan losses:
Beginning balance	$	910	$	875	$	223		$	258		$	595		$	2,861
Charge-offs	—		—		(26		)	—			(18		)	(44		)
Recoveries	—		—		24			1			—			25
Provision for loan losses	85		9		(1		)	(31		)	38			100
Ending balance	$	995	$	884	$	220		$	228		$	615		$	2,942

For the Six Months Ended	Commercial Loans		Commercial Real Estate		Consumer Loans			Home Equity			Residential Mortgages			Total
June 30, 2013
	(In thousands)
Allowance for loan losses:
Beginning balance	$	833	$	857	$	232		$	282		$	572		$	2,776
Charge-offs	—		—		(76		)	(2		)	(18		)	(96		)
Recoveries	—		—		61			1			—			62
Provision for loan losses	162		27		3			(53		)	61			200
Ending balance	$	995	$	884	$	220		$	228		$	615		$	2,942

For the Three Months Ended	Commercial Loans		Commercial Real Estate			Consumer Loans			Home Equity		Residential Mortgages			Total
June 30, 2012
	(In thousands)
Allowance for loan losses:
Beginning balance	$	576	$	1,310		$	327		$	281	$	513		$	3,007
Charge-offs	—		(654		)	(9		)	—		—			(663		)
Recoveries	—		1			10			1		—			12
Provision for loan losses	142		22			(12		)	—		(2		)	150
Ending balance	$	718	$	679		$	316		$	282	$	511		$	2,506

For the Six Months Ended	Commercial Loans		Commercial Real Estate			Consumer Loans			Home Equity		Residential Mortgages		Total
June 30, 2012
	(In thousands)
Allowance for loan losses:
Beginning balance	$	535	$	1,310		$	326		$	265	$	464	$	2,900
Charge-offs	—		(654		)	(78		)	—		—		(732		)
Recoveries	1		1			34			1		1		38
Provision for loan losses	182		22			34			16		46		300
Ending balance	$	718	$	679		$	316		$	282	$	511	$	2,506

17

The following table presents the balances in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method:

June 30, 2013	Commercial Loans		Commercial Real Estate		Consumer Loans		Home Equity		Residential Mortgages		Total
	(In thousands)
Allowance for loan losses attributable to loans:	0
Individually evaluated for impairment	$	235	$	24	$	—	$	—	$	—	$	259
Collectively evaluated for impairment	760		860		220		228		615		2,683
Total	$	995	$	884	$	220	$	228	$	615	$	2,942
Loans:
Individually evaluated for impairment	$	1,259	$	526	$	—	$	—	$	—	$	1,785
Collectively evaluated for impairment	50,919		87,132		27,790		46,918		111,674		324,433
Total	$	52,178	$	87,658	$	27,790	$	46,918	$	111,674	$	326,218

December 31, 2012	Commercial Loans		Commercial Real Estate		Consumer Loans		Home Equity		Residential Mortgages		Total
	(In thousands)
Allowance for loan losses attributable to loans:
Individually evaluated for impairment	$	214	$	23	$	—	$	—	$	—	$	237
Collectively evaluated for impairment	619		834		232		282		572		2,539
Total	$	833	$	857	$	232	$	282	$	572	$	2,776
Loans:
Individually evaluated for impairment	$	885	$	201	$	—	$	—	$	—	$	1,086
Collectively evaluated for impairment	46,579		83,906		29,678		47,083		104,237		311,483
Total	$	47,464	$	84,107	$	29,678	$	47,083	$	104,237	$	312,569

The following table presents information related to loans individually evaluated for impairment by segment of loans as of June 30, 2013 and December 31, 2012:

	June 30, 2013						December 31, 2012
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
	(In thousands)
With no related allowance recorded:
Commercial loans	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate	—		—		—		—		—		—
With an allowance recorded:
Commercial loans	1,259		1,259		235		885		885		214
Commercial real estate	526		526		24		201		201		23
Total	$	1,785	$	1,785	$	259	$	1,086	$	1,086	$	237

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The following table presents the average recorded investment in impaired loans for the periods indicated:

	Three months ended				Six months ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
	(In thousands)
With no related allowance recorded:	0		0		0		0
Commercial loans	$	—	$	100	$	—	$	—
Commercial real estate	—		—		—		—
With an allowance recorded	198		0		1317		0
Commercial loans	1,268		—		1,317		—
Commercial real estate	531		640		536		788
Total	$	1,799	$	740	$	1,853	$	788

At June 30, 2013, impaired commercial real estate loans represents three loans.  At June 30, 2013, impaired commercial loans represents nine loans. Six of the commercial loans were considered troubled debt restructurings and totaled $1.1 million as of June 30, 2013. The three commercial real estate loans were for customers who had commercial loans considered to be troubled debt restructurings. The remaining three commercial loans totaling $205,100 represented one relationship that was considered impaired. The average recorded investment of impaired commercial real estate loans for the three months and six months ended June 30, 2012 was a commercial real estate relationship with multiple properties.  The loans were charged off in June 2012 except for $100,000 which was paid by a related party in July 2012.  Cash basis interest income of $25,000 and $50,000 was recognized for the three months and six months ended June 30, 2013, respectively.  Cash basis interest income was not recognized for the three months and six months ended June 30, 2012.

The following table presents the recorded investment in nonaccrual and past due loans over 90 days still on accrual by segment as of June 30, 2013 and December 31, 2012:

	June 30, 2013
	Nonaccrual		Loans Past Due Over 90 days still Accruing
	(In thousands)
Commercial loans	$	260	$	—
Commercial real estate	—		—
Consumer loans	1		—
Home equity	150		—
Residential mortgages	357		—
Total	$	768	$	—

	December 31, 2012
	Nonaccrual		Loans Past Due Over 90 days still Accruing
	(In thousands)
Commercial loans	$	59	$	—
Commercial real estate	—		238
Consumer loans	—		—
Home equity	150		—
Residential mortgages	279		—
Total	$	488	$	238

The following represents the aging of the recorded investment in past due loans as of June 30, 2013 and December 31, 2012 by class of loans.

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	June 30, 2013
	Total		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due
	(In thousands)
Commercial loans	$	52,178	$	—	$	—	$	—	$	—	$	52,178
Commercial real estate	87,658		—		—		—		—		87,658
Consumer loans	27,790		111		—		1		112		27,678
Home equity	46,918		83		—		150		233		46,685
Residential mortgages	111,674		178		—		357		535		111,139
Total	$	326,218	$	372	$	—	$	508	$	880	$	325,338

	December 31, 2012
	Total		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Loans Not Past Due
	(In thousands)
Commercial loans	$	47,464	$	—	$	—	$	—	$	—	$	47,464
Commercial real estate	84,107		—		—		238		238		83,869
Consumer loans	29,678		85		—		—		85		29,593
Home equity	47,083		23		—		150		173		46,910
Residential mortgages	104,237		181		56		279		516		103,721
Total	$	312,569	$	289	$	56	$	667	$	1,012	$	311,557

Troubled Debt Restructurings

As of June 30, 2013 and December 31, 2012, the Company has a recorded investment in troubled debt restructurings of $1.1 million and $662,000 respectively. The Company has allocated $188,000 and $186,000 of specific reserves to customers whose loan terms have been modified in troubled debt restructurings as of June 30, 2013 and December 31, 2012, respectively.  The Company has not committed to lend additional amounts as of June 30, 2013 and December 31, 2012 to customers with outstanding loans that are classified as troubled debt restructurings.

During the three months ended June 30, 2013, there were two new loans modified that would be considered troubled debt restructurings.  There were no loans considered to be troubled debt restructurings for the three months ended June 30, 2012. The modification of the terms of such loans included one or a combination of the following:  a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

Six commercial loans were considered to be troubled debt restructurings as of June 30, 2013.  Each loan was a commercial line of credit which was not paid in full at the time of maturity. The loans maturity dates were extended ranging from ten years to twenty years and the reduction in interest rates were to below market rates.  One of the commercial loans had a principal balance as of June 30, 2013 of $188,000 which was considered impaired and had a specific allowance of $19,000 based on the present value of estimated future cash flows.  This loan is currently performing in accordance with the modified terms of the loan.  In addition, one commercial loan had a principal balance of $306,000 as of June 30, 2013 which was considered impaired and had a specific allowance of $150,000 based on the present value of estimated future cash flows. This loan is currently performing in accordance with the modified terms of the loan. Two commercial loans which represent one commercial relationship, with a principal balance of $55,000 as of June 30, 2013 which was considered impaired and had a specific allowance of $14,000 based on the present value of estimated future cash flows. These two loans are considered nonaccrual. These loans are currently paying in accordance with the modified terms. The remaining two commercial loans which represent one commercial relationship, were new troubled debt restructurings during the quarter. The principal balance of $505,000 as of June 30, 2013, was considered impaired and had a specific allowance of $6,000 based on the present value of estimated future cash flows. These loans are currently paying in accordance with the modified terms. As of June 30, 2013, there was no difference between the pre-modification outstanding recorded investment and the post-modification outstanding recorded investment of troubled debt restructurings.

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Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors.  The Company analyzes loans individually by classifying the loans as to credit risk.  This analysis includes non-homogeneous loans, such as commercial and commercial real estate with an outstanding relationship greater than $250,000.  Homogeneous loans are reviewed when appropriate given foreclosures, bankruptcies or relationships that include non-homogeneous loans. For homogeneous loan pools, such as residential mortgages, home equity and consumer loans, the Company uses the payment status to identify the credit risk in these loan portfolios.  Payment status is reviewed on at least a monthly basis by the Company’s personnel and on a quarterly basis with respect to determining the adequacy of the allowance for loan losses.  This analysis is performed on at least an annual basis.  The Company uses the following definitions for risk ratings:

Special Mention.  Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncovered, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

Substandard.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debts.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful.  Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans.  Loans listed as not rated are either less than $250,000 or are included in groups of homogeneous loans.

Based on the most recent analysis performed (all loans graded within past 12), the risk category by class of loan is as follows:

	June 30, 2013
	Not Rated		Pass		Special Mention		Substandard		Doubtful
	(In thousands)
Commercial loans	$	16,680	$	34,067	$	126	$	1,231	$	74
Commercial real estate	15,529		71,358		444		327		—
Total	$	32,209	$	105,425	$	570	$	1,558	$	74

	December 31, 2012
	Not Rated		Pass		Special Mention		Substandard		Doubtful
	(In thousands)
Commercial loans	$	16,927	$	29,752	$	—	$	700	$	85
Commercial real estate	15,905		67,680		—		494		28
Total	$	32,832	$	97,432	$	—	$	1,194	$	113

Note E — Segment Information

Effective January 1, 2013, the Bank reorganized its internal reporting segments to better align services provided to customers. Based on this re-alignment, the Bank has determined that it has three primary business segments; its banking franchise, its insurance, risk management and employee benefits activities and its financial and investment advisory activities. The prior year segment information has not been restated because it is impracticable to do so based upon how product performance is now being accounted for within the accounting records. For the three months and six months ended June 30, 2013, the Bank's insurance, risk management and employee benefit activities consisted of those conducted through its wholly owned subsidiary, Bailey & Haskell Associates, Inc. The Bank's financial and investment advisory activities consisted of those conducted through its wholly owned subsidiary Benefit Consulting Group, Inc. The activities of Workplace Health Solutions Inc. were merged into Bailey & Haskell Associates,

21

Inc. as of January 1, 2013. Effective January 1, 2013, the activities of Benefit Consulting Group, Inc. were divided into three functions of which one was transferred to the banking franchise as it represents services similar to trust services, one was transferred to Bailey & Haskell Associates, Inc. as it resembles services already provided by the entity and the financial and advisory services remained at Benefit Consulting Group Inc. which is being developed into broker-dealer services.

Prior to January 1, 2013, the Bank determined that it had four primary business segments, its banking franchise, its insurance activities, its employee benefit consulting activities and risk management activities.  For the three months and six months ended June 30, 2012 the Bank’s insurance activities consisted of those conducted through its wholly owned subsidiary, Bailey & Haskell Associates, Inc. The Bank’s benefit consulting activities consisted of those conducted through its wholly owned subsidiary Benefit Consulting Group, Inc. The risk management activities consisted of those conducted through its wholly owned subsidiary Workplace Health Solutions Inc.

Information about the Bank’s segments is presented in the following table for the periods indicated:

	Three months ended June 30, 2013
	Banking Activities		Insurance, Risk Management and Employee Benefits Activities		Financial/Investment Advisory Activities			Total
	(In thousands)
Net interest income	$	4,898	$	—	$	—		$	4,898
Provision for loan losses	100		—		—			100
Net interest income after provision for loan losses	4,798		—		—			4,798
Investment gains, net	568		—		—			568
Commissions and fees on sales of non-banking products	477		4,917		604			5,998
Other operating income	1,246		—		—			1,246
Non-interest expenses	5,145		4,249		690			10,084
Depreciation and amortization	387		90		9			486
Income (loss) before income taxes	1,557		578		(95		)	2,040
Income tax expense (benefit)	347		237		(36		)	548
Net income (loss)	1,210		341		(59		)	1,492
Less: net income attributable to noncontrolling interest	—		—		—			—
Net income (loss) attributable to Oneida Financial Corp.	$	1,210	$	341	$	(59	)	$	1,492
Total Assets	$	675,635	$	29,250	$	2,108		$	706,993

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	Three months ended June 30, 2012
	Banking Activities		Insurance Activities		Benefit Consulting Activities		Risk Management Activities		Total
	(In thousands)
Net interest income	$	4,920	$	—	$	—	$	—	$	4,920
Provision for loan losses	150		—		—		—		150
Net interest income after provision for loan losses	4,770		—		—		—		4,770
Investment gains, net	301		—		—		—		301
Non-interest income	1,115		3,126		1,813		481		6,535
Non-interest expenses	4,323		2,435		1,371		451		8,580
Depreciation and amortization	388		42		21		1		452
Income before income taxes	1,475		649		421		29		2,574
Income tax expense	209		280		174		12		675
Net income	1,266		369		247		17		1,899
Less: net income attributable to noncontrolling interest	—		—		—		—		—
Net income attributable to Oneida Financial Corp.	$	1,266	$	369	$	247	$	17	$	1,899
Total Assets	$	656,287	$	20,675	$	7,060	$	428	$	684,450

	Six months ended June 30, 2013
	Banking Activities		Insurance, Risk Management and Employee Benefit Activities		Financial/Investment Advisory Activities			Total
	(In thousands)
Net interest income	$	9,735	$	—	—			9,735
Provision for loan losses	200		—		—			200
Net interest income after provision for loan losses	9,535		—		—			9,535
Investment gains, net	1,391		—		—			1,391
Commissions and fees on sales of non banking products	925		9,916		1,127			11,968
Non-interest income	2,498		—		—			2,498
Non-interest expenses	10,097		8,307		1,375			19,779
Depreciation and amortization	778		181		17			976
Income (loss) before income taxes	3,474		1,428		(265		)	4,637
Income tax expense (benefit)	713		584		(105		)	1,192
Net income (loss)	2,761		844		(160		)	3,445
Less: net income attributable to noncontrolling interest	3		—		—			3
Net income (loss) attributable to Oneida Financial Corp.	$	2,758	$	844	$	(160	)	$	3,442
Total Assets	$	675,635	$	29,250	$	2,108		$	706,993

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	Six months ended June 30, 2012
	Banking Activities		Insurance Activities		Benefit Consulting Activities		Risk Management Activities		Total
	(In thousands)
Net interest income	$	9,785	$	—	$	—	$	—	$	9,785
Provision for loan losses	300		—		—		—		300
Net interest income after provision for loan losses	9,485		—		—		—		9,485
Investment losses, net	834		—		—		—		834
Non-interest income	2,439		6,231		3,729		963		13,362
Non-interest expenses	8,808		4,978		2,821		894		17,501
Depreciation and amortization	786		82		41		1		910
Income before income taxes	3,164		1,171		867		68		5,270
Income tax expense	484		504		357		22		1,367
Net income	2,680		667		510		46		3,903
Less: net income attributable to noncontrolling interest	3		—		—		—		3
Net income attributable to Oneida Financial Corp.	$	2,677	$	667	$	510	$	46	$	3,900
Total Assets	$	656,287	$	20,675	$	7,060	$	428	$	684,450

The following represents a reconciliation of the Company’s reported segment assets to consolidated assets as of June 30:

	2013			2012
	(In thousands)
Total assets for reportable segments	$	706,993		$	684,450
Elimination of intercompany cash balances	(8,520		)	(8,176		)
Consolidated Total	$	698,473		$	676,274

Note F — Fair Value

Fair Value Measurement

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair values:

Level 1:  Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access as of the measurement date.

Level 2:  Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3:  Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate fair value:

Securities:  The fair values of trading securities and investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).  The fair value of level 3 investment securities are determined by the Company’s Finance Department, which reports to the Chief Financial Officer (CFO).  The CFO reviews the values and

24

these are reported to the Investment Committee on a quarterly basis.  Discounted cash flows are calculated using spread to swap and LIBOR curves that are updated to incorporate loss severities, volatility, credit spread and optionality. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.  During times when trading is more liquid, broker quotes are used (if available) to validate the model.

Impaired Loans:  At the time a loan is considered impaired, it is valued at the lower of cost or fair value.  Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses.  For collateral dependent loans, fair value is commonly based on recent real estate appraisals.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.  Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available.  Such adjustments can be significant and typically result in a Level 3 classification of the inputs to determine fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and the client’s business, resulting in a Level 3 fair value classification.  Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Other Real Estate:   Assets acquired through or instead of loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis.  These assets are subsequently accounted for at the lower of cost or fair value less estimated costs to sell.  Fair value is commonly based on recent real estate appraisals and may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.

Assets and liabilities measured at fair value on a recurring basis, including financial assets for which the Company has elected the fair value option, are summarized below:

	Fair Value Measurements at June 30, 2013 Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Trading securities
Common and preferred equities	$	4,252	$	1,047	$	3,205	$	—
Available-for-sale securities
U.S. Agencies	56,864		—		56,864		—
Corporate	42,324		—		42,324		—
Agency asset backed securities	3,729		—		3,729		—
Trust preferred securities	4,919		—		—		4,919
State and municipal	46,814		—		44,593		2,221
Small business administration	14,184		—		14,184		—
Residential mortgage-backed securities	57,582		—		57,582		—
Collateralized mortgage obligations	1,403		—		1,403		—
Total	$	232,071	$	1,047	$	223,884	$	7,140

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	Fair Value Measurement at December 31, 2012 Using
	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
Assets:
Trading securities
Common and preferred equities	$	5,630	$	3,172	$	2,458	$	—
Available-for-sale securities
U.S. Agencies	47,284		—		47,284		—
Corporate	40,144		—		40,144		—
Agency asset backed securities	5,829		—		5,829		—
Trust preferred securities	5,621		—		—		5,621
State and municipal	42,721		—		40,105		2,616
Small business administration	13,767		—		13,767		—
Residential mortgage-backed securities	71,337		—		71,337		—
Collateralized mortgage obligations	1,666		—		1,666		—
Total	$	233,999	$	3,172	$	222,590	$	8,237

There were no transfers between Level 1 and Level 2 during 2013 or 2012. 

The table below presents a reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months and six months ended June 30, 2013:

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Trust Preferreds			Municipal Securities			Total
	(In thousands)
Beginning balance January 1, 2013		$	5,621		$	2,616		$	8,237
Total gains or losses (realized/unrealized)
Included in earnings
Interest income on securities		127			—			127
Other changes in fair value		—			—			—
Net impairment losses recognized in earnings		—			—			—
Interest payments applied to principal		(447		)	—			(447		)
Pay downs on securities		—			(196		)	(196		)
Included in other comprehensive income		52			(37		)	15
Ending balance March 31, 2013		$	5,353		$	2,383		$	7,736
Total gains or losses (realized/unrealized)
Included in earnings
Interest income on securities		125			—			125
Gain on sale of securities		208			—			208
Other changes in fair value		—			—			—
Net impairment losses recognized in earnings		—			—			—
Interest payments applied to principal		(33		)	—			(33		)
Pay downs on securities		—			(94		)	(94		)
Sales of securities		(889		)	—			(889		)
Included in other comprehensive income		155			(68		)	87
Ending balance June 30, 2013		$	4,919		$	2,221		$	7,140

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	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Trading Securities			Trust Securities			Municipal Securities			Total
	(In thousands)
Beginning balance January 1, 2012	$	1,919		$	3,615		$	7,495		$	13,029
Total gains or losses (realized/unrealized)
Included in earnings
Interest income on securities	—			—			—			—
Other changes in fair value	(12		)	—			—			(12		)
Net impairment losses recognized in earnings	—			—			—			—
Interest payments applied to principal	—			(350		)	—			(350		)
Pay downs on securities	—			—			(1,073		)	(1,073		)
Included in other comprehensive income	—			192			(42		)	150
Ending balance March 31, 2012	$	1,907		$	3,457		$	6,380		$	11,744
Total gains or losses (realized/unrealized)
Included in earnings
Interest income on securities	—			—			—			—
Other changes in fair value	89			—			—			89
Net impairment losses recognized in earnings	—			—			—			—
Interest payments applied to principal	—			—			—			—
Pay downs on securities	—			—			(1,543		)	(1,543		)
Included in other comprehensive income	—			191			50			241
Ending balance June 30, 2012	$	1,996		$	3,648		$	4,887		$	10,531

The fair value of the Company’s trust preferred securities are determined internally by calculating discounted cash flows.  Information such as historical and current performance of the underlying collateral, deferral/default rates, collateral coverage ratios, break in yield calculations, cash flow projections, liquidity and credit premiums required by a market participant, and financial trend analysis with respect to the individual issuing financial institutions and insurance companies, are utilized in determining individual security valuations.  Assumptions are back-tested on a quarterly basis as specific-issuer deferral and defaults that occurred are compared to those that were projected and ongoing assumptions are adjusted in accordance with the level of unexpected deferrals and defaults that occurred.  See Note C to the Consolidated Financial Statements for the significant unobservable inputs used in the fair value measurement of the Company’s trust preferred securities.

The Company’s Level 3 state and local municipal securities valuations were supported by analysis prepared by an independent third party.  The third party’s approach to determining fair value involves using recently executed transactions for similar securities and market quotations for similar securities.  As these securities are not rated by the rating agencies and are localized to our market area, it was determined that these were valued using Level 3 inputs.  In addition, the Company reviews past history of the contractual payments and financial condition of the municipalities in determining an appropriate market value for this type of security.

The Company’s Level 3 common and preferred equity security valuation was supported by analysis prepared by an independent third party.  The third party’s approach to determining fair value is based on the security characteristics including benchmark yields, reported trades, rating data and industry research reports.  Due to the limited trading activity of this individual security in the market, it was determined that this was valued using Level 3 inputs.  In addition, the Company reviews past history of the contractual payments and financial condition of the equity security in determining an appropriate market value for this type of security. This security was called in October 2012.

There were no impaired loans or other real estate owned, net that were measured at fair value as of June 30, 2013 or December 31, 2012.

Fair Value Option

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The Company has elected the fair value option for certain preferred and common equity securities as they do not have stated maturity values and the fair value fluctuates with market changes.  The decision to elect the fair value option is made individually for each instrument and is irrevocable once made.  Changes in fair value for the selected instruments are recorded in earnings. Interest income is recorded based on the contractual amount of interest income earned on financial assets (except any that are in nonaccrual status). Dividend income is recorded based on cash dividends.  Cash flows from the purchase and sale of securities for which the fair value option has been elected are shown as operating activities in the consolidated statement of cash flows.

The following table presents the amount of gains and losses from changes in fair value included in income before taxes for financial assets carried at fair value for the three months and six months ended June 30, 2013 is as follows:

	Three months ended				Six months ended
	June 30, 2013		June 30, 2012		June 30, 2013		June 30, 2012
	(In thousands)
Interest income	$	—	$	—	$	—	$	—
Interest expense	—		—		—		—
Change in fair value	305		241		1,124		677
Total change in fair value	$	305	$	241	$	1,124	$	677

Fair Value of Financial Instruments

Carrying amounts and estimated fair values of financial instruments at June 30, 2013 and December 31, 2012 were as follows:

June 30, 2013	Carrying Value		Fair Value Measurements Using
			Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	11,606	$	11,606	$	—	$	—	$	11,606
Trading securities	4,252		1,047		3,205		—		4,252
Investment securities, available-for-sale	227,819		—		220,679		7,140		227,819
Investment securities, held-to-maturity	42,129		—		40,820		1,784		42,604
Loans held for sale	552		—		562		—		562
Loans receivable, net	324,107		—		—		332,706		332,706
Federal Home Loan Bank stock	1,656		N/A		N/A		N/A		N/A
Accrued interest receivable	2,221		—		1,200		1,021		2,221
Financial liabilities:	0
Deposits	$	593,688	$	450,268	$	146,096	$	—	$	596,364
Borrowings	1,000		—		1,054		—		1,054
Accrued interest payable	10		3		7		—		10

December 31, 2012	Carrying Amount		Fair Value Measurement Using
			Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets:
Cash and cash equivalents	$	19,803	$	19,803	$	—	$	—	$	19,803
Trading securities	5,630		3,172		2,458		—		5,630
Investment securities, available-for-sale	228,369		—		220,132		8,237		228,369
Investment securities, held-to-maturity	29,077		—		29,193		1,587		30,780
Loans held for sale	1,029		—		1,073		—		1,073
Loans receivable, net	310,674		—		—		321,207		321,207
Federal Home Loan Bank stock	1,936		N/A		N/A		N/A		N/A
Accrued interest receivable	2,065		—		1,077		988		2,065

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Financial liabilities:
Deposits	$	568,265	$	428,436	$	142,616	$	—	$	571,052
Borrowings	6,000		—		6,097		—		6,097
Accrued interest payable	31		4		27		—		31

The methods and assumptions, not previously presented, used to estimate fair values are describes as follows:

(a)Cash and Cash Equivalents

The carrying value of our cash and cash equivalents approximates fair value and is classified as Level 1.

(b)Loans Held for Sale

The fair value of loans held for sale is estimated based upon binding contracts and quotes from third party investors resulting in a Level 2 classification.

(c ) Loans

Fair value of loans, excluding loans held for sale, are estimated as follows:  for variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values resulting in a Level 3 classification. Fair values for other loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality resulting in a Level 3 classification.  Impaired loans are valued at the lower of cost or fair value as described previously.  The methods utilized to estimate the fair value of loans do not necessarily represent an exit price

(d)  FHLB Stock

It is not practicable to estimate the fair value of FHLB stock due to restrictions placed on its transferability.

(e ) Deposits

The fair value of deposits with no stated maturity, such as checking deposits, money market deposits, NOW accounts and savings deposits, is equal to the recorded book value resulting in a Level 1 classification.  The fair value of time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities on time deposits resulting in a Level 2 classification.

(f) Borrowings

The fair value of the Company’s borrowings are estimated using discounted cash flows analysis based on the current borrowing rates for similar types of borrowing arrangements resulting in a Level 2 classification.

(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 1, Level 2 or Level 3 classification based on the level of the asset or the liability with which the accrual is associated.

(h) Off-balance Sheet Instruments

Fair value for off-balance sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standings.  The fair value of commitments is not material.

Note G — Stock-Based Compensation

The Company has one share based compensation plan as described below.  Total compensation cost that has been charged against income for the plan was $149,411 and $297,303 for the three months and six months ended June 30, 2013, respectively.  There was no compensation cost related to this plan for the three months and six months ended June 30, 2012 as the plan was started in

29

July 2012.  The total income tax benefit was $57,523 and $114,462 for the three months and six months ended June 30, 2013, respectively.

Stock Options

The Company’s 2012 Equity Incentive Plan, which is shareholder approved, permits the granting of share options to its directors, officers and key employees for up to 216,750 shares of common stock.  Option awards are generally granted with an exercise price equal to the market price of the Company’s common stock at the date of grant; those options have vesting periods of five years and have ten year contractual terms.  There were 19,250 shares available for future grants under the plan described above as of June 30, 2013. Compensation recorded in conjunction with the option awards was $9,702 and $19,306 for the three months and six months ended June 30, 2013, respectively.

The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model that uses the assumptions noted in the table below.  Expected volatilities are based on historical volatilities of the Company's common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior.  The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable.  The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

The fair value of options granted was determined using the following weighted-average assumptions as of the grant date: 

	2013	2012
Risk-free interest rate	N/A	0.60	%
Expected term	N/A	5.00 years
Expected stock price volatility	N/A	21.98	%
Dividend yield	N/A	4.66	%

A summary of activity in the stock option plan for 2013 was as follows:

	Shares	Average Exercise Price		Weighted Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at December 31, 2012	197,500	$	10.30	9.563	$	69,125
Granted	—	$	—	—	$	—
Exercised	—	$	—	—	—
Forfeited or expired	—	$	—	—	—
Outstanding at June 30, 2013	197,500	$	10.30	9.073	$	659,650
Fully Vested and expected to vest	197,500	0			$	659,650
Exercisable as of June 30, 2013	—	$	—	—	—

Information related to the stock option plan was as follows:

	2013	2012
Intrinsic value of options exercised	—	—
Cash received from option exercises	—	—
Tax benefit realized from option exercises	—	—
Weighted average fair value of options granted	—	$	0.9885

As of June 30, 2013, there was $158,743 of total unrecognized compensation cost related to nonvested stock options granted under the plan.  The cost is expected to be recognized over a weighted-average period of 4.1 years.

Stock Awards

The 2012 Equity Incentive Plan provides for the issuance of shares of restricted stock ("RRP") to directors, officers and key employees.  Compensation expense is recognized over the five year vesting period of the awards based on the fair value of the

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stock at issue date.  The fair value of the stock was determined using the grant date fair value of $10.30.  RRP shares vest ratably over the five year vesting period on the anniversary date.  The shares have voting rights and are eligible to receive nonforfeitable dividends on the unvested shares.  These shares are considered to be participating securities in the earnings per share calculation.  Total shares issuable under the plan are 131,500 at June 30, 2013 and 130,000 shares were issued in July 2012.  A summary of changes in the Company’s nonvested shares for the years follows:

Nonvested Shares	Shares	Weighted Average Grant Date Fair Value
Nonvested at January 1, 2013	130,000	10.30
Granted	—	$	—
Vested	—	—
Forfeited	—	—
Nonvested at June 30, 2013	130,000	$	10.30

As of June 30, 2013, there was $1.1 million of total unrecognized compensation cost related to nonvested shares granted under the Plan.  The cost is expected to be recognized over a weighted average period of 4.1 years. Compensation expense recorded in conjunction with the RRP awards was $66,517 and $132,386 for the three months and six months ended June 30, 2013, respecitvely.

Performance Awards

The 2012 Equity Incentive Plan provides for the issuance of shares of performance award restricted stock to directors, officers and key employees.  Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. The fair value of the stock was determined using the grant date fair value of $10.30.  Performance shares cliff vest as of July 24, 2015 based on the performance results for the three year period ending December 31, 2014. There are three sets of performance criteria based on the individual award; (1) based on a three year cumulative earnings per share, return on average assets and return on tangible equity metrics weighted at 33%; (2) three year cumulative earnings per share, annual loan growth rate and net charge off rate weighted at 33%; and (3) average revenue and profit margin weighted at 50%. Compensation cost is estimated based on the probability that the performance conditions will be achieved.  As of June 30, 2013, the compensation cost is estimated in the range of 75% - 100% payout under the terms of the plan for the different performance set.  At each reporting period, the Company will reassess the likelihood of achieving the performance criteria and will adjust compensation expense as needed.   The shares have voting rights.  Upon vesting of the performance shares, any dividends declared during the vesting period will be paid based on the shares vested.  Total shares issuable under the plan are 85,000 at June 30, 2013 and all shares were issued in 2012.  A summary of changes in the Company’s nonvested shares for the years follows:

Nonvested Shares	Shares	Weighted Average Grant Date Fair Value
Nonvested at January 1, 2013	85,000	$	10.30
Granted	—	—
Vested	—	—
Forfeited	—	—
Nonvested at June 30, 2013	85,000	$	10.30

As of June 30, 2013, there was $441,540 of total unrecognized compensation cost related to nonvested shares granted under the Plan.  The cost is expected to be recognized over a weighted average period of 1.5 years. Compensation expense recorded in conjunction with the performance awards totaled $73,192 and $145,611 for the three months and six months ended June 30, 2013, respectively.

Note H - Comprehensive Income

The following table represents the detail of comprehensive income (loss) for the three months and six months ended:

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	For the Three Months Ended June 30, 2013
	Pre-tax			Tax			After-tax
	(In thousands)
Unrealized holding losses on available-for-sale securities during the period	$	(5,719	)	$	2,288		$	(3,431	)
Reclassification adjustment for gains included in net income (1)	(263		)	105			(158		)
Net unrealized losses on available-for-sale securities	(5,982		)	2,393			(3,589		)
Net gain (loss) arising during period (2)	30			(12		)	18
Net unrecognized postretirement benefit obligation	30			(12		)	18
Other comprehensive loss	$	(5,952	)	$	2,381		$	(3,571	)

	For the Six Months Ending June 30, 2013
	Pre-tax			Tax			After-tax
	(In thousands)
Unrealized holding losses on available-for-sale securities during the period	$	(6,527	)	$	2,610		$	(3,917	)
Reclassification adjustment for gains included in net income (1)	(267		)	107			(160		)
Net unrealized loss on available-for-sale securities	(6,794		)	2,717			(4,077		)
Net gain (loss) arising during period (2)	61			(24		)	37
Net unrecognized postretirement benefit obligation	61			(24		)	37
Other comprehensive loss	$	(6,733	)	$	2,693		$	(4,040	)

	For the Three Months Ended June 30, 2012
	Pre-tax			Tax			After-tax
	(In thousands)
Unrealized holding gains on available-for-sale securities during the period	$	2,349		$	(940	)	$	1,409
Reclassification adjustment for gains included in net income (1)	(60		)	24			(36		)
Net unrealized gains on available-for-sale securities	2,289			(916		)	1,373
Net gain (loss) arising during period (2)	35			(14		)	21
Net unrecognized postretirement benefit obligation	35			(14		)	21
Other comprehensive income	$	2,324		$	(930	)	$	1,394

	For the Six Months Ending June 30, 2012
	Pre-tax			Tax			After-tax
	(In thousands)
Unrealized holding gains on available-for-sale securities during the period	$	1,997		$	(799	)	$	1,198
Reclassification adjustment for gains included in net income (1)	(157		)	63			(94		)
Net unrealized gains on available-for-sale securities	1,840			(736		)	1,104
Net gain (loss) arising during period (2)	70			(28		)	42
Net unrecognized postretirement benefit obligation	70			(28		)	42
Other comprehensive income	$	1,910		$	(764	)	$	1,146

___________________________________

(1) Pre-tax reclassification adjustments relating to available-for-sale securities are reported in net gains (losses) on sales of securities on the consolidated statement of operations.

(2) Net gain(loss) arising during period which is comprised of net gain (loss) and amortization of prior gain (loss) is reporting in compensation and benefits on the consolidated statements of operations.

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The following table represents a summary of the change in accumulated other comprehensive income (loss) balances, net of tax, for the six months ended June 30, 2013 and 2012:

	Net unrealized gains (losses) on available-for-sale securities			Unrecognized postretirement benefit obligation			Accumulated other comprehensive income
	(In thousands)
Balance at January 1, 2013	$	2,946		$	(2,035	)	$	911
Other comprehensive income, during the period, net of adjustments	(3,917		)	37			(3,880		)
Amounts reclassified from AOCI	(160		)	—			(160		)
Other comprehensive income	(4,077		)	37			(4,040		)
Balance at June 30, 2013	$	(1,131	)	$	(1,998	)	$	(3,129	)

	Net unrealized gains (losses) on available-for-sale securities			Unrecognized postretirement benefit obligation			Accumulated other comprehensive income
	(In thousands)
Balance at January 1, 2012	$	113		$	(2,235	)	$	(2,122	)
Other comprehensive income, during the period, net of adjustments	1,198			42			1,240
Amounts reclassified from AOCI	(94		)	—			(94		)
Other comprehensive income	1,104			42			1,146
Balance at June 30, 2012	$	1,217		$	(2,193	)	$	(976	)

Note I — Accounting Pronouncements

In July 2013, the FASB amended existing guidance related to the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendment requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for net operating loss carryforward, a similar tax loss, or a tax credit carryforward except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position, or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The amendments in this guidance are effective for fiscal years, and interim periods with those years, beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. The adoption of this guidance is not expected to have a material effect on the Company's operating results or financial condition.

In February 2013, the FASB amended existing guidance related to reporting reclassifications out of accumulated other comprehensive income. The amendment requires an entity to provide information about the amounts reclassified out of accumulated comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items in net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments in this guidance are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this guidance did not have a material effect on the Company's operating results or financial condition.

In July 2012, the FASB amended existing guidance related to impairment testing on indefinite-lived intangible assets.  The amendment permits an assessment of qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired.  If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then no further action is required.  However, if after the same assessment, it is concluded that it is more likely than not that the indefinite-

33

lived intangible asset is impaired, then a quantitative impairment test should be performed whereby the fair value of the indefinite-lived intangible asset is compared to the carrying amount. An entity also has the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test.  The amendments in this guidance are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The adoption of this guidance did not have a material effect on the Company’s operating results or financial condition.

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ITEM 2.       Management’s Discussion and Analysis of Financial Condition and Results Of Operations

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section presents Management’s Discussion and Analysis of Oneida Financial Corp. ("the Company’s") consolidated financial results of operations and condition and should be read in conjunction with the Company’s financial statements and notes thereto included herein.

When used in this quarterly report the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties, including, among other things, changes in economic conditions in the Company’s market area, changes in policies by regulatory agencies, fluctuations in interest rates, demand for loans in the Company’s market area and competition, that could cause actual results to differ materially from historical earnings and those presently anticipated or projected.  The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made.  The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

The Company does not undertake, and specifically declines any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

GENERAL

Oneida Financial Corp. is the parent company of Oneida Savings Bank (“the Bank”).   The Company is a Maryland corporation. The Company conducts no business other than holding the common stock of the Bank and general passive investment activities resulting from the capital it holds. Consequently, the net income of the Company is primarily derived from its investment in the Bank.  Our results of operations depend primarily on our net interest income.  Net interest income is the difference between interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities, mortgage-backed securities and other interest-earning assets (primarily cash and cash equivalents), and the interest we pay on our interest-bearing liabilities, consisting primarily of deposits and Federal Home Loan Bank advances and other borrowings.  Net interest income is a function of our interest rate spread, which is the difference between the average yield earned on our interest-earning assets and the average rate paid on our interest-bearing liabilities, as well as a function of the average balance of interest-earning assets compared to interest-bearing liabilities.  Also contributing to our earnings is non-interest income, which consists primarily of service charges and fees on loan and deposit products and services, fees from our insurance agency, benefit consulting and risk management subsidiaries and fees from trust services, and net gains and losses on sale of investments.  Interest income and non-interest income are offset by provisions for loan losses, general administrative and other expenses, including employee compensation and benefits and occupancy and equipment costs, as well as by state and federal income tax expense.

Our results of operations are also significantly affected by general economic and competitive conditions, particularly with respect to changes in interest rates, government policies and actions of regulatory authorities.  Future changes in applicable law, regulation or government policies may materially affect our financial condition and results of operations.

RECENT DEVELOPMENTS

The Company announced on June 28, 2013, a quarterly cash dividend of $0.12 per share, which was paid on July 23, 2013 to its shareholders of record on July 9, 2013.

In early July 2013, Madison and Oneida counties experienced localized heavy flooding that caused damage in certain areas of our market. This damage, although localized, resulted in damage to a number of homeowners as well as an increase in costs to the local municipalities. The flooding may have affected the collateral properties securing some of our loans and may have affected the ability of some of our borrowers to repay their obligations to the Bank according to contractual terms. As a result, delinquent loans, nonaccrual loans and loan losses may increase. The Bank is generally named as a loss payee on hazard and flood insurance policies covering collateral properties and carries mortgage impairment insurance. These policies will help mitigate any losses that the Bank may otherwise sustain. In addition, New York State and FEMA are in the early stages of providing assistance to homeowners and local municipalities. Based on information to date, management does not feel that the impact of the flooding will have a material impact on the Bank's financial condition and results of operations.

35

During the quarter ended March 31, 2013, the Bank received regulatory approval to reorganize the business functions of its wholly-owned subsidiaries. While the reorganization will result in changes in the net income and operations of the individual subsidiaries, it will not have an impact in the basis of presentation contained in this Form 10-Q report. For more information, see Note E - Segment Information.

At December 31, 2012, the Company completed its acquisition of Schenectady Insuring Agency, Inc., an insurance agency operating in Schenectady, New York. The Company paid $795,149 in cash and established a note payable for $1.0 million to be paid monthly over 24 months with interest at 3.00% per annum to acquire 100% of the capital stock of the Schenectady Insuring Agency, Inc. Goodwill in the amount of $1.5 million and intangible assets in the amount of $929,000 were recorded in conjunction with the acquisition. Schenectady Insuring Agency, Inc. which was merged into Bailey and Haskell Associates, Inc. effective December 31, 2012. The Company began payment on the note in 2013.

FINANCIAL CONDITION

ASSETS.  Total assets at June 30, 2013 were $698.5 million, an increase of $17.1 million, or 2.5%, from $681.4 million at December 31, 2012. The increase in total assets was primarily attributable to an increase in loans receivable due to the Company retaining fixed-rate residential loan originations.

Cash and cash equivalents decreased $8.2 million, or 41.4%, to $11.6 million at June 30, 2013 from $19.8 million at December 31, 2012.  The decrease in cash and cash equivalents reflects the timing of investing excess cash on hand in higher yielding loans and securities.

Trading securities decreased $1.3 million, or 23.2%, to $4.3 million at June 30, 2013 as compared with $5.6 million at December 31, 2012. Trading securities represent common and preferred equity securities that we have elected to adjust to fair value.  The decrease in trading securities was due to the sale of $2.5 million of common equity securities offset by an increase in fair value during the first six months of 2013 that was reflected through the income statement.

Mortgage-backed securities decreased $1.1 million, or 1.2%, to $89.8 million at June 30, 2013 as compared with $90.9 million at December 31, 2012.  Investment securities increased $13.7 million, or 8.2%, to $180.2 million at June 30, 2013 as compared to $166.5 million at December 31, 2012. The increase in investment securities was due to the reinvestment of proceeds received from sales, calls and principal pay downs during the first six months of 2013 in order to obtain a higher return than is obtainable from cash and cash equivalents.

Loans receivable, including loans held for sale, increased $13.0 million, or 4.2%, to $324.7 million at June 30, 2013 as compared with $311.7 million at December 31, 2012.  We continue to maintain a diversified loan portfolio. The increase in net loan balances reflect the Company's continued loan origination efforts partially offset by loan sales activity. We sold $6.2 million in fixed rate residential loans, which represents the majority of the Company's fixed-rate residential loan origination volume during the six months ended June 30, 2013 with terms exceeding 15 years. Loan originations during the first six months of 2013 totaled $49.4 million as compared to total loan originations during the six months ended June 30, 2012 of $62.7 million. The decrease in loan originations from the prior year reflects a $6.0 million commercial construction participation loan included in the prior year originations.

LIABILITIES.  Total liabilities increased by $18.9 million, or 3.2%, to $607.3 million at June 30, 2013 from $588.4 million at December 31, 2012.  The increase was the result of an increase in deposits of $25.4 million offset partially by a decrease in borrowings of $5.0 million and a decrease in other liabilities of $1.5 million.

Deposit accounts increased $25.4 million, or 4.5%, to $593.7 million at June 30, 2013 from $568.3 million at December 31, 2012.  Interest-bearing deposit accounts increased by $26.5 million, or 5.4%, to $519.0 million at June 30, 2013 from $492.5 million at December 31, 2012.  Non-interest bearing deposit accounts decreased $1.1 million, or 1.5%, to $74.7 million at June 30, 2013 from $75.8 million at December 31, 2012.  The increase in deposit accounts was primarily a result of increases in both our retail deposits and municipal deposits offered through our limited purpose commercial banking subsidiary, State Bank of Chittenango.  Retail deposits increased $20.1 million or 4.3% to $482.6 million at June 30, 2013 from $462.5 million at December 31, 2012.  Municipal deposits increased $5.3 million to $111.1 million at June 30, 2013 from $105.8 million at December 31, 2012.  This increase was concurrent with local tax collections by various municipalities.

Borrowings decreased $5.0 million, or 83.3%, to $1.0 million at June 30, 2013 from $6.0 million at December 31, 2012. The decrease in borrowings was due to our decision not to renew the Federal Home Loan Bank (“FHLB”) advances that matured during the first six months of 2013.  At June 30, 2013 we had no overnight line of credit borrowings. Our overnight line of credit is used from time to time for liquidity management.

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Other liabilities decreased $1.5 million, or 10.6%, to $12.6 million at June 30, 2013 from $14.1 million at December 31, 2012. The decrease in other liabilities is primarily due to a decrease in premiums payable at our insurance subsidiary as a result of a decrease in future dated commissions at June 30, 2013 from December 31, 2012.

STOCKHOLDERS’ EQUITY.  Total stockholders’ equity at June 30, 2013 was $91.2 million, a decrease of $1.8 million, or 1.9%, from $93.0 million at December 31, 2012.  The decrease in stockholders’ equity was a result of decrease in accumulated other comprehensive income of $4.0 million at June 30, 2013 resulting from a decrease in the fair value of mortgage-backed and investment securities reflecting the recent increase in interest rates. In addition, stockholders were paid quarterly dividends during the first six months of 2013 totaling $0.24 per share resulting in a reduction in stockholders’ equity of $1.7 million. Offsetting these decreases in stockholders' equity was an increase as a result of $3.4 million of net income for the six months ended June 30, 2013.

ANALYSIS OF NET INTEREST INCOME

Oneida Savings Bank’s principal business has historically consisted of offering savings accounts and other deposits to the general public and using the funds from such deposits to make loans secured by residential and commercial real estate, as well as consumer and commercial business loans.  Oneida Savings Bank also invests a significant portion of its assets in investment securities and mortgage-backed securities both of which have classifications of available-for-sale and held-to-maturity.  Our results of operations depends primarily upon net interest income, which is the difference between income earned on interest-earning assets, such as loans and investments, and interest paid on interest-bearing liabilities, such as deposits and borrowings.  Net interest income is directly affected by changes in volume and mix of interest-earning assets and interest-bearing liabilities which support those assets, as well as the changing interest rates when differences exist in the repricing of assets or liabilities.

AVERAGE BALANCE SHEET.  The following table sets forth certain information relating to our average balance sheet, average yields and costs, and certain other information for the three months and six months ended June 30, 2013 and 2012 and for the year ended December 31, 2012.  For the periods indicated, the total dollar amount of interest income from average interest-earning assets and the resultant yields, as well as the interest expense on average interest-bearing liabilities is expressed in thousands of dollars and rates.  No tax equivalent adjustments were made.  The average balance is computed based upon an average daily balance.  Non-accrual loans and investments have been included in the average balances.

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TABLE 1.  Average Balance Sheet.

	Three months ended June 30,														Twelve Months Ended Dec. 31,
	2013							2012							2012
	Average Outstanding Balance		Interest Earned/Paid			Yield/Rate		Average Outstanding Balance		Interest Earned/Paid			Yield/Rate		Average Outstanding Balance		Interest Earned/Paid			Yield/Rate
	(Dollars in Thousands)
Assets
Interest-earning Assets:
Loans receivable	$	322,570	$	3,754		4.66	%	$	290,256	$	3,760		5.18	%	$	296,156	$	15,126		5.11	%
Investment and mortgage-backed securities	262,830		1,772			2.70	%	269,080		1,903			2.83	%	256,853		7,273			2.83	%
Federal funds	20,836		6			0.12	%	26,181		7			0.11	%	22,178		22			0.10	%
Equity securities	3,957		22			2.22	%	7,451		70			3.76	%	6,929		344			4.96	%
Total interest-earning assets	610,193		5,554			3.64	%	592,968		5,740			3.87	%	582,116		22,765			3.91	%
Non interest-earning Assets:
Cash and due from banks	10,795							11,414							11,154
Other assets	85,711							82,956							82,691
Total assets	$	706,699						$	687,338						$	675,961
Liabilities and Stockholders’ Equity
Interest-bearing Liabilities:
Money market deposits	$	179,994	$	156		0.35	%	$	188,085	$	203		0.43	%	$	176,382	$	751		0.43	%
Savings accounts	126,126		85			0.27	%	109,334		76			0.28	%	111,387		303			0.27	%
Interest-bearing checking	74,723		15			0.08	%	68,045		14			0.08	%	67,322		55			0.08	%
Time deposits	141,921		380			1.07	%	137,053		408			1.20	%	137,250		1,630			1.19	%
Borrowings	1,810		14			3.10	%	11,228		118			4.23	%	10,481		431			4.11	%
Notes payable	835		6			2.88	%	137		1			2.94	%	109		3			2.75	%
Total interest-bearing liabilities	525,409		656			0.50	%	513,882		820			0.64	%	502,931		3,173			0.63	%
Non-interest-bearing Liabilities:
Demand deposits	75,439							71,293							72,288
Other liabilities	11,556							12,795							10,728
Total liabilities	$	612,404						$	597,970						$	585,947
Stockholders’ equity	94,295							89,368							90,014
Total liabilities and stockholders’ equity	$	706,699						$	687,338						$	675,961
Net Interest Income			$	4,898						$	4,920						$	19,592
Net Interest Spread						3.14	%						3.23	%						3.28	%
Net Earning Assets	$	84,784						$	79,086						$	79,185
Net yield on average interest-earning assets			3.21		%					3.32		%					3.37		%
Average interest-earning assets to average interest-bearing liabilities			116.14		%					115.39		%					115.74		%

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	Six Months Ended June 30,														Twelve Months Ended Dec. 31,
	2013							2012							2012
	Average Outstanding Balance		Interest Earned/Paid			Yield/Rate		Average Outstanding Balance		Interest Earnest/Paid			Yield/Rate		Average Outstanding Balance		Interest Earnest/Paid			Yield/Rate
	(Dollars in Thousands)
Assets
Interest-earning Assets:
Loans receivable	$	319,149	$	7,481		4.69	%	$	289,656	$	7,568		5.23	%	$	296,156	$	15,126		5.11	%
Investment and mortgage-backed securities	256,274		3,495			2.73	%	257,690		3,710			2.88	%	256,853		7,273			2.83	%
Federal funds	18,450		10			0.11	%	30,118		13			0.09	%	22,178		22			0.10	%
Equity securities	4,565		46			2.02	%	7,236		140			3.87	%	6,929		344			4.96	%
Total interest-earning assets	598,438		11,032			3.69	%	584,700		11,431			3.91	%	582,116		22,765			3.91	%
Non interest-earning Assets:
Cash and due from banks	11,195							11,701							11,154
Other assets	85,678							81,458							82,691
Total assets	$	695,311						$	677,859						$	675,961
Liabilities and Stockholders’ Equity
Interest-bearing Liabilities:
Money market deposits	$	174,886	$	298		0.34	%	$	184,530	$	402		0.44	%	$	176,382	$	751		0.43	%
Savings accounts	122,663		161			0.26	%	107,610		145			0.27	%	111,387		303			0.27	%
Interest-bearing checking	74,896		29			0.08	%	67,037		27			0.08	%	67,322		55			0.08	%
Time deposits	140,272		753			1.08	%	137,301		834			1.22	%	137,250		1,630			1.19	%
Borrowings	2,320		42			3.65	%	11,114		235			4.25	%	10,481		431			4.41	%
Notes payable	896		14			3.15	%	160		3			3.77	%	109		3			2.75	%
Total interest-bearing liabilities	515,933		1,297			0.51	%	507,752		1,646			0.65	%	502,931		3,173			0.63	%
Non-interest-bearing Liabilities:
Demand deposits	74,287							69,582							72,288
Other liabilities	11,085							11,520							10,728
Total liabilities	$	601,305						$	588,854						$	585,947
Stockholders’ equity	94,006							89,005							90,014
Total liabilities and stockholders’ equity	$	695,311						$	677,859						$	675,961
Net Interest Income			$	9,735						$	9,785						$	19,592
Net Interest Spread						3.18	%						3.26	%						3.28	%
Net Interest Earning Assets	$	82,505						$	76,948						$	79,185
Net yield on average interest-earning assets			3.25		%					3.35		%					3.37		%
Average interest-earning assets to average interest-bearing liabilities			115.99		%					115.15		%					115.74		%

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RESULTS OF OPERATIONS

General.  Net income for the three months ended June 30, 2013 was $1.5 million compared to $1.9 million for the three months ended June 30, 2012.  For the three months ended June 30, 2013, diluted net income per share was $0.21 as compared with diluted net income per share of $0.28 for the three months ended June 30, 2012.  Net income for the six months ended June 30, 2013 was $3.4 million compared to $3.9 million for the six months ended June 30, 2012. The decrease in net income for both the three month and six month periods is primarily the result of an increase in non-interest expense partially offset by an increase in investment gains, an increase in non-interest income, a decrease in the provision for loan losses and a decrease in the provision for income taxes.

Net income from operations for the three months ended June 30, 2013, excluding the non-cash charges and benefits to earnings, as referenced in the table below, was $1.3 million or $0.18 diluted net income per share compared to net income from operations for the three months ended June 30, 2012 of $1.7 million or $0.25 diluted net income per share. Net income from operations for the six months ended June 30, 2013, excluding the non-cash charges and benefits to earnings, as referenced in the table below, was $2.8 million or $0.41 diluted net income per share. This compares to net income from operations for the six months ended June 30, 2012 of $3.4 million or $0.50 diluted net income per share. The decrease in operating earnings during the six months ended June 30, 2013 as compared with the same period last year was primarily the result of an increase in non-interest expense supporting the continued investment in and growth of the Company's insurance and other non-banking subsidiaries. Partially offsetting the increase in non-interest expense was an increase in non-interest income, an increase in net investment gains, a decrease in the provision for loan losses and a decrease in the provision for income taxes.  The table below summarizes the Company’s operating results excluding these cumulative non-cash benefits related to the change in fair value of trading securities in each period.

Reported Results and Operating Results/Non-Gaap

(excluding non-cash gains and losses recognized under the fair value option)

(All amounts in thousands except net income per diluted share)

	Three Months Ending June 30, 2013			Three Months Ending June 30, 2012
Net income attributable to Oneida Financial Corp.	$	1,492		$	1,899
Less:
Change in fair value of investments	(305		)	(241		)
Income tax effect	82			63
Operating results attributable to Oneida Financial Corp.	$	1,269		$	1,721
Reported net income per diluted share	$	0.21		$	0.28
Operating net income per diluted share	$	0.18		$	0.25

	Six Months Ending June 30, 2013			Six Months Ending June 30, 2012
Net income attributable to Oneida Financial Corp.	$	3,442		$	3,900
Less:
Change in fair value of investments	(885		)	(677		)
Income tax effect	228			176
Operating results attributable to Oneida Financial Corp.	$	2,785		$	3,399
Reported net income per diluted share	$	0.49		$	0.57
Operating net income per diluted share	$	0.41		$	0.50

     The change in fair value of investments for the six months ended June 30, 2013 in the table above excludes $239,000 in gains received upon the sale of certain trading assets during the first quarter 2013.

We believe these non-GAAP financial measures provide a meaningful comparison of the underlying operational performance of our business, and facilitate investors’ assessments of business and performance trends in comparison to others in the financial services industry.  In addition, we believe this alternative presentation of these items enables management to perform a more effective evaluation and comparison of our results and to assess overall performance of our business in relation to our ongoing operations.

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Interest and Dividend Income.  Interest and dividend income decreased by $186,000, or 3.2%, to $5.6 million for the three months ended June 30, 2013 from $5.7 million for the three months ended June 30, 2012.  Interest and fees on loans decreased by $6,000 for the three months ended June 30, 2013 as compared with the same period in 2012.  Interest and dividend income on mortgage-backed and other investment securities decreased $179,000 to $1.8 million for the three months ended June 30, 2013 from $2.0 million for the three months ended June 30, 2012.  Interest income earned on federal funds sold decreased $1,000 during the three months ended June 30, 2013 as compared with the three months ended June 30, 2012.

For the six months ended June 30, 2013, interest and dividend income decreased by $399,000, or 3.5%, to $11.0 million from $11.4 million for the six months ended June 30, 2012. Interest and fees on loans decreased by $87,000 for the six months ended June 30, 2013 as compared with the same period in 2012. Interest and dividend income on mortgage-backed and other investment securities decreased $309,000 for the six months ended June 30, 2013 as compared with the six months ended June 30, 2012.

For the three months ended June 30, 2013, the decrease in income on loans resulted from a decrease of 52 basis points in the average yield on loans to 4.66% from 5.18% offset by an increase of $32.3 million in the average balance of loans to $322.6 million in the second quarter of 2013 from $290.3 million in the second quarter of 2012.  At June 30, 2013, net loans receivable were $324.7 million as compared with $293.9 million at June 30, 2012, reflecting an increase of 10.5%. During 2012, the Bank began retaining a portion of one-to-four family residential mortgages with maturities less than 15 years. Residential mortgages increased $19.5 million from June 30, 2012 to June 30, 2013. The decrease in the average yield on loans is a result of the continued low market interest rate environment resulting in lower yields earned on new loans and variable rate loans.  For the six months ended June 30, 2013, the decrease in income on loans resulted from a decrease of 54 basis points in the average yield on loans to 4.69% from 5.23% partially offset by an increase of $29.4 million in the average balance of loans to $319.1 million from $289.7 million for the six months ended June 30, 2012.

The decrease in interest income from investment and mortgage-backed securities was the result of a decrease of 13 basis points in the average yield earned to 2.70% from 2.83% as well as a decrease of $6.3 million in the average balance of investment and mortgage-backed securities to $262.8 million in the second quarter of 2013 from $269.1 million in the second quarter of 2012. For the six months ended June 30, 2013, interest on investment and mortgage-backed securities decreased $215,000 as compared with the same period in 2012 due to a decrease in the average yield of 15 basis points and a decrease in the average balance of $1.4 million. The decrease in average yield is the result of lower market interest rates.  The decrease in the average balance of investment and mortgage-backed securities is due to the decision to retain more short term residential mortgages in portfolio as a reinvestment alternative.

Interest income on federal funds sold decreased as a result of a decrease in the average balance of federal funds sold to $20.8 million during the second quarter of 2013 as compared with $26.2 million during the second quarter of 2012 partially offset by an increase in average yield of 1 basis point. For the six months ended June 30, 2013, interest income on federal funds sold decreased $3,000 as compared with the same period in 2012 due to a decrease in the average balance of $11.7 million partially offset by an increase in the average yield of 2 basis points.   

Income from equity securities decreased due to a decrease in the average balance to $4.0 million for the three months ended June 30, 2013 from $7.5 million for the three months ended June 30, 2012 as well as a decrease in the average yield of 154 basis points.   For the six months ended June 30, 2013, interest income on equity securities decreased $94,000 as a result of both a decrease in the average balance of $2.6 million and a decrease in the average yield of 185 basis points. The decrease in the average balance and average yield was the result of a called preferred equity security during the fourth quarter of 2012 and sale during the first quarter of 2013.

Interest Expense.  Interest expense decreased $164,000, or 20.0%, to $656,000 for the three months ended June 30, 2013 from $820,000 for the three months ended June 30, 2012.  The decrease in interest expense was primarily due to a decrease in interest paid on deposit accounts during the second quarter of 2013 of $65,000, decreasing to $636,000 from $701,000 during the second quarter of 2012.  In addition, borrowing expense decreased to $14,000 for the three months ended June 30, 2013 compared with $118,000 for the three months ended June 30, 2012.  Interest expense decreased $349,000, or 21.2% to $1.3 million for the six months ended June 30, 2013 from $1.6 million for the six months ended June 30, 2012.

The decrease in interest expense paid on deposits was primarily due to a decrease in the average cost of deposits.  Core deposits, consisting of money market accounts, savings accounts and interest-bearing checking accounts, experienced an increase in the average balance of $15.3 million, or 4.2%, to $380.8 million at an average cost of 0.27% during the second quarter of 2013 from $365.5 million at an average cost of 0.32% during the second quarter of 2012.  During the same period the average balance of time deposits increased $4.8 million, or 3.5%, to $141.9 million in the second quarter of 2013 from $137.1 million during the

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second quarter of 2012 and the average rate paid on time deposits decreased 13 basis points. For the six months ended June 30, 2013, the average cost of deposits was 0.49% as compared with 0.57% for the six month period in 2012. In addition, the average balance of deposits increased $16.2 million for the six months ended June 30, 2013 as compared with the six months ended June 30, 2012. Total deposits increased $33.1 million from June 30, 2012, representing an increase of $34.6 million in retail deposits partially offset by a decrease of $1.5 million in municipal deposits.

The decrease in borrowing expense for the second quarter 2013 as compared to the second quarter 2012 was due to a decrease in the average balance of borrowings outstanding in the June 30, 2013 period to $1.8 million as compared with $11.2 million during the June 30, 2012 period as well as a 113 basis point decrease in the average rate paid on borrowed funds to 3.10% for the 2013 period. For the six months ended June 30, 2013, interest expense on borrowings decreased $193,000 due to a decrease in the average outstanding balance of borrowings to $2.3 million as compared to $11.1 million for the six month period 2012. The decrease in borrowings reflects our decision not to renew the FHLB advances that matured during 2012 and 2013.

Provision for Loan Losses.  The total provision for loan losses was $100,000 for the three months ended June 30, 2013 as compared to a provision of $150,000 for the three months ended June 30, 2012. The total provision for loan losses was $200,000 for the six months ended June 30, 2013 as compared to a provision of $300,000 for the six months ended June 30, 2012. Oneida Savings Bank establishes provisions for loan losses, which are charged to operations, in order to maintain the allowance for loan losses at a level deemed appropriate to absorb probable incurred credit losses.  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. Management continues to monitor the adequacy of the allowance for loan losses given the risk assessment of the loan portfolio and current economic conditions making appropriate provisions for loan losses on a quarterly basis.

The provision for loan losses made in the second quarter 2013 reflects the increase in the loan portfolio during the year. Loans individually evaluated for impairment totaled $1.8 million at June 30, 2013 and had an allocated allowance for loan loss reserve of $259,000. Nonperforming loans totaled $768,000 or 0.23% of total loans at June 30, 2013 compared with $712,000 or 0.24% of total loans at June 30, 2012.   Net charge-off activity for the six months ended June 30, 2013 was $34,000 as compared with $694,000 in net charge-offs during the six months ended June 30, 2012. The balance of the allowance for loan losses was $2.9 million or 0.91% of loans receivable at June 30, 2013 compared with $2.5 million or 0.85% of loans receivable at June 30, 2012. The increase in the balance of the allowance for loan losses to June 30, 2013 from June 30, 2012 is primarily attributable to the charge-off in June 2012 of a specifically reserved, impaired commercial real estate loan with a principal balance of $836,000.

Investment Gains (losses).  Investment gains (losses) consists of changes in fair value of trading securities, net gains on sales of securities as well as impairment losses recognized in earnings.

We have identified the preferred and common equity securities we hold in the investment portfolio as trading securities and as such the change in fair value of these securities is reflected as a non-cash adjustment through the income statement.  For the three months ended June 30, 2013 the market value of our trading securities increased $305,000 as compared with an increase of $241,000 in the 2012 period. For the six months ended June 30, 2013, the market value of our trading securities increased $1.2 million as compared with an increase of $677,000 in the 2012 period. The increase in market value of the Company's trading securities during the six months of 2013 includes $239,000 in gains received upon the sale of $2.5 million in certain trading assets during the period which is reflective of the increase in broader equity markets during the period.  

During the second quarter of 2013 the Company realized $263,000 of investment gains. This compares with realized gains of $60,000 during the three months ended June 30, 2012.  For the six months ended June 30, 2013 realized investment gains totaled $267,000 as compared with $157,000 for the same period in 2012.

Non-Interest Income.  Non-interest income increased by $709,000, or 10.8%, to $7.2 million for the three months ended June 30, 2013 from $6.5 million for the three months ended June 30, 2012.  For the six months ended June 30, 2013, non-interest income increased by $1.1 million or 8.3%, to $14.5 million from $13.4 million for the six months ended June 30, 2012.

Revenue derived from commissions and fees on sales of non-banking products increased $578,000, or 10.7%, to $6.0 million during the three months ended June 30, 2013 as compared with $5.4 million during the three months ended June 30, 2012. Revenue derived from non-banking subsidiaries increased $1.0 million or 9.6%, to $12.0 million for the six months ended June 30, 2013 as compared with $10.9 million for the six months ended June 30, 2012. The increase was primarily due to the revenue resulting from the previously announced acquisition of a Schenectady, New York based insurance agency which was merged into the Company's insurance subsidiary effective December 31, 2012.

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Deposit account service fees increased slightly to $704,000 during the three months ended June 30, 2013 from $642,000 during the three months ended June 30, 2012.  For the six months ended June 30, 2013, deposit account service fees increased $109,000 as compared with the same period in 2012.

The increases were partially offset by a decrease in loan sale and servicing income, which totaled $391,000 for the six months ended June 30, 2013 as compared with $456,000 for the six months ended June 30, 2012. The Bank sells substantially all of its fixed-rate residential mortgage loan originations with maturities exceeding 15 years on a servicing retained basis in the secondary market. These loan sales help the bank provide its customers with a fixed rate loan product while controlling interest rate risk. The volume of fixed-rate residential mortgage loan sales has decreased in the current quarter as compared with the 2012 period due to the prevalence of originations by the Bank of fixed rate loans with maturities of 15 years or less.

Non-Interest Expense.  Non-interest expense increased by $1.6 million, or 17.8%, to $10.6 million for the three months ended June 30, 2013 from $9.0 million for the three months ended June 30, 2012.  For the six months ended June 30, 2013, non-interest expense increased by $2.4 million, or 13.0%, to $20.8 million as compared with $18.4 million for the same period in 2012. The increase was primarily due to an increase in operating expenses associated with our insurance agency and consulting subsidiaries associated with commissions paid concurrent with revenue increases.

Salaries, wages and other compensation paid to the employees of Oneida Financial Corp. during the three months ended June 30, 2013 was $6.8 million, an increase of $960,000, or 16.5%, from the second quarter of 2012.  Compensation expense for the six months ended June 30, 2013 was $13.4 million, an increase of $1.5 million, or 12.6%, as compared with compensation expense of $11.9 million for the same period in 2012. The increase in compensation expense was primarily the result of the increase in sales of insurance and other non-banking products through our subsidiaries resulting in an increase in commissions paid and employee benefit expense as well as the addition of the insurance acquisition effective December 31, 2012.

Building occupancy and equipment expense increased $209,000, or 18.5%, to $1.3 million for the three months ended June 30, 2013 as compared to $1.1 million during the three months ended June 30, 2012. For the six months ended June 30, 2013, building and occupancy expense increased $288,000, or 12.3%, to $2.6 million as compared with $2.3 million for the same period in 2012.

Other operating expenses increased $369,000, or 17.8%, to $2.4 million for the three months ended June 30, 2013 as compared to $2.1 million during the three months ended June 30, 2012. For the six months ended June 30, 2013, other operating expenses increased $506,000, or 12.0%, to $4.7 million as compared to $4.2 million for the same period in 2012.

Provision for Income Taxes.  Provision for income taxes was $548,000 for the three months ended June 30, 2013, a decrease of $127,000 from the second quarter 2012 income tax provision of $675,000.  The decrease in income tax provision reflects the decrease in net income for the three months ended June 30, 2013. For the six months ended June 30, 2013, the provision for income taxes was $1.2 million, a decrease of $175,000 from $1.4 million for the same period in 2012. The effective tax rate was 25.7% during the first six months of 2013 as compared with an effective tax rate of 25.9% for the same time period in 2012. The change in the effective tax rates for the specified periods is due to changes in the Bank’s tax exempt and tax preferred investment income and the overall tax rate in effect for the year.

Liquidity and Capital Resources.   Our primary source of funds are deposits; FHLB borrowings; proceeds from the principal and interest payments on loans and mortgage-related debt and equity securities; and to a lesser extent, proceeds from the sale of fixed rate residential real estate loans and additional borrowings when and as needed.  While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit outflows, mortgage prepayments, mortgage loan sales and borrowings are greatly influenced by general interest rates, economic conditions and competition.

Our primary investing activities are the origination of residential mortgages, commercial loans and consumer loans, as well as the purchase of mortgage-backed and other debt securities. During the second quarter of 2013, loan originations totaled $26.6 million compared to $37.1 million during the second quarter of 2012. The purchases of securities available-for-sale totaled $27.4 million during the second quarter of 2013 as compared to $39.9 million during the second quarter of 2012. The purchases of investment securities were funded with cash and cash equivalents.

Cash flow from operations, deposit growth, as well as the sales, maturity and principal payments received on loans and investment securities were used to fund the investing activities described above. If Oneida Savings Bank requires funds beyond its ability to generate them internally, it has the ability to borrow funds from the FHLB.  Oneida Savings Bank may borrow from the FHLB under a blanket agreement which assigns all investments in FHLB stock as well as qualifying first mortgage loans equal to 150% of the outstanding balance as collateral to secure the amounts borrowed.  Additionally, we also maintain lines of credit

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with various other commercial banks as an additional source of short-term borrowing that provides funding sources for lending, liquidity and asset and liability management as needed.

In the normal course of business, the Company extends commitments to originate residential and commercial loans and other consumer loans. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since the Company does not expect all of the commitments to be funded, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. Collateral may be obtained based upon management’s assessment of the customer’s creditworthiness. Commitments to extend credit may be written on a fixed rate basis exposing the Company to interest rate risk given the possibility that market rates may change between the commitment date and the actual extension of credit. As of June 30, 2013, the Company had outstanding commitments to originate loans of approximately $11.1 million, which generally have an expiration period of less than 120 days. Commitments to sell residential mortgages amounted to $6.1 million at June 30, 2013 for loan closing pending and are to be delivered on a best effort basis.

The Company extends credit to consumer and commercial customers, up to a specified amount, through lines of credit. The borrower is able to draw on these lines as needed, thus the funding requirements are generally unpredictable. Unused lines of credit amounted to $46.2 million at June 30, 2013 and generally have an expiration period of less than one year. It is anticipated that there will be sufficient funds available to meet the current loan commitments and other obligations through the sources described above. The credit risk involved in issuing these commitments is essentially the same as that involved in extending loans to customers and is limited to the contractual notional amount of those instruments.

Cash, interest-earning demand accounts at correspondent banks, federal funds sold, and other short-term investments are the Company’s most liquid assets. The level of these assets are monitored daily and are dependent on operating, financing, lending and investing activities during any given period. Excess short-term liquidity is usually invested in overnight federal funds sold. In the event that funds beyond those generated internally are required due to higher expected loan commitment fundings, deposit outflows or the amount of debt being called, additional sources of funds are available through the use of repurchase agreements, the sale of loans or investments or the Company’s various lines of credit. As of June 30, 2013 the total of cash, interest-earning demand accounts and federal funds sold was $11.6 million.

At June 30, 2013, the Bank exceeded all regulatory capital requirements. The current requirements and the actual levels for the Bank at June 30, 2013 and December 31, 2012 are detailed in the following tables.

	Actual				For Capital Adequacy Purposes				Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of June 30, 2013:
Total Capital
(to Risk Weighted Assets)	$	67,976	15.83	%	$	34,342	8	%	$	42,928	10	%
Tier I Capital
(to Risk Weighted Assets)	$	65,034	15.15	%	$	17,171	4	%	$	27,757	6	%
Tier I Capital
(to Average Assets)	$	65,034	9.56	%	$	27,205	4	%	$	34,006	5	%

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	Actual				For Capital Adequacy Purposes				Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
As of December 31, 2012:
Total Capital
(to Risk Weighted Assets)	$	63,591	15.16	%	$	33,552	8	%	$	41,940	10	%
Tier I Capital
(to Risk Weighted Assets)	$	60,815	14.50	%	$	16,776	4	%	$	25,164	6	%
Tier I Capital
(to Average Assets)	$	60,815	9.33	%	$	26,064	4	%	$	32,580	5	%

On July 2, 2013, the Federal Reserve Board approved final rules that implement changes to the regulatory capital framework for financial institutions. The new rules include, among other things, the following elements:

1) a new regulatory capital component referred to as "Common Equity Tier 1 capital", and threshold ratios for this new component;

2) a "capital conservation buffer" above the minimum required level of Common Equity Tier 1 capital, and restrictions on dividend payments, share buybacks, and certain discretionary bonus payments to executive officers if a capital conservation buffer of at least 2.5% of risk-weighted assets is not achieved;

3) the inclusion of accumulated other comprehensive income (AOCI) in Tier 1 capital, although banks with less than $250 billion in total assets will be allowed a one-time opt-out from this requirement;

4) additional constraints on the inclusion of minority interest, mortgage servicing assets, and deferred tax assets in regulatory capital;

5) increased risk-weightings for certain assets, including equity exposures, certain acquisition/development and construction loans, and certain loans that are more than 90-days past due or are on non-accrual status; and

6) an increase in minimum required risk-based capital ratios over a phase-in period, and an increase in the threshold for a "well-capitalized" classification for the Tier 1 Risk-Based Capital Ratio.

These changes will be phased in beginning January 2015, and our preliminary estimates indicate we are well-positioned to absorb the impact without constraining organic growth plans, although no assurance can be provided in that regard.

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ONEIDA FINANCIAL CORP. 

SELECTED FINANCIAL RATIOS

At and for the Three and Six Months Ended June 30, 2013 and 2012 (unaudited)

(Annualized where appropriate)

	Three Months Ending June 30,				Six Months Ending June 30,
	2013		2012		2013		2012
Performance Ratios:
Return on average assets	0.84	%	1.11	%	0.99	%	1.15	%
Return on average equity	6.33	%	8.50	%	7.32	%	8.76	%
Return on average tangible equity	8.85	%	11.77	%	10.27	%	12.16	%
Interest rate spread	3.14	%	3.23	%	3.18	%	3.26	%
Net interest margin	3.21	%	3.32	%	3.25	%	3.35	%
Efficiency Ratio	86.11	%	78.12	%	84.78	%	78.81	%
Non-interest income to average total assets	4.10	%	3.80	%	4.16	%	3.94	%
Non-interest expense to average total assets	5.98	%	5.26	%	5.97	%	5.43	%
Average interest-earning assets as a ratio to average interest-bearing liabilities	116.14	%	115.39	%	115.99	%	115.15	%
Asset Quality Ratios:
Non-performing assets to total assets	0.27	%	0.67	%	0.27	%	0.67	%
Non-performing loans to total loans	0.23	%	0.24	%	0.23	%	0.24	%
Net charge-offs to average loans	0.01	%	0.22	%	0.01	%	0.24	%
Allowance for loan losses to non-performing loans	383.57	%	351.97	%	383.57	%	351.97	%
Allowance for loan losses to loans receivable	0.91	%	0.85	%	0.91	%	0.85	%
Capital Ratios:
Average equity to average total assets	13.34	%	13.00	%	13.52	%	13.13	%
Equity to total assets (end of period)	13.05	%	13.37	%	13.05	%	13.37	%
Tangible equity to tangible assets (end of period)	9.58	%	10.08	%	9.58	%	10.08	%

ITEM 3. Quantitative and Qualitative Disclosure About Market Risk

Various forms of market risk are inherent in the business of the Bank including concentration risk, liquidity management, credit risk and collateral risk among others.  However, the Bank’s most significant form of market risk is interest rate risk, as the majority of the Bank’s assets and liabilities are sensitive to changes in interest rates.  Ongoing monitoring and management of this risk is an important component of the Company’s asset and liability management process. The Bank’s interest rate risk management program focuses primarily on evaluating and managing the composition of the Bank’s assets and liabilities in the context of various interest rate scenarios.  Factors beyond Management’s control, such as market interest rates and competition, also have an impact on interest income and expense.  Based on the asset-liability composition at June 30, 2013, in a rising interest rate environment, Management would expect that the Company’s cost of shorter-term deposits might rise faster than its earnings on longer-term loans and investments.  At June 30, 2013, the Bank had $94.7 million in time deposits scheduled to mature within one year. At that date, the average maturity of our investment portfolio was 5.5 years, and fixed rate residential mortgage loans totaled $61.1 million representing 18.7% of our loan portfolio. Conversely, as interest rates decrease, the prepayment of principal on loans and investments tends to increase, causing the Company to invest funds in a lower rate environment.  To mitigate the effect of interest rate changes, Management has taken steps to emphasize core deposits, monitor certificate of deposit rates to better match asset changes, and sell substantially all newly originated longer term fixed rate loans in the secondary market without recourse.  Management believes this approach will help reduce the exposure to interest rate fluctuations and enhance long-term profitability.

For a discussion of the Company’s asset and liability management policies as well as the potential impact of interest rate changes upon the earnings of the Company, see “Management’s Discussion and Analysis of Financial Condition and Results

46

of Operations” in the Company’s 2012 Annual Report to Stockholders.  There has been no material change in the Company’s interest rate risk profile since December 31, 2012.

ITEM 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report.   Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the period covered by this quarterly report, the Company’s disclosure controls and procedures are effective to ensure that information to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods or submits specified in the Securities and Exchange Commission’s rules and forms.  There has been no change in the Company’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ONEIDA FINANCIAL CORP.

AND SUBSIDIARIES

Part II — Other Information

Item 1 Legal Proceedings

Much of the Bank’s market area is included in the 270,000-acre land claim of the Oneida Indian Nation (“Oneidas”).  The land claim area is held primarily by private persons.   Over 15 years ago the United States Supreme Court ruled in favor of the Oneidas in a lawsuit which management believes was intended to encourage the State of New York to negotiate an equitable settlement in a land dispute that has existed over 200 years.

In June 1998, the United States Justice Department intervened in the action on behalf of the Oneidas against Madison County and Oneida County in New York State.  In September 1998, an U.S. District Court removed a stay of litigation, having been in place since the late 1980’s pending settlement negotiations.  In December 1998, both the Oneidas and the U.S. Justice Department filed motions to amend the long outstanding claim against the State of New York.  The motion attempts to include in the claim, various named and 20,000 unnamed additional defendants, who own real property in parts of Madison and Oneida counties, thereby including the additional defendants in the original suit.  The U.S. District Court granted the motions to add as a defendant the State of New York, but denied the motions to add the private landowners. Neither the Bank nor the Company is a named defendant in the motion.  The court further rejected as not being viable the remedies of ejectment and/or of monetary damages against private landowners.  In January 2001, amended complaints were served by the Oneidas and the United States which seek to eject the Counties of Madison and Oneida from lands owned by the counties, and the Oneidas also seek a declaration that they have the right to possess all land within the land claim area. In June 2001, the court determined that certain land purchased by the Oneidas in 1997 and 1998 are exempt from real estate taxes, accepting the Oneidas argument that the acquired parcels lie within the boundaries of the “reservation” established in 1974 by the Federal Government.  The State of New York, Counties of Madison and Oneida and the City of Sherrill appealed the court’s decision with a court date of March 2002.  In February 2002, a joint statement was issued by the Oneidas, State of New York, and the counties of Madison and Oneida, indicating that the framework for a settlement had been agreed upon subject to the approval by the State legislature and the Federal Government. The Oneidas of Wisconsin and the Stockbridge-Munsee Band of the Mohican Indians have commenced separate actions in the United State District Court for the Northern District of New York to dispute and interrupt any settlement pending.  In July 2003, the United States Court of Appeals affirmed the decision of the lower court against the City of Sherrill but appeals continue relative to the decision against the Counties of Madison and Oneida. In January 2005 the United State Supreme Court heard the appeal brought forward by the City of Sherrill against the Oneidas arguing that the acquisition of real property by the Oneidas within the land claim area does not return the property to sovereign status. Therefore, the City of Sherrill contends that the property is subject to the payment of real property taxes or reverts to the ownership of the taxing authority if assessed property taxes are not paid. The United States Supreme Court filed their decision in March 2005, ruling in favor of the City of Sherrill.  The Oneida Indian Nation is attempting to put all land acquired to date in a federal land trust.  All parties involved continue to pursue all legal options available.

To date neither the original claim nor the motion to amend has had an adverse impact on the local economy or real property values.  In addition, title insurance companies continue to underwrite policies in the land claim area with no change in premiums or underwriting standards.  Oneida Savings Bank requires title insurance on all residential real estate loans, excluding home equity loans.  Both the State of New York and the Oneidas have indicated in their respective communications that individual landowners will not be adversely affected by the ongoing litigation.  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 1a Risk Factors

There has not been any material change in the risk factors disclosure from that contained in the Company’s Form 10-K for the fiscal year ended December 31, 2012.

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds

(a)  Not applicable

(b)  Not applicable

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(c) There were no shares repurchased by the Company during the three months ended June 30, 2013.

Item 3 Defaults upon Senior Securities

Not applicable.

Item 4 Mine Safety Disclosures

Not applicable

Item 5 Other Information

None

Item 6 Exhibits

(a) All required exhibits are included in Part I under Consolidated Financial Statements, Notes to Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations, and are incorporated by reference, herein.

Exhibits

Exhibit 31.1 — Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 — Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes — Oxley Act of 2002

Exhibit 32.1 — Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101* - The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Condition, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows, and (vi) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text and in detail.

 _________________________________________________

*Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.

		ONEIDA FINANCIAL CORP.
Date:	August 14, 2013	By:	/s/ Michael R. Kallet
		Michael R. Kallet
		President and Chief Executive Officer
Date:	August 14, 2013	By:	/s/ Eric E. Stickels
		Eric E. Stickels
		Executive Vice President and Chief Financial Officer

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