Alliance Financial Announces First Quarter Earnings

SYRACUSE, N.Y., April 13, 2011 /PRNewswire/ -- Alliance Financial Corporation ("Alliance" or the "Company") (NasdaqGM: ALNC), the holding company for Alliance Bank, N.A., announced today a 20.3% increase in net income for the quarter ended March 31, 2011 compared to the first quarter of 2010.  Net income was $3.3 million or $0.70 per diluted common share in the first quarter of 2011, compared with $2.7 million or $0.59 per diluted common share in the year-ago quarter. Net income increased 18.4% compared to the fourth quarter of 2010.  

Net interest income was nearly unchanged in the first quarter compared to the first quarter of 2010, while the provision for credit losses dropped sharply on lower net charge-offs and continuing strong credit metrics.  The provision for credit losses was $200,000 in the first quarter, compared to $1.1 million in the year-ago quarter and $800,000 in the fourth quarter of 2010.

Jack H. Webb, President and CEO of Alliance said, "Throughout the financial crisis our asset quality metrics have compared very favorably to peer averages.  Those metrics improved further in the first quarter, with net charge-offs at the lowest level in more than four years and the loan loss provision at the lowest level since the fourth quarter of 2005.  With net interest income and net operating expenses remaining relatively steady, along with our ability to reduce our provision for credit losses resulted in first quarter net income that was the second highest quarterly net income in our history."

Webb added, "Current economic conditions continue to suppress loan demand; however, we continue to see positive results from the execution of our commercial lending strategy, with originations of $16.5 million in the first quarter nearly double the amount we originated in the first quarter of 2010. Our strong funding base, with deposits at a record high at the end of the first quarter, puts us in a strong position to respond to the credit needs of our market as the economy improves."

Balance Sheet Highlights

Total assets were $1.5 billion at March 31, 2011, consistent with the levels at December 31, 2010.  Securities available-for-sale increased $39.1 million to $453.5 million at the end of the first quarter.  Total loans and leases (net of unearned income) decreased $20.1 million to $878.4 million at March 31, 2011.  This decrease in loan balances resulted from a combination of weak loan demand across all loan categories, an exceptionally competitive lending environment, seasonal factors, and the continued amortization of our lease portfolio.  Loan origination volumes in the first quarter increased $4.6 million or 10.0% compared to the first quarter of 2010 but were $41.6 million or 44.9% lower than the fourth quarter of 2010.    

Commercial loans and mortgages decreased $3.9 million or 1.6% in the first quarter and totaled $246.0 million at March 31, 2011.  Originations of commercial loans and mortgages in the first quarter (excluding lines of credit) totaled $16.5 million, compared with $38.5 million in the fourth quarter of 2010 and $8.9 million in the year-ago quarter.  The decrease in originations compared with the fourth quarter reflects the effect of seasonal conditions and soft demand as well as an exceptionally high level of loan closings in the fourth quarter of 2010.          

Residential mortgages outstanding decreased $4.6 million or 1.4% in the first quarter.  Originations of residential mortgages totaled $18.2 million in the first quarter of 2011, compared with $38.6 million in the fourth quarter of 2010 and $19.3 million in the year-ago quarter.            

Indirect auto loan balances were $170.2 million at the end of the first quarter, which was a decrease of $5.9 million from the end of the fourth quarter of 2010.  The Company originated $15.6 million of indirect auto loans in the first quarter, compared with $14.5 million in the fourth quarter of 2010 and $17.2 million in the year-ago quarter.  Alliance originates auto loans through a network of reputable, well established automobile dealers located in Central and Western New York.  Applications received through the Company's indirect lending program are subject to the same comprehensive underwriting criteria and procedures as employed in its direct lending programs.  

Leases (net of unearned income) decreased $4.5 million in the first quarter as a result of the Company's previously announced decision to cease new lease originations.        

The Company's investment securities portfolio totaled $453.5 million at March 31, 2011, compared with $414.4 million at December 31, 2010.  The Company's portfolio is comprised entirely of investment grade securities, the majority of which are rated "AAA" by one or more of the nationally recognized rating agencies. The breakdown of the securities portfolio at March 31, 2011 was 80% government-sponsored entity guaranteed mortgage-backed securities, 18% municipal securities and 1% obligations of U.S. government-sponsored corporations.  Mortgage-backed securities, which totaled $363.4 million at March 31, 2011, are comprised primarily of pass-through securities backed by conventional residential mortgages and guaranteed by Fannie-Mae, Freddie-Mac or Ginnie Mae, which in turn are backed by the United States government. The Company's municipal securities portfolio, which totaled $81.2 million at the end of the first quarter, is primarily comprised of highly rated general obligation bonds issued by local municipalities in New York State.

Deposits increased $28.8 million or 2.5% to an all-time high in the first quarter, and were $1.2 billion at March 31, 2011. Transaction accounts (checking, savings, and money market) increased $28.4 million due primarily to higher balances for existing municipal deposit customers.  Low cost transaction accounts comprised 70.6% of total deposits at the end of the first quarter, compared with 69.9% at December 31, 2010 and 68.3% at March 31, 2010.

Shareholders' equity was $135.0 million at March 31, 2011, compared with $133.1 million at December 31, 2010.  Net income for the quarter increased shareholders' equity by $3.3 million and was partially offset by common stock dividends declared of $1.4 million or $0.30 per common share.  Unrealized gains on securities available for sale, net of taxes, decreased $105,000 in the first quarter due to changes in market interest rates and other market conditions.    

The Company's Tier 1 leverage ratio was 8.36% and its total risk-based capital ratio was 15.03% at the end of the first quarter.  The Company's tangible common equity capital ratio (a non-GAAP financial measure) was 6.70% at March 31, 2011.

Asset Quality and the Provision for Credit Losses

Delinquent loans and leases (including non-performing) decreased to $15.5 million at March 31, 2011, compared to $16.3 million at December 31, 2010 and $16.9 million at March 31, 2010.  Approximately 42% of all delinquent loans and leases at the end of the first quarter were past due less than sixty days, compared with 41% at December 31, 2010 and 38% at March 31, 2010.  

Nonperforming assets were $8.7 million or 0.59% of total assets at March 31, 2011, compared with $9.1 million or 0.63% of total assets at December 31, 2010 and $10.0 million or 0.69% of total assets at March 31, 2010. Included in nonperforming assets at the end of the first quarter are nonperforming loans and leases totaling $8.1 million, compared with $8.5 million and $9.6 million at December 31, 2010 and March 31, 2010, respectively.  

Conventional residential mortgages comprised $3.5 million (46 loans) or 44% of nonperforming loans and leases at March 31, 2011.  Nonperforming commercial loans and mortgages totaled $2.9 million (28 loans) or 36% of nonperforming loans and leases and nonperforming leases totaled $635,000 (16 leases) or 8% of nonperforming loans and leases at the end of the first quarter.  

The provision for credit losses in the first quarter was down sharply from the year-ago period on the Company's strong asset quality metrics, including lower charge-offs in the current and most recent quarters which are factors considered in management's quarterly estimate of loan loss provisions and the adequacy of the allowance for credit losses.  The provision expense was $200,000 in the first quarter compared to $1.1 million in the year-ago period and $800,000 in the fourth quarter of 2010.  Net charge-offs were $205,000 in the first quarter, compared with $792,000 in the year-ago period and $583,000 in the fourth quarter of 2010.  

Net charge-offs, annualized, equaled 0.09% of average loans and leases in the first quarter, compared to 0.35%, in the year-ago period and 0.26% in the fourth quarter of 2010.  The provision for credit losses as a percentage of net charge-offs was 97.6% in the first quarter, compared to 138.3% in the year-ago quarter and 137.2% in the fourth quarter of 2010.

The allowance for credit losses was $10.7 million at March 31, 2011, compared with $10.7 million at December 31, 2010 and $9.7 million at March 31, 2010.  The ratio of the allowance for credit losses to total loans and leases was 1.22% at March 31, 2011, compared with 1.19% at December 31, 2010 and 1.07% at March 31, 2010.  The ratio of the allowance for credit losses to nonperforming loans and leases was 133% at March 31, 2011, compared with 126% at December 31, 2010 and 101% at March 31, 2010.

Net Interest Income

Net interest income totaled $11.0 million in the three months ended March 31, 2011, compared to $11.1 million in the year-ago quarter, and $10.8 million in fourth quarter of 2010.  The tax-equivalent net interest margin decreased 17 basis points in the first quarter compared with the year-ago quarter due to the effect of persistently low interest rates on the Company's interest-earning assets.  

The net interest margin on a tax-equivalent basis was 3.44% in the first quarter of 2011, compared with 3.61% in the first quarter of 2010 and 3.45% in the fourth quarter of 2010. The decrease in the net interest margin compared with the first quarter of 2010 was the result of a decrease in the tax-equivalent earning asset yield of 53 basis points in the first quarter compared with the year-ago quarter, which was partially offset by a decrease in its cost of interest-bearing liabilities of 39 basis points over the same period.  The rate of decline in the Company's net interest margin slowed considerably in the first quarter of 2011 compared with the fourth quarter of 2010 due in part to the full quarter impact of deposit rate changes made in November 2010 on existing accounts, the benefit of which was enhanced by deposit growth thereby lowering our wholesale borrowings.  The Company's yield on earning assets decreased 11 basis points in the first quarter of 2011 compared with the fourth quarter of 2010, which was offset by a decrease in its cost of interest-bearing liabilities of 12 basis points during the same period.

Average interest-earning assets were $1.3 billion in the first quarter, which was an increase of 3.6% from the year-ago quarter and up 1.6% from the fourth quarter of 2010.  Total average loans and leases were 65.7% of total interest-earning assets in the first quarter of 2011, compared to 70.1% in the year-ago quarter and 68.0% in the fourth quarter of 2010.  Competition, sluggish demand and low market interest rates have all been contributing factors to the decline in our loan portfolios, along with the continuing amortization of the lease portfolio.    

Although the net interest margin declined only one basis point from the fourth quarter of 2010, a slightly increased rate of compression in the net interest margin is likely in coming quarters as the persistently low interest rate environment continues to negatively affect the return on the Company's loan and investment portfolios.

Non-Interest Income and Non-Interest Expenses

Non-interest income was $4.6 million in the first quarter of 2011, compared with $4.6 million in the first quarter of 2010 and $5.9 million in the fourth quarter of 2010.  Gains on the sale of loans increased $95,000 compared with the first quarter of 2010, but was down $369,000 from the fourth quarter of 2010 due to a drop in residential mortgage demand and to a greater proportion of originations in the first quarter of 2011 being bi-weekly payment mortgages which are retained in the portfolio. In December 2010, the Company sold substantially all of the assets of its insurance agency subsidiary, Ladd's Inc. and discontinued its operations, which resulted in a decrease in insurance agency income of $346,000 in the first quarter of 2011 compared to the first quarter of 2010, and a decrease of $190,000 compared to the fourth quarter of 2010.  A gain of $815,000 was recognized in the fourth quarter on the sale of Ladd's and is included in other non-interest income.  The fourth quarter gain was almost entirely offset by taxes of $806,000 resulting from a difference in the tax basis of such assets versus the book value. The discontinuation of Ladd's operations had no material net effect on the first quarter's financial results.          

Non-interest income (excluding gains on sales of securities and gain on the Ladd's transaction) comprised 29.5% of total revenue in the first quarter of 2011 compared with 29.1% in the year-ago quarter and 32.2% in the fourth quarter of 2010.  

Non-interest expenses were $11.0 million in the quarter ended March 31, 2011, compared to $11.0 million in the first quarter of 2010 and $11.3 million in the fourth quarter of 2010.  Salaries and benefits expense decreased $274,000 or 4.7% compared to the fourth quarter of 2010 due largely to the salaries and benefits and severance expenses incurred for employees of Ladd's in the fourth quarter.  

The Company's efficiency ratio was 70.5% in the first quarter of 2011 compared with 69.9% in the year-ago quarter and 71.1% in the fourth quarter of 2010.  

The Company's effective tax rate was 24.7% for the quarter ended March 31, 2011 compared with 24.2% in the year-ago period and 26.7% in the fourth quarter (excluding the gain and related tax on the Ladd's transaction).

About Alliance Financial Corporation    

Alliance Financial Corporation is an independent financial holding company with Alliance Bank, N.A. as its principal subsidiary that provides retail, commercial and municipal banking, and trust and investment services through 29 offices in Cortland, Madison, Oneida, Onondaga and Oswego counties.  Alliance also operates an investment management administration center in Buffalo, N.Y. and an equipment lease financing company, Alliance Leasing, Inc.  

Forward-Looking Statements

This press release contains certain forward-looking statements with respect to the financial condition, results of operations and business of Alliance Financial Corporation.  These forward-looking statements involve certain risks and uncertainties.  Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities: an increase in competitive pressure in the banking industry; changes in the interest rate environment which may affect the net interest margin; changes in the regulatory environment; general economic conditions, either nationally or regionally, resulting, among other things, in a deterioration in credit quality; changes in business conditions and inflation; changes in the securities markets; changes in technology used in the banking business; our ability to maintain and increase market share and control expenses; increases in FDIC insurance premiums may cause earnings to decrease; and other risks set forth under the caption "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2010 and in subsequent filings with the Securities and Exchange Commission.

SOURCE Alliance Financial Corporation