Alliance Financial Announces Second Quarter Earnings

SYRACUSE, N.Y., July 14 /PRNewswire-FirstCall/ -- Alliance Financial Corporation ("Alliance", or the "Company") (NasdaqGM: ALNC), the holding company for Alliance Bank, N.A., announced today its net income for the quarter ended June 30, 2010 increased 46.9% to $3.0 million, compared to $2.0 million in the year-ago quarter.  The results for the second quarter of 2010 reflect the positive impact of a 5.3% increase in net interest income and a 39.2% decrease in the provision for credit losses compared to the year-ago quarter.

Net income available to common shareholders for the second quarter was $3.0 million or $0.64 per diluted share, compared with $1.3 million or $0.28 per diluted share in the year-ago quarter.  Preferred dividends and the accretion of the preferred stock discount on preferred stock issued under the Treasury Department's Capital Purchase Program was $726,000 or $0.16 per diluted share in the second quarter of 2009.  The Company redeemed the preferred stock in May 2009.  

Net income for the six months ended June 30, 2010 increased 15.0% to $5.7 million, compared with $5.0 million in the year-ago period, as the result of an 8.0% increase in net interest income and a 38.3% decrease in loan loss provisions compared to the first half of 2009.

Net income available to common shareholders for the six months ended June 30, 2010 was $5.7 million or $1.23 per diluted share, compared with $3.9 million or $0.85 per diluted share in the year-ago period.  Preferred dividends and the accretion of the preferred stock discount was $1.1 million or $0.24 per diluted share for the first half of 2009.  

Jack H. Webb, President and CEO of Alliance said, "Throughout the difficult economic and credit cycle of the past three years, our commitment to meeting the financial needs of the communities in which we operate has remained strong.  We continue to be an important and well regarded source of credit to qualified borrowers, and we continue to provide our customers with the security of a strong, locally based financial institution, offering sophisticated products and services, such as investment management, on-line banking and commercial cash management services, that rival our larger competitors."

Webb added, "Our second-quarter earnings, asset quality and capital strength reflect the effective execution of our community-banking strategy, and with that, our commitment to prudently maximizing the value of our shareholders' investment in Alliance."  

Balance Sheet Highlights

Total assets were $1.5 billion at June 30, 2010, which was an increase of $11.4 million from the end of the first quarter.  Total loans and leases (net of unearned income) increased $10.5 million during the quarter, and were $915.2 million at June 30, 2010.  

Commercial loans and mortgages increased $16.3 million in the second quarter and totaled $227.9 million at June 30, 2010.  Originations of commercial loans (excluding lines of credit) in the second quarter totaled $13.3 million, compared with $8.9 million in the first quarter of 2010 and $10.8 million in the year-ago quarter.  The balance of the increase in commercial loans in the second quarter resulted from increased utilization on existing commercial lines of credit.  Alliance has generated an increased pipeline of commercial loans in the second quarter as the result of successfully executing the growth strategy of developing relationships with new credit-worthy businesses seeking the stability that comes of working with a financially strong, locally based community bank.    

Residential mortgages outstanding were nearly unchanged in the second quarter, and totaled $354.5 million at June 30, 2010.  Residential mortgage origination volume contracted to more moderate levels in the first half of 2010 as slightly higher average borrowing rates early in 2010 combined with exceptionally high mortgage refinance activity in 2009, driven by historically low interest rates during that period, have contributed to a general decline in mortgage originations in our market.  Originations of residential mortgages totaled $27.1 million in the second quarter of 2010, compared with $19.3 million in the first quarter of 2010 and $48.9 million in the year-ago quarter.  Originations for the first half of 2010 were $46.4 million, compared with $96.2 million in the first half of 2009.  Despite the decline in our origination volumes, Alliance has maintained its position as one of the top providers of residential mortgages in Central New York.  

Indirect auto loan balances increased $1.9 million to $183.4 million at the end of the second quarter.  The Company originated $25.3 million of indirect auto loans in the second quarter, compared with $17.2 million in the first quarter of 2010 and $32.3 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 $7.0 million in the second quarter as a result of the Company's previously announced decision to cease new lease originations.  The remaining balance of the lease portfolio of $54.4 million is expected to continue to run-off at the rate of approximately $6 million per quarter over the next twelve months.  

The Company's investment securities portfolio was essentially unchanged in the second quarter and totaled $406.8 million at June 30, 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 June 30, 2010 was 80% guaranteed mortgage-backed securities, 18% municipal securities and 1% obligations of U.S. Government-sponsored corporations.  Mortgage-backed securities, which totaled $326.4 million at June 30, 2010, 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 full faith and credit of the federal government. The Company's municipal securities portfolio, which totaled $71.6 million at the end of the second quarter, is comprised primarily of highly rated general obligation bonds issued by local municipalities in New York State.

The Company had net unrealized gains of approximately $11.8 million in its securities portfolio at June 30, 2010.

Deposits were $1.1 billion at June 30, 2010, which was $11.8 million less than the end of the first quarter, but was up $42.5 million compared with the end of 2009.  Municipal money market accounts decreased $27.2 million during the quarter due largely to the seasonality of municipal cash flows.  The Company's deposit mix remains favorably weighted in lower cost demand, savings and money market accounts, which comprised 67.3% of total deposits at the end of the second quarter, compared with 65.2% at December 31, 2009 and 60.2% at June 30, 2009.

Shareholders' equity was $132.7 million at June 30, 2010, compared with $127.5 million at the end of the first quarter.  Net income for the quarter increased shareholders' equity by $3.0 million and was partially offset by common stock dividends declared of $1.3 million or $0.28 per common share.  Accumulated other comprehensive income included in shareholders' equity increased $4.5 million during the second quarter due primarily to higher net unrealized gains on securities available-for-sale, resulting from lower interest rates during the quarter and other market factors.  

The Company's Tier 1 leverage ratio was 7.87% and its total risk-based capital ratio was 13.88% at the end of the second quarter, both of which exceeded the regulatory thresholds required to be classified as a well-capitalized institution, which are 5.0% and 10.0%, respectively.  The Company's tangible common equity capital ratio was 6.44% at June 30, 2010.

Asset Quality and the Provision for Credit Losses

Overall delinquencies were lower for the third consecutive quarter with fewer loans and leases 30 to 89 days past due.  Loans and leases past due 30 days or more (including non-performing) totaled $16.8 million or 1.84% of total loans and leases at June 30, 2010, compared with $16.9 million or 1.88% of total loans and leases at March 31, 2010, and $18.7 million or 2.06% of total loans and leases at December 31, 2009.  The overall decrease in past due loans and leases occurred as a result of payments of past due amounts, charge-offs and repossession of collateral.    

Persistent weakness in the local, state and national economies continued to affect the levels of nonperforming loans and leases in the second quarter.  Nonperforming assets were $10.3 million or 0.71% of total assets at June 30, 2010, compared with $10.0 million or 0.69% of total assets at March 31, 2010, and $9.0 million or 0.64% of total assets at December 31, 2009. Conventional residential mortgages comprised $3.4 million (40 loans) or 35.6% of nonaccrual loans and leases at June 30, 2010.  Commercial loans on nonaccrual status totaled $4.0 million (37 loans) or 41.2% of nonaccrual loans and leases at the end of the second quarter.  Leases on nonaccrual status totaled $1.5 million (26 leases) or 15.5% of nonaccrual loans and leases at the end of the second quarter.  

The provision for credit losses decreased 39.2% and 38.3% in the quarter and six months ended June 30, 2010 compared with the year-ago periods largely as the result of substantially lower net charge-offs in 2010 and generally improved asset quality.  The provision for credit losses was $1.1 million and $2.2 million in the quarter and six months ended June 30, 2010, respectively, compared with $1.8 million and $3.6 million in the year-ago periods, respectively.

Net charge-offs were $519,000 and $1.3 million in the three months and six months ended June 30, 2010, respectively, compared with $1.6 million and $2.9 million in the year-ago periods, respectively.  Net charge-offs equaled 0.23% and 0.29%, respectively, of average loans and leases during the three months and six months ended June 30, 2010, compared with 0.71% and 0.62%, respectively, in the year-ago periods.  The provision for credit losses as a percentage of net charge-offs was 211.0% and 167.0%, respectively, in the quarter and six months ended June 30, 2010, compared with 109.2% and 124.5%, respectively, in the year-ago periods.      

The allowance for credit losses was $10.3 million at June 30, 2010, compared with $9.7 million at March 31, 2010 and $9.4 million at December 31, 2009.  The ratio of the allowance for credit losses to total loans and leases was 1.12% at June 30, 2010, compared with 1.07% at March 31, 2010 and 1.03% at December 31, 2009.  The ratio of the allowance for credit losses to nonperforming loans and leases was 106.3% at June 30, 2010, compared with 101.3% at March 31, 2010 and 109.7% at December 31, 2009.

Net Interest Income

Net interest income totaled $11.2 million in the three months ended June 30, 2010, which was an increase of $568,000 or 5.3% compared with the second quarter of 2009.  Net interest income was virtually unchanged from the first quarter of 2010 on a slight decline in the net interest margin, which was offset by a 2.2% increase in earning assets.  The increase in net interest income compared to the year-ago quarter resulted from a higher net interest margin and earning-asset growth.  Average earning assets increased $29.2 million or 2.3% in the second quarter compared with the year-ago quarter, with a $68.7 million increase in securities offsetting a $26.7 million decline in loan and lease balances.  Most of the decline in average loans and leases was in the lease portfolio as the result of our decision to discontinue lease originations.

The Company's tax-equivalent net interest margin increased six basis points in the second quarter compared with the year-ago quarter, but was down five basis points compared with the first quarter of 2010.  The net interest margin on a tax-equivalent basis was 3.56% in the second quarter of 2010, compared with 3.50% in the second quarter of 2009 and 3.61% in the first quarter of 2010. The increase in the net interest margin compared with the year-ago period resulted primarily from the rate of decline in the Company's cost of funds exceeding the decline in the earning-assets yield.  The Company's yield on earning-assets decreased 30 basis points in the second quarter of 2010 compared with the year-ago quarter, due to the effect of reinvesting cash flows in the low interest rate environment and earning asset growth being concentrated in lower yielding mortgage-backed securities.  The cost of funds decreased 42 basis points compared with the second quarter of 2009 due to continued downward changes in the Company's interest-bearing deposit rates, lower wholesale funding costs and a favorable change in the Company's deposit mix as the result of growth in the Company's lower cost demand, savings and money market accounts (transaction accounts).  Average transaction account balances increased $94.6 million or 14.1% in the second quarter compared with the second quarter of 2009.  Total average transaction accounts were $765.4 million or 67.2% of total average deposits in the second quarter compared with $670.8 million or 63.6% in the year-ago quarter.      

Net interest income for the six months ended June 30, 2010 totaled $22.3 million, an increase of $1.6 million or 8.0% compared with $20.7 million in the year-ago period.  Average earning assets increased $35.2 million in the first half of 2010 compared with the year-ago period, with most of the growth in residential mortgages and investment securities.  The tax-equivalent net interest margin was 3.58% in the first half of 2010, compared with 3.46% in the first half of 2009.  A decrease of 32 basis points in the Company's tax-equivalent earning-assets yield in the first half of 2010 compared with the same period in 2009 was offset by a decrease of 54 basis points in the cost of funds.

Non-Interest Income and Non-Interest Expenses

Non-interest income was $4.9 million in the second quarter of 2010, compared with $4.8 million in the second quarter of 2009 and $4.6 million in the first quarter of 2010.  Non-interest income comprised 30.3% of total revenue in the second quarter of 2010 compared with 31.0% in the year-ago quarter and 29.1% in the first quarter of 2010.  

Non-interest income totaled $9.4 million in the first six months of 2010 compared with $10.1 million in the year-ago period.  The Company recognized $1.0 million in pre-tax gains on the sale of securities in the first quarter of 2009.  There were no securities gains realized in 2010.  Adjusted for the effect of these gains, non-interest income increased $309,000 primarily due to increases in investment management income, electronic customer transaction fees and gains on sales of loans.  Excluding the effect of securities gains, non-interest income comprised 29.7% of total revenue in the first half of 2010 compared with 30.6% in the year-ago period.  

Non-interest expenses were $11.0 million in the quarter ended June 30, 2010 compared with $10.9 million in the second quarter of 2009 and $11.0 million in the first quarter of 2010.    

Non-interest expenses were $21.9 million in the six months ended June 30, 2010 compared with $21.0 million in the first half of 2009.  Salaries and benefits expense increased $1.5 million or 16.1% compared with the first half of 2009.  Approximately $893,000 or 59% of this increase represents incremental recurring expense from a combination of new customer service and business development positions, normal salary increases and a lack of incentive compensation expense in the first half of 2009.  As required under generally accepted accounting principles, the deferral of salaries and benefits expense in connection with successfully originated loans comprised approximately $300,000 or 36% of the increase in salaries and benefits in 2010 compared with the same period in 2009, due to the substantially higher residential mortgage origination volume in 2009.  

FDIC insurance expense decreased $580,000 or 41.8% compared with the first half of 2009 due to a special assessment required of all FDIC-insured banks.  The assessment for Alliance was $676,000 in the second quarter of 2009.

The Company's efficiency ratio was 68.3% in the second quarter of 2010 compared with 70.8% in the year-ago quarter and 69.9% in the first quarter of 2010.  The Company's efficiency ratio was 69.1% in the six months ended June 30, 2010 compared with 70.4% in the year-ago period.

The Company's effective tax rate was 25.0% and 24.6% for the three months and six months ended June 30, 2010, respectively, compared with 24.3% and 20.5% in the year-ago periods, respectively.  

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 and commercial 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., an equipment lease financing company, Alliance Leasing, Inc., and a multi-line insurance agency, Ladd's Agency, 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, 2009 and in subsequent filings with the Securities and Exchange Commission.

SOURCE Alliance Financial Corporation