Alliance Financial Announces Fourth Quarter and Full Year 2012 Earnings

SYRACUSE, N.Y., Jan. 28, 2013 /PRNewswire/ -- Alliance Financial Corporation ("Alliance" or the "Company") (NasdaqGM: ALNC), the holding company for Alliance Bank, N.A., announced today net income for the quarter ended December 31, 2012 of $1.3 million or $0.28 per diluted common share, compared with $2.8 million or $0.60 per diluted common share in the year-ago quarter and $2.3 million or $0.48 per diluted common share in the third quarter of 2012. Expenses related to the pending acquisition of the Company by NBT Bancorp Inc. ("NBT") totaled $1.4 million after tax or $0.31 per share.

Net income for the year ended December 31, 2012 was $9.2 million or $1.92 per diluted share, compared with $13.3 million or $2.80 per diluted share in 2011.  Expenses related to the Company's pending acquisition totaled $2.0 million after tax or $0.43 per share in 2012.

Jack H. Webb, President and CEO of Alliance said, "Our fourth quarter loan originations increased 6.6% over the fourth quarter of 2011, capping off a strong year of originations in 2012. Our core business units continue to effectively execute our business strategy of growing organically through meeting the credit needs of qualified borrowers in Central New York. In 2012, we supported the Central New York economy by providing approximately $362 million in loans to consumers and businesses in our markets."

Balance Sheet Highlights   
Total assets were $1.4 billion at December 31, 2012.  Loans and leases (net of unearned income) were $928.1 million at the end of 2012, representing growth of $21.7 million from September 30, 2012 and $55.4 million from the end of 2011.  The growth in our loan portfolio was funded primarily through cash generated from amortization and maturities of investment securities.

Loan origination volumes in the fourth quarter increased $6.0 million, or 6.6%, to $97.0 million, compared with $91.0 million in the year-ago quarter on increased demand in each of our commercial and indirect lending businesses.  Loan originations in 2012 totaled $361.9 million, compared with $255.3 million in 2011.       

Commercial loans and mortgages increased $22.8 million in the fourth quarter and totaled $297.3 million at December 31, 2012.  Originations of commercial loans and mortgages in the fourth quarter (excluding lines of credit) totaled $34.7 million, compared with $31.3 million in the year-ago quarter and $12.5 million in the third quarter of 2012.  Originations in 2012 totaled $76.5 million compared with $75.9 million in 2011.    

Residential mortgages outstanding totaled $329.0 million at December 31, 2012.  Originations of residential mortgages totaled $38.2 million in the fourth quarter of 2012, compared with $40.8 million in the year-ago quarter.  Originations in 2012 totaled $151.2 million compared with $107.5 million in 2011.

Indirect auto loan balances were $199.3 million at the end of the fourth quarter.  Alliance originated $22.9 million of indirect auto loans in the fourth quarter, compared with $17.9 million in the year-ago quarter. Originations in 2012 totaled $129.6 million compared with $68.8 million in 2011. The increase in originations this year is attributable to a change in the Company's rate structure designed to increase its market share without lowering its underwriting standards, along with the implementation of an electronic application system. 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.  

The Company's investment securities portfolio totaled $336.5 million at December 31, 2012. The securities portfolio decreased $37.8 million in 2012 as the Company reinvested cash flows from the portfolio in new loan originations, which provided higher yields than those on securities in which the Company typically invests.  Net unrealized gains on our securities portfolio totaled $10.4 million at the end of the fourth quarter.

Deposits totaled $1.1 billion at December 31, 2012 and were relatively unchanged throughout 2012. Low-cost transaction accounts comprised 78.4% of total deposits at the end of the fourth quarter, compared with 77.1% at September 30, 2012 and 71.0% at December 31, 2011. Alliance's liability mix remained favorably weighted toward transaction accounts in the fourth quarter as retail and municipal depositors continue to prefer transaction accounts over time accounts in the low interest rate environment, and also because of the buildup of cash on commercial customers' balance sheets.

Shareholders' equity was $146.9 million at December 31, 2012, compared with $148.4 million at the end of the third quarter.  Net income for the quarter increased shareholders' equity by $1.3 million and was offset by common stock dividends declared of $1.5 million or $0.32 per common share. 

The Company's Tier 1 leverage ratio was 9.37% and its total risk-based capital ratio was 15.27% at the end of the fourth quarter.  The Company's tangible common equity capital ratio (a non-GAAP financial measure) was 7.98% at December 31, 2012.

Asset Quality and the Provision for Credit Losses    
Delinquent loans and leases (including non-performing) totaled $12.2 million at December 31, 2012, compared with $10.1 million at September 30, 2012 and $17.0 million at December 31, 2011.       

Non-performing assets were $5.5 million or 0.39% of total assets at December 31, 2012, compared with $5.1 million or 0.35% of total assets at September 30, 2012 and $11.7 million or 0.83% of total assets at December 31, 2011.  The decline in non-performing assets in 2012 resulted primarily from non-accrual loans returning to accrual status as a result of satisfactory payment performance, charge-offs and pay-offs of non-performing loans. Included in non-performing assets at the end of the fourth quarter are non-performing loans and leases totaling $4.8 million, compared with $4.1 million at September 30, 2012 and $11.3 million at December 31, 2011.

Conventional residential mortgages comprised $2.5 million (43 loans) or 52.7% of non-performing loans and leases, and commercial loans and mortgages totaled $938,000 (16 loans) or 19.5% of non-performing loans and leases at the end of the fourth quarter. 

There were $88,000 in net recoveries of loans previously charged-off in the fourth quarter of 2012 and net charge-offs were $1.9 million in the year ended December 31, 2012, compared with net charge-offs of $1.3 million and $1.8 in the year-ago periods, respectively.  As was previously disclosed in the Company's 2012 quarterly reports on Form 10-Q, the Company recorded write-downs totaling $2.7 million on one commercial relationship between the fourth quarter of 2011 and the third quarter of 2012.  Approximately $1.7 million or 51% of the gross charge-offs recognized in 2012 were on this one relationship, which was transferred to real estate owned at a net amount of $898,000 in the third quarter of 2012. Net charge-offs annualized equaled (0.04)% and 0.21%, respectively, of average loans and leases during the quarter and year ended December 31, 2012, compared with 0.61% and 0.21% in the year-ago periods, respectively.      

No provision for credit losses was recorded in the fourth quarter of 2012, compared to provision expense of $800,000 in the year-ago quarter. A negative provision expense of $300,000 was recorded in 2012, compared to provision expense of $1.9 million in 2011.  Alliance assesses a number of quantitative and qualitative factors at the individual portfolio level in determining the adequacy of the allowance for credit losses and the required provision expense each quarter.  In addition, Alliance analyzes certain broader, non-portfolio specific factors in assessing the adequacy of the allowance for credit losses, such as the allowance as a percentage of total loans and leases, the allowance as a percentage of non-performing loans and leases and the provision expense as a percentage of net charge-offs.  In doing so, a portion of the allowance has been considered "unallocated", which means it is not based on either quantitative or qualitative factors, but on the broader, non-portfolio specific factors mentioned above.  At December 31, 2012, $279,000 or 3% of the allowance for credit losses was considered to be "unallocated," compared to $698,000 or 8% at September 30, 2012 and $991,000 or 9% at December 31, 2011.  Consistent with the improvement in the Company's asset quality metrics and net charge-off levels in recent quarters (excluding the charge-offs related to the one commercial relationship discussed above), the relative level of unallocated allowance to the total allowance has trended downward in 2012.  Absent any material deterioration in credit quality or material growth in the loan and lease portfolio, some portion of this "unallocated" allowance may be reduced by future probable credit losses, which would have the effect of lowering the amount of provision expense relative to net charge-offs compared with past quarters, which was the case in the fourth quarter of 2012.  

The provision for credit losses as a percentage of net charge-offs was 0% in the fourth quarter compared with 60% in the year-ago quarter. The provision for credit losses as a percentage of net charge-offs was not meaningful in the year-ended December 31, 2012 due to the negative provision that was recorded for the year. The provision for credit losses as a percentage of net charge-offs was 105% in 2011. 

The allowance for credit losses was $8.6 million at December 31, 2012 compared with $8.5 million at September 30, 2012 and $10.8 million at December 31, 2011.  The ratio of the allowance for credit losses to total loans and leases was 0.93% at December 31, 2012, compared with 0.94% at September 30, 2012 and 1.24% at December 31, 2011.  The ratio of the allowance for credit losses to non-performing loans and leases was 178% at December 31, 2012, compared with 207% at September 30, 2012 and 96% at December 31, 2011.

Net Interest Income    
Net interest income totaled $9.6 million in the three months ended December 30, 2012, compared with $10.0 million in the year-ago quarter and in the third quarter of 2012.  The tax-equivalent net interest margin decreased 12 basis points in the fourth quarter compared with the year-ago quarter, and decreased 11 basis points from the third quarter of 2012 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 3.12% in the fourth quarter of 2012, compared with 3.24% in the year-ago quarter and 3.23% in the third quarter of 2012.  The decrease in the net interest margin compared with the fourth quarter of 2011 was the result of a decrease in the tax-equivalent earning asset yield of 43 basis points in the fourth quarter compared with the year-ago quarter, which was partially offset by a decrease in the cost of interest-bearing liabilities of 34 basis points over the same period.  On a linked-quarter basis, the decline in our earning-assets yield was 14 basis points in the fourth quarter, which was offset by a 3 basis point drop in the cost of our interest-bearing liabilities. 

Average interest-earning assets were $1.3 billion in the fourth quarter, which was relatively unchanged from the year-ago quarter and from the third quarter of 2012.  The average balance of our securities portfolio decreased $43.4 million compared with the year-ago quarter, and was offset by a $40.5 million increase in the average balance of loans and leases as we reinvested cash flows from our securities portfolio in higher yielding loans. Total average loans and leases were 70.2% of total interest-earning assets in the fourth quarter of 2012, compared with 66.9% in the year-ago quarter and 69.8% in the third quarter of 2012.       

Net interest income for the year ended December 31, 2012 totaled $39.4 million, which was down $3.9 million or 8.9% compared with 2011.  The tax equivalent net interest margin was 3.21% in 2012, compared with 3.43% in 2011.  The tax-equivalent earning asset yield decreased 48 basis points in 2012 compared with 2011, which was partially offset by a decrease of 28 basis points in the cost of interest-bearing liabilities over the same period.

Average interest-earning assets were $1.3 billion in 2012, which was a decrease of 2.6% from 2011.  The changes in the average balances of securities and loans in 2012 compared with 2011 were similar to that as discussed above for the fourth quarter. Total average loans and leases were 68.9% of total interest-earning assets in 2012, compared with 66.1% in 2011.

Net interest margin is expected to remain under pressure in coming quarters as the persistently low interest rate environment continues to negatively affect the return on loan and investment portfolios, while the ability to further reduce funding costs is limited.

Non-Interest Income and Non-Interest Expenses    
Non-interest income was $5.3 million in the fourth quarter of 2012, compared with $5.1 million in the fourth quarter of 2011 and $4.6 million in the third quarter of 2012. The increase resulted from proceeds from the settlement of a bank-owned life insurance contract during the fourth quarter of 2012.

Non-interest income totaled $18.9 million in 2012, compared with $20.0 million in 2011. The $1.2 million decrease from the prior year period resulted largely from $1.3 million in gains on sales of securities recognized in 2011, which were partly offset by a $526,000 increase in gains on the sale of loans during 2012.

Non-interest income (excluding gains on securities sales) accounted for 35.3% of total revenue in the fourth quarter of 2012, compared with 33.6% in the year-ago quarter.  Non-interest income (excluding gains on securities sales) accounted for 32.3% of total revenue in 2012, compared with 30.1% in the year-ago period.

Non-interest expenses were $12.8 million in the fourth quarter of 2012, compared with $10.6 million in the year-ago quarter and $11.7 million in the third quarter of 2012.  Merger related expenses (pre-tax) of $2.4 million and $991,000 were accrued in the fourth and third quarters of 2012, respectively.  Non-interest expenses were $46.4 million in 2012, compared with $43.6 million in 2011. Merger related expenses totaled $3.4 million in 2012, and included $2.7 million for professional fees and $676,000 for employee related accruals for estimated severance payments, retention awards and merger related bonuses.

The Company's efficiency ratio was 86.0% in the fourth quarter of 2012, compared with 70.6% in the year-ago quarter.  The Company's efficiency ratio was 79.7% in 2012, compared with 70.4% in 2011.  Excluding merger related expenses and other non-recurring items, the efficiency ratio was 70.1% and 73.9%, respectively, for the quarter and year ended December 31, 2012.

The Company's effective tax rate was 35.5% and 24.4% for the quarter and year ended December 31, 2012, respectively, compared with 21.7% and 25.3% in the year-ago periods, respectively.  The decrease in our effective tax rate from 2011 was due to a higher level of tax-exempt income as a percentage to total taxable income.

About Alliance Financial Corporation    
Alliance Financial Corporation is a 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, 2011, and in subsequent filings with the Securities and Exchange Commission.

SOURCE Alliance Financial Corporation