Alliance Financial Announces Fourth Quarter and Record 2011 Earnings

SYRACUSE, N.Y., Jan. 26, 2012 /PRNewswire/ -- Alliance Financial Corporation ("Alliance" or the "Company") (NasdaqGM: ALNC), the holding company for Alliance Bank, N.A., announced today net income of $2.8 million or $0.60 per diluted share for the quarter ended December 31, 2011, compared with the $2.8 million or $0.59 per diluted share in the year-ago quarter.  Net income was $3.7 million or $0.77 per diluted common share in the third quarter of 2011. Net income in the third quarter of 2011 included securities gains, netted against a fixed asset write-down, of $472,000 after tax or $0.10 per diluted share.

Net income for the year ended December 31, 2011 increased 14.4% to $13.3 million or $2.80 per diluted share, compared with $11.6 million or $2.48 per diluted share in 2010.

Jack H. Webb, President and CEO of Alliance said, "We set a record for net income in 2011 for the fifth year in a row, while at the same time maintaining a strong balance sheet with very good asset quality and capital ratios.  Revenues were pressured in 2011 due to a decline in assets and net interest margin; however, our disciplined expense control combined with lower loan loss provisions more than offset the impact of lower revenue in 2011. Our capital ratios increased in 2011 through earnings retention and effective capital management, and are well above regulatory minimums for well-capitalized institutions."

Webb added, "We originated more than $250 million of credit to consumers and businesses in Central New York in 2011. In the aggregate, over the past four years we provided more than $1 billion in loans to qualified borrowers in Central New York, in what continues to be a challenging lending environment. We remain committed to meeting the credit needs of qualified borrowers in our market; however, consistent with the financial sector as a whole, loan growth and revenue growth in the current operating environment will likely remain under pressure as weak economic conditions and low interest rates are expected to continue to weigh on loan demand and our net interest margin."

Balance Sheet Highlights  

Total assets were $1.4 billion at December 30, 2011, which was a decrease of $21.7 million from the end of the third quarter.  Total loans and leases (net of unearned income) were virtually unchanged in the fourth quarter, as a decrease in our residential mortgages and continuing amortization of our lease portfolio was offset by growth in commercial loans and mortgages. Securities available-for-sale decreased $34.8 million during the quarter as we did not reinvest cash flows from the portfolio.  

Total assets decreased $45.5 million or 3.1% from the end of 2010 as loans and leases, net, decreased $25.8 million and securities available-for-sale decreased $40.1 million.  The Company's commercial lending business performed well in 2011, with the commercial portfolio increasing $28.4 million or 11.4% during the year. The residential mortgage and indirect auto loan portfolios declined approximately $18 million and $17 million, respectively, in 2011 due to soft market conditions and low interest rates, while our lease portfolio decreased $17 million as we continue to wind down this portfolio.

Loan originations (excluding lines of credit) totaled $91.0 million in the fourth quarter, compared with $92.5 million in the year-ago quarter and $59.5 million in the third quarter of 2011.  Loan originations in 2011 totaled $255.3 million, compared with $284.1 million in 2010.        

Commercial loans and mortgages increased $19.0 million in the fourth quarter and totaled $278.3 million at December 31, 2011.  Originations of commercial loans and mortgages in the fourth quarter (excluding lines of credit) totaled $31.3 million, compared with $38.5 million in the year-ago quarter and $10.3 million in the third quarter of 2011. Originations in 2011 totaled $75.9 million compared with $80.4 million in 2010.

Residential mortgages outstanding at December 31, 2011 were $316.8 million, which was a decrease of $12.0 million from the end of the third quarter of 2011.  Originations of residential mortgages totaled $40.8 million in the fourth quarter of 2011, compared with $38.6 million in the year-ago quarter and $30.5 million in the third quarter of 2011. Originations totaled $107.5 million in 2011, compared with $119.7 million in 2010. The Company sold approximately 57% of its 2011 residential mortgage originations in connection with its balance sheet management activities.            

Indirect auto loan balances were $158.8 million at the end of the fourth quarter, which was a decrease of $2.8 million from the end of the third quarter of 2011.  The Company originated $17.9 million of indirect auto loans in the fourth quarter, compared with $14.5 million in the year-ago quarter and $17.9 million in the third quarter of 2011.  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 $3.2 million in the fourth quarter and $16.8 million for the year as a result of the Company's previously announced decision to cease new lease originations.        

The Company's investment securities portfolio totaled $374.3 million at December 31, 2011, which was a decrease of $34.8 million from the end of the third quarter.  The Company substantially reduced new securities purchases to manage our interest-rate risk, given the very low yields available for the types of shorter-duration, non-corporate securities in which the Company invests. The securities portfolio is expected to decline in coming quarters absent an upturn in interest rates that would make the returns on shorter-duration securities more attractive.

The breakdown of the securities portfolio at December 31, 2011 was 76% government-sponsored entity- guaranteed mortgage-backed securities, 22% municipal securities, and 1% obligations of U.S. government-sponsored corporations.  Mortgage-backed securities, which totaled $285.7 million at December 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 U.S. government. The Company's municipal securities portfolio, which totaled $82.3 million at the end of the fourth quarter, is primarily comprised of highly rated general obligation bonds issued by local municipalities in New York State.

Deposits decreased $25.0 million in the fourth quarter due to seasonal municipal deposit outflows, and totaled $1.1 billion at December 30, 2011.  

Shareholders' equity was $144.0 million at December 31, 2011, compared with $143.1 million at the end of the third quarter.  Net income for the quarter increased shareholders' equity by $2.8 million and was partially offset by common stock dividends declared of $1.5 million or $0.31 per common share.  

The Company's Tier 1 leverage ratio was 9.09% and its total risk-based capital ratio was 15.97% at the end of the fourth quarter.  The Company's tangible common equity capital ratio (a non-GAAP financial measure) was 7.69% at December 30, 2011.

Asset Quality and the Provision for Credit Losses

Delinquent loans and leases (including non-performing) totaled $17.0 million at December 31, 2011, compared with $17.9 million at September 30, 2011 and $16.3 million at December 31, 2010.    

Non-performing assets were $11.7 million or 0.83% of total assets at December 31, 2011, compared with $12.9 million or 0.90% of total assets at September 30, 2011 and $9.1 million or 0.63% of total assets at December 31, 2010. Included in non-performing assets at the end of the fourth quarter are non-performing loans and leases totaling $11.3 million, compared with $12.2 million and $8.5 million at September 30, 2011 and December 31, 2010, respectively. As disclosed in our third quarter 2011 earnings release and Form 10-Q, one commercial relationship totaling $3.6 million was placed on non-performing status during the third quarter.  During the fourth quarter, the borrower's business continued to weaken, which led to an increase in our impairment reserve on this relationship by $400,000 to $2.1 million, of which $1.0 million was charged off in the fourth quarter. Our exposure to this borrower, net of the write-down recorded in the fourth quarter and included in non-performing assets, was $2.0 million at December 31, 2011, and the impairment reserve remaining on this net exposure was $1.1 million at the end of the fourth quarter.  

Conventional residential mortgages comprised $3.1 million (48 loans) or 27.2% of non-performing loans and leases at the end of the fourth quarter.  Non-performing commercial loans and mortgages totaled $7.4 million (38 loans) or 65.9% of non-performing loans and leases and non-performing leases totaled $107,000 (5 leases) or 1.0% of non-performing loans and leases at the end of the fourth quarter.  

The provision for credit losses was $800,000 in the fourth quarter, which was unchanged from the year-ago quarter and slightly higher than the third quarter of 2011.  The provision for credit losses was $1.9 million in 2011, compared with $4.1 million in 2010, as net charge-offs dropped 35.2% in 2011.  

Net charge-offs were $1.3 million and $1.8 million in the three months and twelve months ended December 31, 2011, respectively, compared with $583,000 and $2.8 million in the year-ago periods, respectively.  Net charge-offs, annualized, equaled 0.61% and 0.21%, respectively, of average loans and leases during the three months and twelve months ended December 31, 2011, compared with 0.26% and 0.31%, in the year-ago periods, respectively. The provision for credit losses as a percentage of net charge-offs was 60% and 105%, respectively, in the quarter and year ended December 31, 2011, compared with 137% and 145%, respectively, in the year-ago periods.  

The allowance for credit losses was $10.8 million at December 31, 2011, compared with $11.3 million at September 30, 2011 and $10.7 million at December 31, 2010.  The ratio of the allowance for credit losses to total loans and leases was 1.24% at December 31, 2011, compared with 1.30% at September 30, 2011 and 1.19% at December 31, 2010.  The ratio of the allowance for credit losses to non-performing loans and leases was 96% at December 31, 2011, compared with 93% at September 30, 2011 and 126% at December 31, 2010.

Net Interest Income

Net interest income was lower in the fourth quarter compared with the year-ago period and with the third quarter of 2011 due to a decrease in interest-earning assets and lower net interest margin, both of which were affected by weak economic conditions and low interest rates.

Net interest income totaled $10.0 million in the three months ended December 31, 2011, compared with $10.8 million in the year-ago quarter and $11.0 million in third quarter of 2011.  Average interest-earning assets were $1.3 billion in the fourth quarter, which was a decrease of $16.7 million compared with the year-ago quarter, and a decrease of $22.4 million compared with the third quarter of 2011. Average securities available-for-sale decreased $12.0 million compared with the year-ago quarter, and was $55.0 million lower than the third quarter of 2011 due to a reduction in purchases of securities as a consequence of the low yields currently available in the market and a sale of securities near the end of the third quarter of 2011.

Total average loans and leases were $866.8 million or 66.9% of total interest-earning assets in the fourth quarter of 2011, compared with $891.4 million or 68.0% in the fourth quarter of 2010 and $871.1 million or 66.1% in the third quarter of 2011.  Average loans and leases have been little changed in 2011 as the Company continues to sell the majority of its fixed-rate residential mortgage originations due to the exceptionally low market interest rates.  Loan growth has also been constrained as weak economic conditions, coupled with business and consumer reluctance to take on additional debt, curbed loan demand. Average balances for all of the Company's portfolios were lower in the fourth quarter compared with the year-ago quarter, except for commercial loans, which were up $33.5 million or 14.5% compared with the year-ago quarter as the Company has grown its market share.        

The net interest margin on a tax-equivalent basis was 3.24% in the fourth quarter of 2011, compared with 3.45% in the year-ago quarter and 3.48% in the third quarter of 2011. A sharp increase in prepayments on the Company's mortgage-backed securities portfolio accounted for approximately 9 and 6 basis points of the decline in margin from the third quarter and from the year-ago quarter, respectively. The Company's interest-earning assets yield continued to decline in the third quarter as amortization of our loans and leases were reinvested at lower market yields. The Company's cost of funds also declined, but not to the same extent as the earning assets yield because of the limited ability to further reduce deposit rates. The tax-equivalent earning assets yield declined 39 basis points in the fourth quarter compared with the year-ago quarter, and was partially offset by a 19 basis-point decrease in the cost of interest-bearing liabilities over the same period.  The tax-equivalent interest-earning assets yield decreased 26 basis points in the fourth quarter compared with the third quarter of 2011, and the cost of interest-bearing liabilities decreased 2 basis points over the same period.

Net interest income for the year ended December 31, 2011 totaled $43.3 million, which was a decrease of $1.0 million compared with 2010.  Average interest-earning assets were $1.3 billion in 2011, which was an increase of $15.7 million compared with 2010. Average securities available-for-sale increased $33.7 million compared with the year-ago period, which offset a decline in average loans and leases of $25.0 million.

Total average loans and leases were $872.5 million or 66.1% of total interest-earning assets in 2011 compared with $897.5 million or 68.8% in 2010.  Average commercial loans outstanding increased $34.9 million or 16.0% in 2011 compared with 2010, which partially offset declines in the Company's residential mortgage, consumer and lease portfolios.

The tax-equivalent net interest margin was 3.43% in 2011, compared with 3.55% in 2010.  The tax-equivalent earning assets yield declined 41 basis points in 2011 compared with 2010, which was partially offset by a decrease in the cost of interest-bearing liabilities of 31 basis points over the same period.  

Net interest income is expected to remain under pressure in coming quarters as weak economic conditions and exceptionally low interest rates will likely continue to weigh on loan growth and net interest margin.

Non-interest Income and Non-interest Expenses

Non-interest income was $5.1 million in the fourth quarter of 2011, compared with $5.9 million in the year-ago quarter and $5.9 million in the third quarter of 2011.  Non-interest income in the third quarter of 2011 included gains on the sale of securities of $1.3 million, while the fourth quarter of 2010 included a gain of $815,000 on the sale of substantially all of the assets of the Company's insurance agency subsidiary ("Agency").  Excluding security gains and the gain on the sale of the assets of the Agency, non-interest income was virtually unchanged in the fourth quarter compared with the year-ago period, but was up $468,000 compared to the third quarter of 2011, due primarily to an increase in gains on the sales of loans.  Gains on the sale of loans was nearly unchanged from the year-ago quarter, but increased $416,000 from the third quarter of 2011 due to fluctuations in the volume of originations and sales of residential mortgages.

Non-interest income totaled $20.0 million in 2011 compared with $20.5 million in 2010.  Investment management income increased $430,000 or 5.9% in 2011 compared with 2010 primarily as a result of the impact of changes in equity and debt markets over the past two years on the value of assets under management.  Insurance agency income decreased $1.3 million due to the discontinuation of our insurance agency operations.  The elimination of the operating expenses associated with our insurance agency substantially offset the revenue decline in 2011, resulting in no significant net effect on our financial results. Gains on the sale of securities available-for-sale increased to $1.3 million in 2011, compared with $308,000 in 2010 due to increased sale activity in 2011. Other non-interest income decreased $610,000 in 2011 compared to 2010 due primarily to the gain of $815,000 recognized on the sale of the Agency in 2010.        

Non-interest income (excluding securities gains and the Agency sale) comprised 33.6% of total revenue in the fourth quarter, compared with 32.2% in the year-ago quarter.  Non-interest income comprised 30.1% of total revenue in 2011 compared with 30.4% in the year-ago period.  

Non-interest expenses were $10.6 million in the fourth quarter of 2011, compared with $11.3 million in the year-ago period and $11.1 million in the third quarter of 2011.  Salaries and benefits expense decreased $310,000 or 5.3% due primarily to the discontinuation of salaries and benefits for the Agency's employees in 2011. Professional fees decreased $253,000 or 27.5% due to a number of one-time consulting engagements in the fourth quarter of 2010. FDIC insurance expense decreased $190,000 or 46.7% compared with the fourth quarter of 2010 due to the impact of the change by the FDIC to an asset-based assessment system, which became effective in the second quarter of 2011.

Non-interest expenses were $43.6 million in 2011 compared with $44.5 million in 2010. Salaries and benefits expense decreased $417,000 or 1.9% due to the discontinuation of salaries and benefits for the Agency's employees in 2011 partially offset by normal base salary increases and higher incentive compensation. FDIC insurance expense decreased $540,000 or 33.7% in 2011 compared with 2010 primarily due to the change implemented by the FDIC in the basis for calculating insurance premiums. Other non-interest expense increased $747,000 or 12.6% in 2011 compared with 2010 due primarily to the $555,000 write-down of bank-owned property recorded in the third quarter of 2011.

The Company's efficiency ratio was 70.6% in the fourth quarter of 2011, compared with 71.1% in the year-ago period and 71.5% in the third quarter of 2011.  The Company's efficiency ratio was 70.4% in 2011, compared with 69.9% in 2010. The efficiency ratio, excluding the fixed asset write-down, was 69.4% in 2011.  

The Company's effective tax rate was 21.7% and 25.3% for the three months and twelve months ended December 30, 2011, respectively, compared with 26.7% and 24.6% in the year-ago periods, respectively. The Company's effective tax rates for the three months and twelve months ended December 31, 2010 excludes the $815,000 gain on the sale of the assets of the Agency and the related tax expense of $806,000 which result from a difference in the tax basis of such assets versus the book value.        

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