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UNITED STATES
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 March 31, 2011
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 000-15366
ALLIANCE FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
New York | 16-1276885 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification Number) |
120 Madison Street, Syracuse, New York 13202
(Address of Principal Executive Offices) (Zip Code)
(315) 475-2100
(Registrants Telephone Number including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 ¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of accelerated filer, large accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer | ¨ | Accelerated Filer | x | |||
Non-accelerated filer | ¨ | Smaller Reporting Company | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of the Registrants common stock, $1.00 par value, on May 4, 2011 was 4,745,491 shares.
Table of Contents
Page Number(s) | ||||||||
Part I. | FINANCIAL INFORMATION | |||||||
Item 1. | Financial Statements (All Unaudited) | |||||||
Consolidated Balance Sheets | 4 | |||||||
Consolidated Statements of Income | 5 | |||||||
Consolidated Statements of Changes in Shareholders Equity | 6 | |||||||
Consolidated Statements of Comprehensive Income | 7 | |||||||
Consolidated Statements of Cash Flow | 8 | |||||||
Notes to Consolidated Financial Statements | 9-24 | |||||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 25-37 | ||||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 38 | ||||||
Item 4. | Controls and Procedures | 39 | ||||||
Part II. | OTHER INFORMATION | |||||||
Item 1. | Legal Proceedings | 40 | ||||||
Item 1A. | Risk Factors | 40 | ||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 40 | ||||||
Item 3. | Defaults Upon Senior Securities | 40 | ||||||
Item 4. | Removed and Reserved | 40 | ||||||
Item 5. | Other Information | 40 | ||||||
Item 6. | Exhibits | 40 | ||||||
Signatures | 41 | |||||||
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Throughout this report, the terms Company, Alliance, we, our and us refers to the consolidated entity of Alliance Financial Corporation, its wholly-owned subsidiaries, including Alliance Bank, N.A. (the Bank) and the Alliance Agency Inc., formerly Ladds Agency, Inc. (Ladds), and the Banks subsidiaries, Alliance Preferred Funding Corp. and Alliance Leasing, Inc. Alliance is a New York corporation which was formed in November 1998 as a result of the merger of Cortland First Financial Corporation and Oneida Valley Bancshares, Inc.
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) with respect to the financial conditions, results of operations and business of Alliance. The words may, could, should, would, believe, anticipate, estimate, expect, intend, plan and similar expressions are intended to identify forward-looking statements. 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:
| changes in the interest rate environment that reduce margins; |
| changes in the regulatory environment; |
| the highly competitive industry and market area in which we operate; |
| general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality; |
| changes in business conditions and inflation; |
| changes in credit market conditions; |
| changes in the securities markets which affect investment management revenues; |
| increases in FDIC deposit insurance premiums and assessments could adversely affect our financial condition; |
| changes in technology used in the banking business; |
| the soundness of other financial services institutions which may adversely affect our credit risk; |
| certain of our intangible assets may become impaired in the future; |
| our controls and procedures may fail or be circumvented; |
| new line of business or new products and services which may subject us to additional risks; |
| changes in key management personnel which may adversely impact our operations; |
| the effect on our operations of recent legislative and regulatory initiatives that were or may be enacted in response to the ongoing financial crisis; |
| severe weather, natural disasters, acts of war or terrorism and other external events which could significantly impact our business; and |
| other factors detailed from time to time in our Securities and Exchange Commission filings |
Although we believe that the expectations reflected in such forward-looking statements are reasonable, actual results may differ materially from the results discussed in these forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
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Alliance Financial Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
March 31, 2011 | December 31, 2010 | |||||||
Assets |
||||||||
Cash and due from banks |
$ | 21,786 | $ | 32,501 | ||||
Fed funds sold |
8,600 | | ||||||
Cash and cash equivalents |
30,386 | 32,501 | ||||||
Securities available-for-sale |
453,530 | 414,410 | ||||||
Federal Home Loan Bank of New York (FLHB) and Federal Reserve Bank (FRB) stock |
8,112 | 8,652 | ||||||
Loans and leases held-for-sale |
315 | 2,940 | ||||||
Loans and leases, net of unearned income and deferred costs |
878,402 | 898,537 | ||||||
Allowance for credit losses |
(10,678 | ) | (10,683 | ) | ||||
Net loans and leases |
867,724 | 887,854 | ||||||
Premises and equipment, net |
18,504 | 18,975 | ||||||
Accrued interest receivable |
4,988 | 4,149 | ||||||
Bank-owned life insurance |
28,666 | 28,412 | ||||||
Goodwill |
30,844 | 30,844 | ||||||
Intangible assets, net |
8,397 | 8,638 | ||||||
Other assets |
17,710 | 17,247 | ||||||
Total assets |
$ | 1,469,176 | $ | 1,454,622 | ||||
Liabilities and shareholders equity |
||||||||
Liabilities |
||||||||
Deposits: |
||||||||
Non-interest-bearing deposits |
$ | 170,354 | $ | 179,918 | ||||
Interest-bearing deposits |
992,996 | 954,680 | ||||||
Total deposits |
1,163,350 | 1,134,598 | ||||||
Borrowings |
127,971 | 142,792 | ||||||
Accrued interest payable |
1,083 | 1,391 | ||||||
Other liabilities |
15,970 | 16,936 | ||||||
Junior subordinated obligations issued to unconsolidated subsidiary trusts |
25,774 | 25,774 | ||||||
Total liabilities |
1,334,148 | 1,321,491 | ||||||
Shareholders equity |
||||||||
Preferred stock par value $1.00 a share; 900,000 shares authorized, none issued and outstanding |
| | ||||||
Preferred stock par value $1.00 a share; 100,000 shares authorized, Series A, junior preferred stock, none issued and outstanding |
| | ||||||
Common stock - par value $1.00; 10,000,000 shares authorized, 5,067,803 and 5,051,347 shares issued; and 4,745,491 and 4,729,035 shares outstanding, respectively |
5,068 | 5,051 | ||||||
Surplus |
45,805 | 45,620 | ||||||
Undivided profits |
94,263 | 92,380 | ||||||
Accumulated other comprehensive income |
1,639 | 1,713 | ||||||
Directors stock-based deferred compensation plan (123,732 and 120,237 shares, respectively) |
(3,091 | ) | (2,977 | ) | ||||
Treasury stock, at cost: 322,312 shares |
(8,656 | ) | (8,656 | ) | ||||
Total shareholders equity |
135,028 | 133,131 | ||||||
Total liabilities & shareholders equity |
$ | 1,469,176 | $ | 1,454,622 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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Alliance Financial Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
(In thousands, except per share data)
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Interest income: |
||||||||
Interest and fees on loans and leases |
$ | 10,662 | $ | 11,821 | ||||
Federal funds sold and interest bearing deposits |
4 | 2 | ||||||
Interest and dividends on taxable securities |
2,860 | 2,909 | ||||||
Interest and dividends on nontaxable securities |
736 | 724 | ||||||
Total interest income |
14,262 | 15,456 | ||||||
Interest expense: |
||||||||
Deposits: |
||||||||
Savings accounts |
58 | 106 | ||||||
Money market accounts |
447 | 773 | ||||||
Time accounts |
1,487 | 1,971 | ||||||
NOW accounts |
68 | 143 | ||||||
Total deposits |
2,060 | 2,993 | ||||||
Borrowings: |
||||||||
Repurchase agreements |
207 | 203 | ||||||
FHLB advances |
855 | 985 | ||||||
Junior subordinated obligations issued to unconsolidated subsidiary trusts |
157 | 154 | ||||||
Total interest expense |
3,279 | 4,335 | ||||||
Net interest income |
10,983 | 11,121 | ||||||
Provision for credit losses |
200 | 1,095 | ||||||
Net interest income after provision for credit losses |
10,783 | 10,026 | ||||||
Non-interest income: |
||||||||
Investment management income |
1,916 | 1,807 | ||||||
Service charges on deposit accounts |
1,010 | 1,050 | ||||||
Card-related fees |
653 | 591 | ||||||
Insurance agency income |
| 346 | ||||||
Income from bank-owned life insurance |
254 | 269 | ||||||
Gain on the sale of loans |
288 | 193 | ||||||
Other non-interest income |
465 | 305 | ||||||
Total non-interest income |
4,586 | 4,561 | ||||||
Non-interest expense: |
||||||||
Salaries and employee benefits |
5,530 | 5,569 | ||||||
Occupancy and equipment expense |
1,830 | 1,840 | ||||||
Communication expense |
150 | 176 | ||||||
Office supplies and postage expense |
284 | 269 | ||||||
Marketing expense |
263 | 293 | ||||||
Amortization of intangible assets |
241 | 290 | ||||||
Professional fees |
824 | 740 | ||||||
FDIC insurance premium |
393 | 402 | ||||||
Other non-interest expense |
1,464 | 1,382 | ||||||
Total non-interest expense |
10,979 | 10,961 | ||||||
Income before income tax expense |
4,390 | 3,626 | ||||||
Income tax expense |
1,084 | 877 | ||||||
Net income |
$ | 3,306 | $ | 2,749 | ||||
Net income per share: |
||||||||
Basic earnings per share |
$ | 0.70 | $ | 0.59 | ||||
Diluted earnings per share |
$ | 0.70 | $ | 0.59 | ||||
Cash dividends declared per share |
$ | 0.30 | $ | 0.28 |
The accompanying notes are an integral part of the consolidated financial statements.
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Alliance Financial Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders Equity (Unaudited)
(In thousands, except per share data)
Issued and Outstanding Common Shares |
Common Stock |
Surplus | Undivided Profits |
Accumulated Other Comprehensive Income |
Treasury Stock |
Directors Deferred Stock |
Total | |||||||||||||||||||||||||
Balance at January 1, 2010 |
4,614,921 | $ | 4,937 | $ | 43,013 | $ | 86,194 | $ | 946 | $ | (8,656 | ) | $ | (2,499 | ) | $ | 123,935 | |||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | | 2,749 | | | | 2,749 | ||||||||||||||||||||||||
Other comprehensive income, net of taxes: |
||||||||||||||||||||||||||||||||
Change in unrealized appreciation in available-for-sale securities (net of tax) |
| | | | 1,107 | | | 1,107 | ||||||||||||||||||||||||
Change in accumulated unrealized losses and prior service costs for retirement plans |
| | | | 23 | | | 23 | ||||||||||||||||||||||||
Total comprehensive income |
| | | 2,749 | 1,130 | | | 3,879 | ||||||||||||||||||||||||
Retirement of common stock |
(629 | ) | 1 | (16 | ) | | | | | (15 | ) | |||||||||||||||||||||
Amortization of restricted stock |
| | 81 | | | | | 81 | ||||||||||||||||||||||||
Stock options exercised |
42,000 | 41 | 736 | | | | | 777 | ||||||||||||||||||||||||
Tax benefit of stock-based compensation |
| | 134 | | | | | 134 | ||||||||||||||||||||||||
Cash dividend $0.28 per common share |
| | | (1,304 | ) | | | | (1,304 | ) | ||||||||||||||||||||||
Directors deferred stock plan purchase |
| | 92 | | | | (92 | ) | | |||||||||||||||||||||||
Balance at March 31, 2010 |
4,656,292 | $ | 4,979 | $ | 44,040 | $ | 87,639 | $ | 2,076 | $ | (8,656 | ) | $ | (2,591 | ) | $ | 127,487 | |||||||||||||||
Balance at January 1, 2011 |
4,729,035 | $ | 5,051 | $ | 45,620 | $ | 92,380 | $ | 1,713 | $ | (8,656 | ) | $ | (2,977 | ) | $ | 133,131 | |||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | | 3,306 | | | | 3,306 | ||||||||||||||||||||||||
Other comprehensive income, net of taxes: |
||||||||||||||||||||||||||||||||
Change in unrealized appreciation in available-for-sale securities (net of tax) |
| | | | (105 | ) | | | (105 | ) | ||||||||||||||||||||||
Change in accumulated unrealized losses and prior service costs for retirement plans |
| | | | 31 | | | 31 | ||||||||||||||||||||||||
Total comprehensive income |
| | | 3,306 | (74 | ) | | | 3,232 | |||||||||||||||||||||||
Retirement of common stock |
(1,383 | ) | (1 | ) | (40 | ) | | | | | (41 | ) | ||||||||||||||||||||
Issuance of restricted stock |
17,839 | 18 | (18 | ) | | | | | | |||||||||||||||||||||||
Amortization of restricted stock |
| | 120 | | | | | 120 | ||||||||||||||||||||||||
Tax benefit of stock-based compensation |
| | 9 | | | | | 9 | ||||||||||||||||||||||||
Cash dividend $0.30 per common share |
| | | (1,423 | ) | | | | (1,423 | ) | ||||||||||||||||||||||
Directors deferred stock plan purchase |
| | 114 | | | | (114 | ) | | |||||||||||||||||||||||
Balance at March 31, 2011 |
4,745,491 | $ | 5,068 | $ | 45,805 | $ | 94,263 | $ | 1,639 | $ | (8,656 | ) | $ | (3,091 | ) | $ | 135,028 | |||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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Alliance Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Other comprehensive (loss) income, before tax: |
||||||||
Change in pension and post-retirement liabilities |
$ | 51 | $ | 38 | ||||
Net unrealized holding (losses) gains arising during period |
(172 | ) | 1,762 | |||||
Other comprehensive (loss) income before tax |
(121 | ) | 1,800 | |||||
Income tax benefit (expense) related to other comprehensive income |
47 | (670 | ) | |||||
Other comprehensive (loss) income net of tax |
(74 | ) | 1,130 | |||||
Net income |
3,306 | 2,749 | ||||||
Comprehensive income |
$ | 3,232 | $ | 3,879 | ||||
The accompanying notes are an integral part of the consolidated financial statements
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Alliance Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flow (Unaudited)
(In thousands)
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Operating Activities: |
||||||||
Net Income |
$ | 3,306 | $ | 2,749 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for credit losses |
200 | 1,095 | ||||||
Depreciation expense |
557 | 595 | ||||||
Increase in surrender value of life insurance |
(254 | ) | (269 | ) | ||||
Provision for deferred income taxes |
(499 | ) | (112 | ) | ||||
Amortization of investment security discounts and premiums, net |
873 | 536 | ||||||
Net gain on sale of premises and equipment |
| (4 | ) | |||||
Proceeds from the sale of loans and leases held-for-sale |
12,379 | 9,989 | ||||||
Origination of loans held-for-sale |
(9,579 | ) | (9,260 | ) | ||||
Gain on sale of loans held-for-sale |
(288 | ) | (193 | ) | ||||
Gain on foreclosed real estate |
(67 | ) | | |||||
Amortization of capitalized servicing rights |
106 | 70 | ||||||
Amortization of intangible assets |
241 | 290 | ||||||
Restricted stock expense, net |
120 | 81 | ||||||
Amortization of prepaid FDIC insurance premium |
365 | 367 | ||||||
Change in other assets and liabilities |
(2,218 | ) | (1,920 | ) | ||||
Net cash provided by operating activities |
5,242 | 4,014 | ||||||
Investing Activities: |
||||||||
Proceeds from maturities, redemptions, calls and principal repayments of investment securities available-for-sale |
24,629 | 20,962 | ||||||
Purchase of investment securities available-for-sale |
(64,794 | ) | (65,926 | ) | ||||
Purchase of FHLB and FRB stock |
(266 | ) | (2,916 | ) | ||||
Redemption of FHLB stock |
806 | 4,261 | ||||||
Net decrease in loans and leases |
19,801 | 8,717 | ||||||
Purchases of premises and equipment |
(86 | ) | (220 | ) | ||||
Proceeds from the sale of premises and equipment |
| 7 | ||||||
Proceeds from disposition of foreclosed assets |
187 | | ||||||
Net cash used in investing activities |
(19,723 | ) | (35,115 | ) | ||||
Financing Activities: |
||||||||
Net increase in checking, savings and money market accounts |
28,403 | 70,921 | ||||||
Net increase (decrease) increase in time accounts |
349 | (16,660 | ) | |||||
Net decrease in short-term borrowings |
(4,821 | ) | (18,586 | ) | ||||
Payments on long-term borrowings |
(10,000 | ) | (10,000 | ) | ||||
Proceeds from the exercise of stock options |
| 777 | ||||||
Retirement of common stock |
(41 | ) | (15 | ) | ||||
Tax benefit of stock-based compensation |
9 | 134 | ||||||
Purchase of shares for directors deferred stock-based plan |
(114 | ) | (92 | ) | ||||
Cash dividends paid to common shareholders |
(1,419 | ) | (1,292 | ) | ||||
Net cash provided by financing activities |
12,366 | 25,187 | ||||||
Net decrease in cash and cash equivalents |
(2,115 | ) | (5,914 | ) | ||||
Cash and cash equivalents at beginning of period |
32,501 | 26,696 | ||||||
Cash and cash equivalents at end of period |
$ | 30,386 | $ | 20,782 | ||||
Supplemental Disclosures of Cash Flow Information: |
||||||||
Interest received during the period |
$ | 13,423 | $ | 14,662 | ||||
Interest paid during the period |
3,587 | 4,748 | ||||||
Income taxes |
492 | 439 | ||||||
Non-cash investing activities: |
||||||||
Change in unrealized gain/loss on available-for-sale securities |
(172 | ) | 1,762 | |||||
Transfer of loans to other real estate and repossessed assets |
129 | | ||||||
Non-cash financing activities: |
||||||||
Common dividend declared and unpaid |
1,423 | 1,304 |
The accompanying notes are an integral part of the consolidated financial statements.
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Nature of Operations
Alliance Financial Corporation (the Company) is a financial holding company which owns and operates Alliance Bank, N.A. (the Bank), Alliance Financial Capital Trust I, Alliance Financial Capital Trust II (collectively the Capital Trusts) and the Alliance Agency Inc., formerly Ladds Agency, Inc. (Ladds). The Company provides financial services through the Bank from 29 retail branches and customer service facilities in the New York counties of Cortland, Madison, Oneida, Onondaga and Oswego, and from a Trust Administration Center in Buffalo, NY. Primary services include commercial, retail and municipal banking, consumer finance, mortgage financing and servicing, and investment management services. The Capital Trusts were formed for the purpose of issuing corporation-obligated mandatorily redeemable capital securities to third-party investors and investing the proceeds from the sale of such capital securities solely in junior subordinated debt securities of the Company. The Bank has a substantially wholly-owned subsidiary, Alliance Preferred Funding Corp., which is engaged in residential real estate activity, and a wholly-owned subsidiary, Alliance Leasing, Inc., which was engaged in commercial equipment financing activity in over thirty states until the third quarter of 2008, at which time Alliance Leasing, Inc. ceased the origination of new leases.
1. | Basis of Presentation and Significant Accounting Policies |
The accompanying unaudited financial statements were prepared in accordance with the instructions for Form 10-Q and Regulation S-X and, therefore, do not include information for footnotes necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP). The material under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations is written with the presumption that the users of the interim financial statements have read, or have access to, the latest audited financial statements and notes thereto of Alliance, together with Managements Discussion and Analysis of Financial Condition and Results of Operations as of December 31, 2010 and for the three-year period then ended, included in the Alliances Annual Report on Form 10-K for the year ended December 31, 2010. Accordingly, only material changes in the results of operations and financial condition are discussed in the remainder of Part I. Certain amounts from prior year periods are reclassified, when necessary, to conform to the current period presentation.
All adjustments that in the opinion of management are necessary for a fair presentation of the financial statements have been included in the results of operations for the three months ended March 31, 2011 and 2010.
Critical Accounting Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management has identified the allowance for credit losses, income taxes, and the carrying value and subsequent annual impairment analysis of goodwill and intangible assets to be the accounting areas that require the most subjective and complex judgments, and as such could be the most subject to revision as new information becomes available. Actual results could differ from those estimates.
Securities
Alliance classifies securities as held-to-maturity or available-for-sale at the time of purchase. Held-to-maturity securities are those that Alliance has the positive intent and ability to hold to maturity, and are reported at cost, adjusted for amortization of premiums and accretion of discounts. Securities not classified as held-to-maturity are classified as available-for-sale and are reported at fair value, with net unrealized gains and losses reflected as a separate component of accumulated other comprehensive income, net of taxes. None of Alliances securities have been classified as trading securities or held-to-maturity.
Gains and losses on the sale of securities are based on the specific identification method. Premiums and discounts on securities are amortized and accreted into income using the interest method over the life of the security. Securities are reviewed regularly for other than temporary impairment. Purchases and sales of securities are recognized on a trade-date basis.
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Loans and Leases
Loans and leases held for investment are stated at unpaid principal balances, unearned interest income, net deferred loan origination fees and costs, and the allowance for credit losses. Interest on loans is based upon the principal amount outstanding. Interest on loans is accrued except when in managements opinion the collectability of interest is doubtful, at which time the accrual of interest on the loan is discontinued and the amount of accrued interest is reversed. Loan and lease origination fees and certain direct origination costs are deferred and the net amount is amortized as a yield adjustment over the life of the loan or lease. For disclosure purposes, the unpaid principal balance approximates the recorded investment in loans and leases which is net of any partial charge-offs, but excludes accrued interest receivable and net deferred costs.
Loans are made to individuals as well as commercial and tax exempt entities. Specific loan terms vary as to interest rate, repayment and collateral requirements based on the type of loan and credit worthiness of the prospective borrower. Credit risk tends to be geographically concentrated in that a majority of the loan customers are located in the markets serviced by Alliance.
Commercial credits typically comprise working capital loans, loans for physical assets expansion, asset acquisition loans and other business loans. Commercial loans are made based primarily on the historical and projected cash flows of the borrower and secondarily the underlying collateral provided by the borrower. Loans to closely held businesses will generally be guaranteed in full or for a meaningful amount by the businesses major owners. The cash flows of borrowers, however, may not behave as forecasted and collateral values may fluctuate due to economic or individual performance factors. Minimum standards and underwriting guidelines have been established for all commercial loan types.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or the general economy.
Lease financings, included in portfolio loans and leases on the consolidated balance sheet consist of direct financing leases of commercial equipment, primarily computers and office equipment, manufacturing equipment, commercial truck and trailers, and medical equipment. Income attributable to finance leases is initially recorded as unearned income and subsequently recognized as finance income at level rates of return over the term of the leases. The recorded residual values of Alliances leased assets are estimated at the inception of the lease to be the expected fair market value of the assets at the end of the lease term. Alliance reviews commercial lease residual values at least annually and recognizes residual value impairments deemed to be other than temporary. In accordance with U.S. GAAP, anticipated increases in specific future residual values are not recognized before realization. Operating leases are stated at cost of the equipment less scheduled depreciation. Equipment on operating leases is depreciated on a straight-line basis to its estimated residual value over the lease term. Operating lease income is recognized on a straight-line basis over the term of the lease.
Alliance originates direct and indirect consumer loans including residential real estate, home equity lines and loans, indirect vehicle loans, and other consumer direct loan types. Each loan type has a separate automated decision system which consists of several factors including debt to income, type of collateral and loan to collateral value, credit history and our relationship with the borrower.
Alliances credit policy includes an independent loan review process that reviews and validates the credit risk program on a periodic basis.
Allowance for Credit Losses
The allowance for credit losses represents managements best estimate of probable incurred losses in Alliances loan and lease portfolio. Managements quarterly evaluation of the allowance for credit losses is a comprehensive analysis that builds a total allowance by evaluating the probable incurred losses within each loan and lease portfolio segment. Alliances portfolio segments are as follows: commercial loan and commercial real estate loans, commercial leases, residential real estate, indirect consumer loans and other consumer loans. Alliances allowance for credit losses consists
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
of specific valuation allowances based on probable credit losses on specific loans, historical valuation allowances based on loan loss experience for similar loans with similar characteristics and trends and general valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the organization.
Historical valuation allowances are calculated for commercial loans and leases based on the historical loss experience of specific types of loans and leases and the internal risk grade 24 months prior to the time they were charged off. The internal credit risk grading process evaluates, among other things, the borrowers ability to repay, the underlying collateral, if any, and the economic environment and industry in which the borrower operates. Historical valuation allowances for residential real estate and consumer loan segments are based on the average loss rates for each class of loans for the time period that includes the current year and two full prior years. Alliance calculates historical loss ratios for pools of similar consumer loans based upon the product of the historical loss ratio and the principal balance of the loans in the pool. Historical loss ratios are updated quarterly based on actual loss experience.
For commercial loan and lease segments, Alliance evaluates those classified in our internal risk grading system as substandard, doubtful or loss with a principal balance in excess of $200,000 to determine if they are impaired. A loan or lease is considered impaired, based on current information and events, if it is probable that Alliance will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. The measurement of impaired loans and leases is generally discounted at the historical effective interest rate, except that all collateral-dependent loans and leases are measured for impairment based on the estimated fair value of the collateral. Loans with modified terms in which a concession to the borrower has been made that we would not otherwise consider unless the borrower was experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. Impaired loans and leases are measured at the present value of their estimated future cash flows using the instruments 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 troubled debt restructurings that subsequently default, Alliance determines the amount of reserve in accordance with the accounting policy for the allowance for credit losses. Large groups of smaller balance homogenous loans, such as consumer and residential real estate loans less than $200,000, are collectively evaluated for impairment, and accordingly, they are not separately identified for impairment disclosures.
General valuation allowances are based on general economic conditions and other qualitative risk factors which affect our company. Factors considered include trends in our delinquency rates, macro-economic and credit market conditions, changes in asset quality, changes in loan and lease portfolio volumes, concentrations of credit risk, the changes in internal loan policies, procedures and internal controls, experience and effectiveness of lending personnel. Management evaluates the degree of risk that each one of these components has on the quality of the loan and lease portfolio on a quarterly basis.
Loans and leases are charged off when they are considered a loss regardless of the delinquency status. From a delinquency standpoint, the policy of Alliance is to charge off loans when they are 120 days past due unless circumstances are documented that attest to the ability to collect the loan. In lieu of charging off the entire loan balance, loans with collateral may be written down to the value of the collateral, less cost to sell, if foreclosure or repossession of collateral is assured and is in process.
Directors Stock-Based Deferral Plan
In accordance with Accounting Standards Codification (ASC) Topic 710-10-05-08, Deferred Compensation-Rabbi Trusts, the stock held in the trust is classified in equity similar to the manner in which treasury stock is classified.
Recent Accounting Pronouncements
In April 2011, The Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2011-2, A Creditors Determination of Whether a Restructuring Is a Troubled Debt Restructuring, (ASU 2011-2). ASU 2011-2 clarifies which loan modifications constitute troubled debt restructurings. It is intended to assist creditors in determining whether a modification of the terms of a receivable meets the criteria to be considered a troubled debt restructuring, both for purposes of recording an impairment loss and for disclosure of troubled debt restructurings. ASU 2011-2 is effective for interim and annual periods beginning on or after June 15, 2011, and applies retrospectively to restructurings occurring on or after the beginning of the fiscal year of adoption. Early application is permitted. We
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
do not expect the adoption to have a material impact on our consolidated statements of financial position, results of operation or cash flows.
2. | Securities |
The amortized cost and estimated fair value of securities for the dates indicated (in thousands):
March 31, 2011 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
Debt Securities: |
||||||||||||||||
Obligations of U.S. government-sponsored corporations |
$ | 3,725 | $ | 151 | $ | | $ | 3,876 | ||||||||
Obligations of states and political subdivisions |
80,341 | 1,451 | 597 | 81,195 | ||||||||||||
Mortgage-backed securities - residential |
358,785 | 5,723 | 1,138 | 363,370 | ||||||||||||
Total debt securities |
442,851 | 7,325 | 1,735 | 448,441 | ||||||||||||
Stock Investments: |
||||||||||||||||
Equity securities |
1,853 | 229 | | 2,082 | ||||||||||||
Mutual funds |
3,000 | 26 | 19 | 3,007 | ||||||||||||
Total stock investments |
4,853 | 255 | 19 | 5,089 | ||||||||||||
Total available-for-sale |
$ | 447,704 | $ | 7,580 | $ | 1,754 | $ | 453,530 | ||||||||
December 31, 2010 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
Debt Securities: |
||||||||||||||||
Obligations of U.S. government-sponsored corporations |
$ | 4,020 | $ | 166 | $ | | $ | 4,186 | ||||||||
Obligations of states and political subdivisions |
77,246 | 1,624 | 658 | 78,212 | ||||||||||||
Mortgage-backed securities - residential |
324,294 | 5,716 | 1,000 | 329,010 | ||||||||||||
Total debt securities |
405,560 | 7,506 | 1,658 | 411,408 | ||||||||||||
Stock Investments: |
||||||||||||||||
Equity securities |
1,852 | 143 | | 1,995 | ||||||||||||
Mutual funds |
1,000 | 25 | 18 | 1,007 | ||||||||||||
Total stock investments |
2,852 | 168 | 18 | 3,002 | ||||||||||||
Total available-for-sale |
$ | 408,412 | $ | 7,674 | $ | 1,676 | $ | 414,410 | ||||||||
As of March 31, 2011 and December 31, 2010, the mortgage-backed securities portfolio was 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.
At March 31, 2011 and December 31, 2010, securities with a carrying value of $435.3 million and $402.3 million, respectively, were pledged as collateral for certain deposits and for other purposes as required or permitted by law.
There were no securities sales during the first quarter of 2011 and 2010, respectively.
The carrying value and estimated fair value of debt securities for the dates indicated, by contractual maturity, are shown below (in thousands). The maturities of mortgage-backed securities are based on the average life of the security. All other expected maturities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
March 31, 2011 | ||||||||
Amortized Cost |
Estimated Fair Value |
|||||||
Due in one year or less |
$ | 94,302 | $ | 95,798 | ||||
Due after one year through five years |
216,230 | 219,844 | ||||||
Due after five years through ten years |
107,054 | 107,793 | ||||||
Due after ten years |
25,265 | 25,006 | ||||||
Total debt securities |
$ | 442,851 | $ | 448,441 | ||||
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at the dates indicated are as follows (in thousands):
March 31, 2011 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Type of Security |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
Obligations of states and political subdivisions |
$ | 20,785 | $ | 597 | $ | | $ | | $ | 20,785 | $ | 597 | ||||||||||||
Mortgage-backed securities residential |
84,235 | 1,049 | 1,556 | 89 | 85,791 | 1,138 | ||||||||||||||||||
Subtotal, debt securities |
105,020 | 1,646 | 1,556 | 89 | 106,576 | 1,735 | ||||||||||||||||||
Mutual funds |
| | 481 | 19 | 481 | 19 | ||||||||||||||||||
Total temporarily impaired securities |
$ | 105,020 | $ | 1,646 | $ | 2,037 | $ | 108 | $ | 107,057 | $ | 1,754 | ||||||||||||
December 31, 2010 | ||||||||||||||||||||||||
Less than 12 Months | 12 Months or Longer | Total | ||||||||||||||||||||||
Type of Security |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
Obligations of states and political subdivisions |
$ | 21,482 | $ | 658 | $ | | $ | | $ | 21,482 | $ | 658 | ||||||||||||
Mortgage-backed securities residential |
58,211 | 909 | 1,579 | 91 | 59,790 | 1,000 | ||||||||||||||||||
Subtotal debt securities |
79,693 | 1,567 | 1,579 | 91 | 81,272 | 1,658 | ||||||||||||||||||
Mutual funds |
| | 482 | 18 | 482 | 18 | ||||||||||||||||||
Total temporarily impaired securities |
$ | 79,693 | $ | 1,567 | $ | 2,061 | $ | 109 | $ | 81,754 | $ | 1,676 | ||||||||||||
Management does not believe any individual unrealized loss as of March 31, 2011 represents an other-than-temporary impairment. A total of 107 available-for-sale securities were in a continuous unrealized loss position for less than 12 months and 4 securities for 12 months or longer. The unrealized losses relate primarily to securities issued by FNMA, GNMA, FHLMC, and various political subdivisions within the State of New York. These unrealized losses are primarily attributable to changes in interest rates and other market conditions. Alliance does not intend to sell these securities and does not believe it will be required to sell them prior to recovery of the amortized cost.
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
3. | Loans and Leases |
Major classifications of loans and leases at the dates indicated (in thousands):
March 31, 2011 |
December 31, 2010 |
|||||||
Residential real estate |
$ | 330,330 | $ | 334,967 | ||||
Commercial loans |
128,461 | 133,787 | ||||||
Commercial real estate |
117,500 | 116,066 | ||||||
Leases |
42,509 | 47,549 | ||||||
Consumer |
||||||||
Indirect auto loans |
170,239 | 176,125 | ||||||
Home equity line of credit |
69,185 | 68,762 | ||||||
Other consumer loans |
21,432 | 22,857 | ||||||
Total |
879,656 | 900,113 | ||||||
Less: Unearned income |
(4,583 | ) | (5,083 | ) | ||||
Net deferred loan costs |
3,329 | 3,507 | ||||||
Total loans and leases |
878,402 | 898,537 | ||||||
Allowance for credit losses |
(10,678 | ) | (10,683 | ) | ||||
Net loans and leases |
$ | 867,724 | $ | 887,854 | ||||
Non-accrual loans and leases and loans past due 90 days still accruing include both smaller balance homogeneous loans and leases that are collectively evaluated for impairment and individually classified as impaired loans. The following tables present non-accrual loans and leases and loans and leases 90 days past due and still accruing at the dates indicated (in thousands):
March 31, 2011 | ||||||||||||
Non-accrual | Greater than 90 Days Past Due and Still Accruing |
Non-performing Loans and Leases |
||||||||||
Commercial |
$ | 1,275 | $ | | $ | 1,275 | ||||||
Commercial real estate |
1,639 | | 1,639 | |||||||||
Leases |
635 | | 635 | |||||||||
Residential real estate |
3,544 | | 3,544 | |||||||||
Consumer: |
||||||||||||
Indirect |
292 | | 292 | |||||||||
Home equity line of credit |
488 | | 488 | |||||||||
Other |
183 | 5 | 188 | |||||||||
Total |
$ | 8,056 | $ | 5 | $ | 8,061 |
December 31, 2010 | ||||||||||||
Non-accrual | Greater than 90 Days Past Due and Still Accruing |
Non-performing Loans and Leases |
||||||||||
Commercial |
$ | 1,212 | $ | | $ | 1,212 | ||||||
Commercial real estate |
2,084 | | 2,084 | |||||||||
Leases |
697 | | 697 | |||||||||
Residential real estate |
3,543 | | 3,543 | |||||||||
Consumer: |
||||||||||||
Indirect |
212 | 10 | 222 | |||||||||
Home equity line of credit |
490 | | 490 | |||||||||
Other |
236 | 9 | 245 | |||||||||
Total |
$ | 8,474 | $ | 19 | $ | 8,493 |
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following tables present the aging of past due loans and leases, including nonperforming loans and leases, at the dates indicated (in thousands):
March 31, 2011 | ||||||||||||||||||||||||
30-59 Days Past Due |
60-89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due |
Loans Not Past Due |
Total Loans and Leases |
|||||||||||||||||||
Commercial |
$ | 1,066 | $ | 239 | $ | 1,242 | $ | 2,547 | $ | 125,914 | $ | 128,461 | ||||||||||||
Commercial real estate |
2,446 | | 1,156 | 3,602 | 113,898 | 117,500 | ||||||||||||||||||
Leases, net of unearned income |
117 | | 318 | 435 | 37,491 | 37,926 | ||||||||||||||||||
Residential real estate |
2,356 | 677 | 3,530 | 6,563 | 323,767 | 330,330 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Indirect |
544 | 71 | 74 | 689 | 169,550 | 170,239 | ||||||||||||||||||
Home equity line of credit |
128 | 48 | 269 | 445 | 68,740 | 69,185 | ||||||||||||||||||
Other |
116 | 50 | 48 | 214 | 21,218 | 21,432 | ||||||||||||||||||
Total |
$ | 6,773 | $ | 1,085 | $ | 6,637 | $ | 14,495 | $ | 860,578 | $ | 875,073 |
December 31, 2010 | ||||||||||||||||||||||||
30-59 Days Past Due |
60-89 Days Past Due |
Greater than 90 Days Past Due |
Total Past Due |
Loans Not Past Due |
Total Loans and Leases |
|||||||||||||||||||
Commercial |
$ | 520 | $ | 361 | $ | 1,077 | $ | 1,958 | $ | 131,829 | $ | 133,787 | ||||||||||||
Commercial real estate |
1,511 | 308 | 934 | 2,753 | 113,313 | 116,066 | ||||||||||||||||||
Leases, net of unearned income |
203 | 306 | 172 | 681 | 41,785 | 42,466 | ||||||||||||||||||
Residential real estate |
4,000 | 440 | 3,543 | 7,983 | 326,984 | 334,967 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Indirect |
969 | 58 | 94 | 1,121 | 175,004 | 176,125 | ||||||||||||||||||
Home equity line of credit |
164 | 24 | 366 | 554 | 68,208 | 68,762 | ||||||||||||||||||
Other |
212 | 70 | 97 | 379 | 22,478 | 22,857 | ||||||||||||||||||
Total |
$ | 7,579 | $ | 1,567 | $ | 6,283 | $ | 15,429 | $ | 879,601 | $ | 895,030 |
The following tables summarize activity in the allowance for credit losses and the recorded investment by portfolio segment and based on impairment method for the periods indicated (in thousands):
March 31, 2011 | ||||||||||||||||||||||||||||
Commercial & Commercial Real Estate |
Leases, net |
Residential Real Estate |
Consumer Indirect |
Consumer Other |
Unallocated | Total | ||||||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||||||
Beginning balance |
$ | 5,568 | $ | 1,583 | $ | 946 | $ | 933 | $ | 779 | $ | 874 | $ | 10,683 | ||||||||||||||
Charge-offs |
(1 | ) | (106 | ) | (100 | ) | (37 | ) | (238 | ) | (482 | ) | ||||||||||||||||
Recoveries |
6 | 55 | 22 | 38 | 156 | 277 | ||||||||||||||||||||||
Net charge-offs |
5 | (51 | ) | (78 | ) | 1 | (82 | ) | (205 | ) | ||||||||||||||||||
Provision |
272 | (470 | ) | 26 | (141 | ) | 30 | 483 | 200 | |||||||||||||||||||
Ending Balance |
$ | 5,845 | $ | 1,062 | $ | 894 | $ | 793 | $ | 727 | $ | 1,357 | $ | 10,678 | ||||||||||||||
Ending allowance balance attributable to loans and leases |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 275 | $ | 25 | $ | 82 | $ | | $ | | $ | 382 | ||||||||||||||||
Collectively evaluated for impairment |
5,570 | 1,037 | 812 | 793 | 727 | 1,357 | 10,296 | |||||||||||||||||||||
Loans and leases balance: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 2,004 | $ | 428 | $ | 1,123 | $ | | $ | | $ | 3,555 | ||||||||||||||||
Collectively evaluated for impairment |
243,957 | 37,498 | 329,207 | 170,239 | 90,617 | 871,518 | ||||||||||||||||||||||
Total ending loans and leases balance |
$ | 245,961 | $ | 37,926 | $ | 330,330 | $ | 170,239 | $ | 90,617 | $ | 875,073 | ||||||||||||||||
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2010 | ||||||||||||||||||||||||||||
Commercial & Commercial Real Estate |
Leases, net |
Residential Real Estate |
Consumer Indirect |
Consumer Other |
Unallocated | Total | ||||||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||||||
Beginning balance |
$ | 3,771 | $ | 2,212 | $ | 891 | $ | 973 | $ | 818 | $ | 749 | $ | 9,414 | ||||||||||||||
Charge-offs |
(173 | ) | (479 | ) | | (72 | ) | (268 | ) | (992 | ) | |||||||||||||||||
Recoveries |
17 | | 11 | 35 | 137 | 200 | ||||||||||||||||||||||
Net charge-offs |
(156 | ) | (479 | ) | 11 | (37 | ) | (131 | ) | (792 | ) | |||||||||||||||||
Provision |
374 | 302 | 212 | 8 | 164 | 35 | 1,095 | |||||||||||||||||||||
Ending Balance |
$ | 3,989 | $ | 2,035 | $ | 1,114 | $ | 944 | $ | 851 | $ | 784 | $ | 9,717 | ||||||||||||||
Ending allowance balance attributable to loans and leases |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 48 | $ | 80 | $ | | $ | | $ | | $ | 128 | ||||||||||||||||
Collectively evaluated for impairment |
3,941 | 1,955 | 1,114 | 944 | 851 | 784 | 9,589 | |||||||||||||||||||||
Loans and leases balance: |
||||||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 2,141 | $ | 1,016 | $ | 110 | $ | | $ | | $ | 3,267 | ||||||||||||||||
Collectively evaluated for impairment |
209,433 | 60,412 | 354,923 | 181,537 | 91,157 | 897,462 | ||||||||||||||||||||||
Total ending loans and leases balance |
$ | 211,574 | $ | 61,428 | $ | 355,033 | $ | 181,537 | $ | 91,157 | $ | 900,729 | ||||||||||||||||
The following table presents loans and leases balances disaggregated on the basis of Alliances impairment methodology as of the date indicated (in thousands):
March 31, 2011 | December 31, 2010 | |||||||||||||||||||||||
Unpaid Contractual Principal Balance(1) |
Recorded Investment |
Related Allowance |
Unpaid Contractual Principal Balance(1) |
Recorded Investment |
Related Allowance |
|||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Commercial |
$ | 1,832 | $ | 768 | $ | 2,134 | $ | 1,080 | ||||||||||||||||
Leases |
1,045 | 386 | 1,253 | 365 | ||||||||||||||||||||
Residential real estate |
732 | 732 | 738 | 738 | ||||||||||||||||||||
3,609 | 1,886 | 4,125 | 2,183 | |||||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
Commercial |
1,273 | 1,236 | 275 | 1,277 | 1,265 | $ | 319 | |||||||||||||||||
Leases |
57 | 42 | 25 | 63 | 47 | 18 | ||||||||||||||||||
Residential real estate |
391 | 391 | 82 | 393 | 393 | 84 | ||||||||||||||||||
1,721 | 1,669 | 382 | 1,733 | 1,705 | 421 | |||||||||||||||||||
Total: |
||||||||||||||||||||||||
Commercial |
3,105 | 2,004 | 275 | 3,411 | 2,345 | 319 | ||||||||||||||||||
Leases |
1,102 | 428 | 25 | 1,316 | 412 | 18 | ||||||||||||||||||
Residential real estate |
1,041 | 1,123 | 82 | 1,131 | 1,131 | 84 | ||||||||||||||||||
$ | 5,248 | $ | 3,555 | $ | 382 | $ | 5,858 | $ | 3,888 | $ | 421 | |||||||||||||
(1) | Unpaid contractual principal balance includes any partial charge-offs taken on loans and leases. |
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table presents the average recorded investment in impaired loans and leases for the periods indicated (in thousands):
For the three months ended March 31, |
||||||||
2011 | 2010 | |||||||
Commercial |
$ | 2,174 | $ | 2,255 | ||||
Leases |
420 | 1,134 | ||||||
Residential real estate |
1,044 | 110 | ||||||
Total |
$ | 3,638 | $ | 3,499 |
There was no interest recognized on impaired loans while they were considered to be impaired.
Troubled debt restructured loans had a carrying amount of $391,000 with a specific reserve of $82,000 at March 31, 2011. Troubled debt restructured loans had a carrying amount of $393,000 with a specific reserve of $84,000 at December 31, 2010. The modifications under the troubled debt restructurings did not extend additional amounts of credit to loans classified as troubled debt restructurings.
Credit Quality Indicators
Alliance establishes a risk rating at origination for commercial loan, commercial real estate and commercial lease relationships over $250,000 based on relevant information about the ability of the borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information and current economic trends, among other factors. Commercial relationship managers monitor the loans and leases in their portfolios on an ongoing basis for any changes in the borrowers ability to service their debt and affirm the risk ratings for the loans and leases in their respective portfolios on a quarterly basis.
Alliance uses the risk rating system to identify criticized and classified loans and leases. Commercial relationships within the criticized and classified risk ratings are analyzed quarterly. Alliance uses the following definitions for criticized and classified loans and leases which are consistent with regulatory guidelines:
Special Mention
A special mention loan has potential weaknesses that deserve managements close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institutions credit position at some future date.
Substandard
A substandard loan is inadequately protected by the current paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.
Doubtful
A loan classified doubtful has all the weaknesses inherent in one classified 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.
Loss
Loans classified as Loss are considered non-collectable and of such little value that their continuance as bankable assets are not warranted.
Loans and leases not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans and leases. Commercial loans and leases listed as not rated are credits less than
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
$250,000. In some instances, the commercial loans and lease portfolios were segmented into groups of homogeneous pools based on similar risk and loss characteristics. Commercial loans that are not risk rated were segregated into a risk category based upon the loans being originated using an automated decision system (credit scoring model). Commercial leases were further segregated into a risk category based on the risk and loss characteristics of certain third party servicers. Loans and leases to municipalities are segregated into a separate risk category.
As of the dates indicated and based on the most recent analysis performed, the recorded investment by risk category and class of loans and leases is as of the dates indicated (in thousands):
March 31, 2011 | December 31, 2010 | |||||||||||||||
Commercial and Commercial Real Estate Loans |
Commercial Leases |
Commercial and Commercial Real Estate Loans |
Commercial Leases |
|||||||||||||
Credit risk profile by internally assigned grade: |
||||||||||||||||
Pass |
$ | 189,851 | $ | 22,491 | $ | 195,360 | $ | 25,538 | ||||||||
Special mention |
8,746 | 44 | 11,126 | 313 | ||||||||||||
Substandard |
20,689 | 905 | 16,163 | 1,051 | ||||||||||||
Substandard individually evaluated for impairment |
2,004 | 428 | 2,345 | 412 | ||||||||||||
Doubtful |
| 106 | | 142 | ||||||||||||
Not rated |
3,635 | 107 | 3,510 | | ||||||||||||
224,925 | 24,081 | $ | 228,504 | $ | 27,456 | |||||||||||
Credit risk profile using other credit quality indicators: |
||||||||||||||||
Loans and leases using a credit scoring model |
12,239 | 241 | 12,367 | 443 | ||||||||||||
Loans and leases to municipal entities |
8,797 | 12,388 | 8,982 | 12,856 | ||||||||||||
Certain third party servicers |
| 1,216 | | 1,711 | ||||||||||||
$ | 245,961 | $ | 37,926 | $ | 249,853 | $ | 42,466 | |||||||||
For residential real estate and consumer loan classes, Alliance evaluates credit quality primarily based upon the aging status of the loan, which was previously presented, and by payment activity.
The following table presents the recorded investment in residential real estate and consumer loans based on payment activity as of the dates indicated (in thousands):
March 31, 2011 | ||||||||||||||||
Residential Real Estate |
Indirect | Home Equity Line of Credit |
Other Consumer | |||||||||||||
Performing |
$ | 326,786 | $ | 169,947 | $ | 68,697 | $ | 21,244 | ||||||||
Non-performing |
3,544 | 292 | 488 | 188 | ||||||||||||
Total |
$ | 330,330 | $ | 170,239 | $ | 69,185 | $ | 21,432 | ||||||||
December 31, 2010 | ||||||||||||||||
Residential Real Estate |
Indirect | Home Equity Line of Credit |
Other Consumer | |||||||||||||
Performing |
$ | 331,424 | $ | 175,913 | $ | 68,272 | $ | 22,621 | ||||||||
Non-performing |
3,543 | 212 | 490 | 236 | ||||||||||||
Total |
$ | 334,967 | $ | 176,125 | $ | 68,762 | $ | 22,857 | ||||||||
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
4. | Deposits |
Deposits consisted of the following at the periods indicated (in thousands):
March 31, 2011 | December 31, 2010 | |||||||
Non-interest-bearing checking |
$ | 170,354 | $ | 179,918 | ||||
Interest-bearing checking |
152,058 | 151,894 | ||||||
Savings accounts |
105,799 | 103,099 | ||||||
Money market accounts |
392,988 | 357,885 | ||||||
Time accounts |
342,151 | 341,802 | ||||||
Total deposits |
$ | 1,163,350 | $ | 1,134,598 | ||||
5. | Earnings Per Share |
Alliance has granted stock compensation awards with non-forfeitable dividend rights which are considered participating securities. As such, earnings per share is computed using the two-class method as required by ASC Topic 260-10-45. Basic earnings per common share is computed by dividing net income allocated to common stock by the weighted average number of common shares outstanding during the period which excludes the participating securities. Diluted earnings per common share includes the dilutive effect of additional potential common shares from stock compensation awards and warrants, but excludes awards considered participating securities.
Basic and diluted net income per common share calculations are as follows (in thousands, except per share data):
For three months
ended March 31, |
||||||||
2011 | 2010 | |||||||
Basic: |
||||||||
Net income available to common shareholders |
$ | 3,306 | $ | 2,749 | ||||
Less: Dividends and undistributed earnings allocated to unvested restricted shares |
(53 | ) | (23 | ) | ||||
Net earnings allocated to common shareholders |
$ | 3,253 | $ | 2,726 | ||||
Weighted average common shares outstanding, including shares considered participating securities |
4,735,630 | 4,623,105 | ||||||
Less: average participating securities |
(73,586 | ) | (39,398 | ) | ||||
Weighted average shares |
4,662,044 | 4,583,707 | ||||||
Net income per common share basic |
$ | 0.70 | $ | 0.59 | ||||
Diluted: |
||||||||
Net earnings allocated to common shareholders |
$ | 3,253 | $ | 2,726 | ||||
Weighted average common shares outstanding for basic earnings per common share |
4,662,044 | 4,583,707 | ||||||
Incremental shares from assumed conversion of stock options and warrants |
8,630 | 30,444 | ||||||
Average common shares outstanding diluted |
4,670,674 | 4,614,151 | ||||||
Net income per common share diluted |
$ | 0.70 | $ | 0.59 | ||||
Dividends of $25,000 and $11,000 were paid on unvested shares with non-forfeitable dividend rights for the quarters ending March 31, 2011 and 2010, respectively. There were no anti-dilutive stock options for the three months ended March 31, 2011 and March 31, 2010.
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
6. | Other Comprehensive (Loss) Income |
The components of accumulated other comprehensive (loss) income, net of tax, for the periods indicated were as follows (in thousands):
For three months ending March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Pre-tax amount |
Tax expense (benefit) |
Net-of-tax amount |
Pre-tax amount |
Tax expense (benefit) |
Net-of-tax amount |
|||||||||||||||||||
Net unrealized securities (losses) gains arising during the period |
$ | (172 | ) | $ | (67 | ) | $ | (105 | ) | $ | 1,762 | $ | 655 | $ | 1,107 | |||||||||
Retirement plan liabilities |
51 | 20 | 31 | 38 | 15 | 23 | ||||||||||||||||||
Other comprehensive (loss) income |
$ | (121 | ) | $ | (47 | ) | $ | (74 | ) | $ | 1,800 | $ | 670 | $ | 1,130 | |||||||||
Net income |
3,306 | 2,749 | ||||||||||||||||||||||
Comprehensive income |
$ | 3,232 | $ | 3,879 | ||||||||||||||||||||
7. | Employee and Director Benefit Plans |
Defined Benefit Plan and Post-Retirement Benefits
Alliance has a noncontributory defined benefit pension plan which it assumed from Bridge Street Financial Inc. (Bridge Street). The plan covers substantially all former Bridge Street full-time employees who met eligibility requirements on October 6, 2006, at which time all benefits were frozen. Under the plan, retirement benefits are primarily a function of both the years of service and the level of compensation. The amount contributed to the plan is determined annually on the basis of (a) the maximum amount that can be deducted for federal income tax purposes, or (b) the amount certified by an actuary as necessary to avoid an accumulated funding deficiency as defined by the Employee Retirement Income Security Act of 1974. Alliance expects to contribute $108,000 for the remainder of 2011.
Post-retirement medical and life insurance benefits are available to certain retirees and their spouses, if applicable.
Supplemental Retirement Plans
Alliance has supplemental executive retirement plans for our current Chief Executive Officer and five former employees.
Directors Retirement Plan
Alliance has a noncontributory defined benefit retirement plan for non-employee directors. The Directors Plan provides for a cash benefit equivalent to 35% of their average annual directors fees, subject to increases based on the directors length and extent of service, payable in a number of circumstances, including normal retirement, death or disability and a change in control. Upon termination of service, the normal retirement benefit is payable in a lump sum or in ten equal installments.
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The components of all of the plans net periodic costs for the three months ended March 31, 2011 and 2010 are as follows (in thousands):
Pension Plan | Post-retirement Plan |
SRP Plan | Directors Retirement Plan |
|||||||||||||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
Service cost |
$ | | $ | | $ | | $ | | $ | 22 | $ | 20 | $ | 23 | $ | 17 | ||||||||||||||||
Interest cost |
72 | 71 | 56 | 58 | 48 | 48 | 14 | 10 | ||||||||||||||||||||||||
Expected return on assets |
(97 | ) | (78 | ) | | | | | | | ||||||||||||||||||||||
Amortization of unrecognized actuarial loss |
31 | 38 | 5 | 4 | 1 | 1 | 7 | 1 | ||||||||||||||||||||||||
Amortization of unrecognized prior service cost |
| | (11 | ) | (11 | ) | 6 | 5 | 12 | 12 | ||||||||||||||||||||||
Net periodic pension cost |
$ | 6 | $ | 31 | $ | 50 | $ | 51 | $ | 77 | $ | 74 | $ | 56 | $ | 40 | ||||||||||||||||
8. | Fair Value Measurements |
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 has the ability to 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 companys own assumptions about the assumptions that market participants would use in pricing an asset or liability.
Assets Measured on a Recurring Basis
The fair values of debt securities available-for-sale are determined by obtaining matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities relationship to other benchmark quoted securities. The fair value of mutual fund and equity securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available (Level 1). For mutual fund and equity securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).
Assets measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurements at March 31, 2011 Using | ||||||||||||
Fair Value | Quoted market prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
||||||||||
Debt Securities: |
||||||||||||
Obligations of U.S. government-sponsored corporations |
$ | 3,876 | $ | | $ | 3,876 | ||||||
Obligations of states and political subdivisions |
81,195 | | 81,195 | |||||||||
Mortgage-backed securities - residential |
363,370 | | 363,370 | |||||||||
Total debt securities |
448,441 | | 448,441 | |||||||||
Stock Investments: |
||||||||||||
Equity securities |
2,082 | | 2,082 | |||||||||
Mutual Funds |
3,007 | 3,007 | | |||||||||
Total stock investments |
5,089 | 3,007 | 2,082 | |||||||||
Total available-for-sale |
$ | 453,530 | $ | 3,007 | $ | 450,523 | ||||||
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Fair Value Measurements at December 31, 2010 Using | ||||||||||||
Fair Value | Quoted market prices in active markets for identical assets (Level 1) |
Significant other observable inputs (Level 2) |
||||||||||
Debt Securities: |
||||||||||||
Obligations of U.S. government-sponsored corporations |
$ | 4,186 | $ | | $ | 4,186 | ||||||
Obligations of states and political subdivisions |
78,212 | | 78,212 | |||||||||
Mortgage-backed securities - residential |
329,010 | | 329,010 | |||||||||
Total debt securities |
411,408 | | 411,408 | |||||||||
Stock Investments: |
||||||||||||
Equity securities |
1,995 | | 1,995 | |||||||||
Mutual Funds |
1,007 | 1,007 | | |||||||||
Total stock investments |
3,002 | 1,007 | 1,995 | |||||||||
Total available-for-sale |
$ | 414,410 | $ | 1,007 | $ | 413,403 | ||||||
Assets Measured on a Non-Recurring Basis
Impaired loans and leases Loans and leases are generally not recorded at fair value on a recurring basis. Periodically, Alliance records nonrecurring adjustment to the carrying value of loans and leases based on fair value measurements for partial charge-offs of the uncollectible portions of those loans and leases. Nonrecurring adjustments also include certain impairment amounts for collateral-dependent loans and leases calculated when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and, as a result, the carrying value of the loan or lease less the calculated valuation amount does not necessarily represent the fair value of the loan or lease. Real estate collateral is typically valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace, adjusted based on non-observable inputs and the related nonrecurring fair value measurement adjustments and have generally been classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans and leases generally are based on assumptions not observable in the marketplace and, therefore, such valuations have been classified as Level 3.
Impaired loans and leases, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1.6 million with a valuation allowance of $382,000 at March 31, 2011. At December 31, 2010, impaired loans had a carrying amount of $1.7 million with a valuation allowance of $421,000. Changes in fair value recognized for partial charge-offs of loans and leases and impairment reserves on loans and leases were $35,000 and $211,000 for the three months ended March 31, 2011 and 2010, respectively.
Loans held-for-sale The fair value of loans held-for-sale is determined, when possible, using quoted secondary-market prices (Level 2). If no such quoted price exists, the fair value of a loan is determined using quoted prices for a similar asset or assets, adjusted for the specific attributes of that loan (Level 2). There was no fair value allowance recorded on loans held-for-sale at March 31, 2011 and December 31, 2010.
Assets measured at fair value on a non-recurring basis by fair value measurement used are summarized below (in thousands):
At March 31, 2011 | At December 31, 2010 | |||||||||||||||
Fair Value | Significant unobservable inputs (Level 3) |
Fair Value | Significant unobservable inputs (Level 3) |
|||||||||||||
Impaired loans and leases: |
||||||||||||||||
Commercial |
$ | 961 | $ | 961 | $ | 946 | $ | 946 | ||||||||
Leases |
17 | 17 | 16 | 16 | ||||||||||||
Residential real estate |
309 | 309 | 309 | 309 | ||||||||||||
$ | 1,287 | $ | 1,287 | $ | 1,271 | $ | 1,271 |
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Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The carrying amounts and estimated fair values of financial instruments as of the dates indicated (in thousands):
March 31, 2011 | December 31, 2010 | |||||||||||||||
Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value |
|||||||||||||
Financial Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 30,386 | $ | 30,386 | $ | 32,501 | $ | 32,501 | ||||||||
FHLB and FRB stock |
8,112 | N/A | 8,652 | N/A | ||||||||||||
Loans held for sale |
315 | 315 | 2,940 | 2,940 | ||||||||||||
Net loans and leases(1) |
867,724 | 905,452 | 887,854 | 923,899 | ||||||||||||
Accrued interest receivable |
4,988 | 4,988 | 4,149 | 4,149 | ||||||||||||
Financial Liabilities: |
||||||||||||||||
Deposits |
1,163,350 | 1,166,585 | 1,134,598 | 1,138,395 | ||||||||||||
Borrowings |
127,971 | 133,947 | 142,792 | 147,575 | ||||||||||||
Junior subordinated obligations |
25,774 | 10,318 | 25,774 | 10,253 | ||||||||||||
Accrued interest payable |
1,083 | 1,083 | 1,391 | 1,391 |
(1) | includes impaired loans and leases |
The fair value of commitments to extend credit and standby letters of credit is not significant.
Alliances fair value estimates are based on our existing on and off balance sheet financial instruments without attempting to estimate the value of any anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on our fair value estimates and have not been considered in these estimates.
The fair value estimates are made as of a specific point in time, based on relevant market information and information about the financial instruments, including our judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in our assumptions could significantly affect the estimates.
We used the following methods and assumptions in estimating our fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the consolidated balance sheet for cash and short-term instruments approximate those assets fair value.
FHLB and FRB Stock
It is not practicable to determine the fair value of FHLB and FRB stock due to restrictions placed on its transferability.
Loans and Leases
Variable-rate loans reprice as the associated rate index changes. Therefore, the carrying value of these loans approximates fair value. The fair value of our fixed-rate loans and leases were calculated by discounting scheduled cash flows through the estimated maturity using current origination rates, credit adjusted for delinquent loans and leases. Our estimate of maturity is based on the contractual cash flows adjusted for prepayment estimates based on current economic and lending conditions. The fair value of accrued interest approximates carrying value.
Deposits
The fair values disclosed for non-interest-bearing accounts and accounts with no stated maturity are, by definition, equal to the amount payable on demand at the reporting date. The fair value of time deposits was estimated by discounting expected monthly maturities at interest rates approximating those currently being offered at the FHLB on similar terms. The fair value of accrued interest approximates carrying value.
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Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Borrowings
The fair value of borrowings are estimated using discounted cash flow analysis, based on interest rates approximating those currently being offered for borrowings with similar terms.
Junior Subordinated Obligations
The fair value of trust preferred debentures has been estimated using a discounted cash flow analysis to maturity.
Off-Balance-Sheet Instruments
Off-balance-sheet financial instruments consist of commitments to extend credit and standby letters of credit, with fair value based on fees currently charged to enter into agreements with similar terms and credit quality. Amounts are not significant.
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Table of Contents
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
Highlights and Overview
Our results of operations are dependent primarily on net interest income, which is the difference between the income earned on our loans and leases and securities and our cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the provision for credit losses, securities and loan sale activities, loan servicing activities, service charges and fees collected on our deposit accounts, income collected from trust and investment advisory services and the income earned on our investment in bank-owned life insurance. Our expenses primarily consist of salaries and employee benefits, occupancy and equipment expense, marketing expense, professional services, technology expense, amortization of intangible assets, other expense and income tax expense. Results of operations are also significantly affected by general economic and competitive conditions, particularly changes in interest rates, inflation, government policies and the actions of regulatory authorities.
The following is a summary of key financial results for the quarter ended March 31, 2011:
| Total assets were $1.5 billion and total deposits were $1.2 billion, compared to $1.5 billion and $1.1 billion for the first quarter of 2010, respectively. |
| Net income was $3.3 million in 2011, compared to $2.7 million in 2010. |
| Net income per diluted share was $0.70 in 2011, compared with $0.59 in 2010. |
| The tax-equivalent net interest margin was 3.44% in 2011 and 3.61% 2010. |
| Provision for credit losses was $200,000 in 2011, compared to $1.1 million in 2010. |
| Total non-performing assets were $8.7 million or 0.59% of total assets at March 31, 2011 compared with $9.1 million or 0.63% at December 31, 2010. |
| Non-interest income was 29.5% of total revenue in 2011 compared with 29.1% in 2010. |
| Our efficiency ratio was 70.5% in 2011 compared with 69.9% in 2010. |
The following discussion is intended to assist in understanding our financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements and accompanying notes contained elsewhere in this report.
Comparison of Operating Results for the Three Months Ended March 31, 2011 and 2010
General
Net income for the quarter ended March 31, 2011 was $3.3 million or $0.70 per diluted share compared to $2.7 million or $0.59 per diluted share in the year-ago quarter. The return on average assets and return on average shareholders equity were 0.90% and 10.27%, respectively, for the first quarter of 2011, compared to 0.77% and 8.93%, respectively, for the first quarter of 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 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 the cost of interest-bearing liabilities of 39 basis points over the same period. The rate of decline in our 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. Our yield on interest-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. The growth in the investment securities portfolio, which typically has lower yields than loans, has been a contributing factor in the decline in the yield on earning assets. Total average loans and leases
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Table of Contents
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.
Between September 2007 and December 2008, the Federal Reserve reduced its target fed funds rate from 5.25% to between zero and 0.25%, where the target rate remains. The Federal Reserves monetary policy, volatility in equity markets, economic recession and federal government economic stimulus efforts, among other factors, have caused yields on U.S. Treasury securities to drop to exceptionally low levels throughout much of the past three years. This persistently low interest rate environment has caused an ongoing decline over the past three years in the returns on our interest-earning assets, consistent with much of the financial industry. Yields on our securities portfolio and on our commercial loans and consumer loans were most affected by the low interest rate environment, due to the significant annual amortization in these portfolios as a result of their relatively shorter duration. Also, our commercial loan and consumer loan portfolios are more sensitive to changes in interest rates due to the variable rate characteristics of a portion of these portfolios. The tax-equivalent yield on our securities portfolio decreased 59 basis points in the first quarter of 2011 compared to the year-ago quarter. The yield on our commercial loans and consumer (including indirect) loans decreased 44 basis points and 58 basis points, respectively, in the first quarter of 2011 compared to the first quarter of 2010.
The cost of our interest-bearing liabilities decreased in the first quarter of 2011 compared to the year-ago quarter due to a combination of the low interest rate environment, our deposit pricing strategies and a favorable change in the mix of our interest-bearing liabilities, with lower-cost interest-bearing transaction accounts (savings, demand and money market) comprising a larger portion of our interest-bearing liabilities. The average balance of interest-bearing transaction accounts increased $63.5 million or 11.0% in the first quarter compared to the year-ago period. The average cost of money market and time deposits dropped 42 basis points and 38 basis points, respectively in the first quarter compared to the year-ago quarter.
Our liability mix changed favorably during 2010 and into 2011 as we continued to focus on increasing our transaction account balances and as we refrained from offering premium rates on time accounts. Our effort to increase our transaction account balances has been enhanced by retail and municipal depositors reluctance to lock up funds in time accounts which pay very low, yet competitive rates, and by the buildup of cash on corporate customers balance sheets. The aggregate average balance of transaction accounts (including non-interest bearing demand deposits) was $814.1 million in the first quarter, which was an increase of $81.1 million or 11.1% from the aggregate average balances of $733.0 million in the year-ago quarter. Average transaction account balances comprised 70.5% of total average deposits in the first quarter, compared with 66.4% in the first quarter of 2010. Average time account balances in the first quarter were $340.9 million or 29.5% of total average deposits in the first quarter, compared with $370.5 million or 33.6% in the year-ago quarter. Our ability to gather transaction deposits over the past year has been greatly enhanced by our strong financial position and earnings performance, enhanced product offerings including upgraded treasury management and internet banking platforms, and a high positive awareness of our brand in our markets and by environmental factors such as equity market volatility and risk aversion among retail investors.
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 our loan and investment portfolios.
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Average Balance Sheet and Net Interest Analysis
The following table sets forth information concerning average interest-earning assets and interest-bearing liabilities and the average yields and rates thereon for the periods indicated. Interest income and yield information is adjusted for items exempt from federal income taxes (nontaxable) and assumes a 34% tax rate. Non-accrual loans have been included in the average balances. Securities are shown at average amortized cost.
For the three months ended March 31, | ||||||||||||||||||||||||
2011 | 2010 | |||||||||||||||||||||||
Average Balance |
Interest Earned/ Paid |
Yield Rate |
Average Balance |
Interest Earned/ Paid |
Yield Rate |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Federal funds sold |
$ | 15,971 | $ | 4 | 0.09 | % | $ | 7,524 | $ | 2 | 0.10 | % | ||||||||||||
Taxable investment securities |
353,856 | 2,731 | 3.09 | % | 292,860 | 2,716 | 3.71 | % | ||||||||||||||||
Nontaxable investment securities |
78,773 | 1,115 | 5.66 | % | 75,202 | 1,097 | 5.84 | % | ||||||||||||||||
FHLB and FRB stock |
8,453 | 129 | 6.09 | % | 9,307 | 192 | 8.27 | % | ||||||||||||||||
Residential real estate loans(1) |
332,497 | 4,306 | 5.18 | % | 356,613 | 4,780 | 5.36 | % | ||||||||||||||||
Commercial loans and commercial real estate |
230,629 | 2,874 | 4.98 | % | 198,984 | 2,695 | 5.42 | % | ||||||||||||||||
Nontaxable commercial loans |
9,157 | 117 | 5.12 | % | 8,743 | 126 | 5.76 | % | ||||||||||||||||
Taxable leases (net of unearned discount) |
26,866 | 395 | 5.88 | % | 49,233 | 732 | 5.95 | % | ||||||||||||||||
Nontaxable leases (net of unearned discount) |
12,575 | 204 | 6.48 | % | 14,764 | 239 | 6.48 | % | ||||||||||||||||
Indirect auto loans |
172,942 | 1,972 | 4.56 | % | 181,789 | 2,390 | 5.26 | % | ||||||||||||||||
Consumer loans |
90,776 | 903 | 3.98 | % | 91,416 | 983 | 4.30 | % | ||||||||||||||||
Total interest-earning assets |
1,332,495 | 14,750 | 4.43 | % | 1,286,435 | 15,952 | 4.96 | % | ||||||||||||||||
Non-interest earning assets: |
||||||||||||||||||||||||
Other assets |
135,701 | 140,218 | ||||||||||||||||||||||
Less: Allowance for credit losses |
(10,978 | ) | (9,888 | ) | ||||||||||||||||||||
Net unrealized gains on securities available-for-sale |
4,938 | 6,691 | ||||||||||||||||||||||
Total assets |
$ | 1,462,156 | $ | 1,423,456 | ||||||||||||||||||||
Liabilities and shareholders equity: |
||||||||||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Demand deposits |
$ | 157,684 | $ | 68 | 0.17 | % | $ | 132,028 | $ | 143 | 0.43 | % | ||||||||||||
Savings deposits |
102,646 | 58 | 0.22 | % | 94,751 | 106 | 0.45 | % | ||||||||||||||||
MMDA deposits |
379,028 | 447 | 0.47 | % | 349,096 | 773 | 0.89 | % | ||||||||||||||||
Time deposits |
340,905 | 1,487 | 1.75 | % | 370,543 | 1,971 | 2.13 | % | ||||||||||||||||
Borrowings |
136,611 | 1,062 | 3.11 | % | 153,736 | 1,188 | 3.09 | % | ||||||||||||||||
Junior subordinated obligations issued to unconsolidated trusts |
25,774 | 157 | 2.43 | % | 25,774 | 154 | 2.39 | % | ||||||||||||||||
Total interest-bearing liabilities |
1,142,648 | 3,279 | 1.15 | % | 1,125,928 | 4,335 | 1.54 | % | ||||||||||||||||
Non-interest bearing liabilities: |
||||||||||||||||||||||||
Demand deposits |
174,788 | 157,130 | ||||||||||||||||||||||
Other liabilities |
15,994 | 17,245 | ||||||||||||||||||||||
Shareholders equity |
128,726 | 123,153 | ||||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 1,462,156 | $ | 1,423,456 | ||||||||||||||||||||
Net interest income |
$ | 11,471 | $ | 11,617 | ||||||||||||||||||||
Net interest rate spread |
3.28 | % | 3.42 | % | ||||||||||||||||||||
Net interest margin |
3.44 | % | 3.61 | % | ||||||||||||||||||||
Federal tax exemption on non-taxable investment securities, loans and leases included in interest income |
488 | 496 | ||||||||||||||||||||||
Net interest income |
$ | 10,983 | $ | 11,121 | ||||||||||||||||||||
(1) | Includes loans held-for-sale |
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The following table sets forth the dollar volume of increase (decrease) in interest income and interest expense resulting from changes in the volume of earning assets and interest-bearing liabilities, and from changes in rates for the periods indicated. Volume changes are computed by multiplying the volume difference by the prior periods rate. Rate changes are computed by multiplying the rate difference by the prior periods balance. The change in interest income and expense due to both rate and volume has been allocated proportionally between the volume and rate variances (in thousands).
For the three months
ended March 31, 2011 compared to March 31, 2010 Increase/(Decrease) Due To |
||||||||||||
Volume | Rate | Net Change |
||||||||||
Federal funds sold |
$ | 3 | $ | (1 | ) | $ | 2 | |||||
Taxable investment securities |
2,023 | (2,008 | ) | 15 | ||||||||
Non-taxable investment securities |
175 | (157 | ) | 18 | ||||||||
FHLB and FRB stock |
(16 | ) | (47 | ) | (63 | ) | ||||||
Residential real estate loans |
(317 | ) | (157 | ) | (474 | ) | ||||||
Commercial loans and commercial real estate |
1,278 | (1,099 | ) | 179 | ||||||||
Non-taxable commercial loans |
31 | (40 | ) | (9 | ) | |||||||
Taxable leases (net of unearned income) |
(328 | ) | (9 | ) | (337 | ) | ||||||
Non-taxable leases (net of unearned income) |
(35 | ) | | (35 | ) | |||||||
Indirect auto loans |
(112 | ) | (306 | ) | (418 | ) | ||||||
Consumer loans |
(7 | ) | (73 | ) | (80 | ) | ||||||
Total interest-earning assets |
$ | 2,695 | $ | (3,897 | ) | $ | (1,202 | ) | ||||
Interest-bearing demand deposits |
$ | 149 | $ | (224 | ) | $ | (75 | ) | ||||
Savings deposits |
54 | (102 | ) | (48 | ) | |||||||
MMDA deposits |
401 | (727 | ) | (326 | ) | |||||||
Time deposits |
(150 | ) | (334 | ) | (484 | ) | ||||||
Borrowings |
(177 | ) | 51 | (126 | ) | |||||||
Junior subordinated obligations issued to unconsolidated subsidiary trusts |
| 3 | 3 | |||||||||
Total interest-bearing liabilities |
277 | (1,333 | ) | (1,056 | ) | |||||||
Net interest income tax equivalent |
$ | 2,418 | $ | (2,564 | ) | $ | (146 | ) | ||||
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Asset Quality and the Allowance for Credit Losses
The following table summarizes delinquent loans and leases grouped by the number of days delinquent at the dates indicated:
Delinquent loans and leases |
March 31, 2011 | December 31, 2010 | March 31, 2010 | |||||||||||||||||||||
$ | %(1) | $ | %(1) | $ | %(1) | |||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
30 days past due |
$ | 6,538 | 0.75 | % | $ | 6,711 | 0.75 | % | $ | 6,493 | 0.72 | % | ||||||||||||
60 days past due |
940 | 0.11 | % | 1,083 | 0.12 | % | 867 | 0.10 | % | |||||||||||||||
90 days past due and still accruing |
5 | | % | 19 | | % | 57 | | % | |||||||||||||||
Non-accrual |
8,056 | 0.92 | % | 8,474 | 0.95 | % | 9,532 | 1.06 | % | |||||||||||||||
Total |
$ | 15,539 | 1.78 | % | $ | 16,287 | 1.82 | % | $ | 16,949 | 1.88 | % | ||||||||||||
(1) | As a percentage of total loans and leases, excluding deferred costs |
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. The decrease in past due loans and leases occurred as a result of payments of past due amounts, charge-offs and repossession of collateral.
The following table represents information concerning the aggregate amount of non-performing assets (in thousands):
March 31, 2011 | December 31, 2010 | March 31, 2010 | ||||||||||
Non-accruing loans and leases: |
||||||||||||
Residential real estate |
$ | 3,544 | $ | 3,543 | $ | 3,513 | ||||||
Commercial loans |
1,275 | 1,212 | 1,888 | |||||||||
Commercial real estate |
1,639 | 2,084 | 2,200 | |||||||||
Leases |
635 | 697 | 1,208 | |||||||||
Indirect auto |
292 | 212 | 187 | |||||||||
Other consumer loans |
671 | 726 | 536 | |||||||||
Total non-accruing loans and leases |
8,056 | 8,474 | 9,532 | |||||||||
Accruing loans and leases delinquent 90 days or more |
5 | 19 | 57 | |||||||||
Total non-performing loans and leases |
8,061 | 8,493 | 9,589 | |||||||||
Other real estate and repossessed assets |
650 | 652 | 422 | |||||||||
Total non-performing assets |
$ | 8,711 | $ | 9,145 | $ | 10,011 | ||||||
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.
As a recurring part of our portfolio management program, we identified approximately $20.8 million in potential problem loans at March 31, 2011 as compared to $16.6 million at December 31, 2010. Potential problem loans are loans that are currently performing, but where the borrowers operating performance or other relevant factors could result in potential credit problems, and are typically classified by our loan rating system as substandard. At March 31, 2011, potential problem loans primarily consisted of commercial real estate, commercial loans and leases. There can be no assurance that additional loans will not become nonperforming, require restructuring, or require increased provision for loan losses.
We have a loan and lease monitoring program through which we believe we appropriately evaluate non-performing loans and leases and the loan and lease portfolio in general. The loan and lease review program continually audits the loan and lease portfolio to confirm managements loan and lease risk rating system, and systematically tracks such problem loans and leases to ensure compliance with loan and lease policy underwriting guidelines, and to evaluate the adequacy of the allowance for credit losses.
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The allowance for credit losses represents managements best estimate of probable incurred losses in our loan and lease portfolio. Managements quarterly evaluation of the allowance for credit losses is a comprehensive analysis that builds a total allowance by evaluating the probable incurred losses within each loan and lease portfolio segment. Our portfolio segments are as follows: commercial loan and commercial real estate loans, commercial leases, residential real estate, indirect consumer loans and other consumer loans. Our allowance for credit losses consists of specific valuation allowances based on probable credit losses on specific loans, historical valuation allowances based on loan loss experience for similar loans with similar characteristics and trends and general valuation allowances based on general economic conditions and other qualitative risk factors both internal and external to the organization.
Historical valuation allowances are calculated for commercial loans and leases based on the historical loss experience of specific types of loans and leases and the internal risk grade 24 months prior to the time they were charged off. The internal credit risk grading process evaluates, among other things, the borrowers ability to repay, the underlying collateral, if any, and the economic environment and industry in which the borrower operates. Historical valuation allowances for residential real estate and consumer loan segments are based on the average loss rates for each class of loans for the time period that includes the current year and two full prior years. We calculate historical loss ratios for pools of similar consumer loans based upon the product of the historical loss ratio and the principal balance of the loans in the pool. Historical loss ratios are updated quarterly based on actual loss experience. Our general valuation allowances are based on general economic conditions and other qualitative risk factors which affect our company. Factors considered include trends in our delinquency rates, macro-economic and credit market conditions, changes in asset quality, changes in loan and lease portfolio volumes, concentrations of credit risk, the changes in internal loan policies, procedures and internal controls, experience and effectiveness of lending personnel. Management evaluates the degree of risk that each one of these components has on the quality of the loan and lease portfolio on a quarterly basis.
For commercial loan and lease segments, we maintain a specific allocation methodology for those classified in our internal risk grading system as substandard, doubtful or loss with a principal balance in excess of $200,000. A loan or lease is considered impaired, based on current information and events, if it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan or lease agreement. The measurement of impaired loans and leases is generally discounted at the historical effective interest rate, except that all collateral-dependent loans and leases are measured for impairment based on the estimated fair value of the collateral. Loans with modified terms in which a concession to the borrower has been made that we would not otherwise consider unless the borrower was experiencing financial difficulties, are considered troubled debt restructurings and classified as impaired. As of March 31, 2011, there was $3.5 million in impaired loans for which $382,000 in related allowance for credit losses was allocated. There was $3.9 million in impaired loans for which $421,000 in related allowance for credit losses was allocated as of December 31, 2010.
Loans and leases are charged against the allowance for credit losses, in accordance with our loan and lease policy, when they are determined by management to be uncollectible. Recoveries on loans and leases previously charged off are credited to the allowance for credit losses when they are received. When management determines that the allowance for credit losses is less than adequate to provide for probable incurred losses, a direct charge to operating income is recorded.
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The following table summarizes changes in the allowance for credit losses arising from loans and leases charged off, recoveries on loans and leases previously charged off and additions to the allowance, which have been charged to expense (in thousands):
Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Balance at beginning of year |
$ | 10,683 | $ | 9,414 | ||||
Loans and leases charged-off: |
||||||||
Residential real estate |
100 | | ||||||
Commercial loans |
1 | 173 | ||||||
Commercial real estate |
| | ||||||
Leases |
106 | 479 | ||||||
Indirect auto |
37 | 72 | ||||||
Consumer |
238 | 268 | ||||||
Total loans and leases charged off |
482 | 992 | ||||||
Recoveries of loans and leases previously charged off: |
||||||||
Residential real estate |
22 | 1 | ||||||
Commercial loans |
6 | 16 | ||||||
Commercial real estate |
| | ||||||
Leases |
55 | 11 | ||||||
Indirect auto |
38 | 35 | ||||||
Consumer |
156 | 137 | ||||||
Total recoveries |
277 | 200 | ||||||
Net loans and leases charged off |
205 | 792 | ||||||
Provision for credit losses |
200 | 1,095 | ||||||
Balance at end of year |
$ | 10,678 | $ | 9,717 | ||||
The provision for credit losses in the first quarter was down sharply from the year-ago period on our strong asset quality metrics, including lower charge-offs in the current and most recent quarters which are factors considered in managements 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 equaled 0.09% of average loans and leases in the first quarter of 2011, compared with 0.35% in the year-ago quarter 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 with 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.
As discussed above, we assess a number of quantitative and qualitative factors at the individual portfolio level in determining the adequacy of the allowance for credit losses each quarter. In addition, we analyze 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. As our asset quality metrics and net charge-off levels have improved in recent quarters, an increasing portion of the allowance for credit losses has been considered unallocated, which means it is not based on either quantitative or qualitative factors but on the broader, non-portfolio specific factors. At March 31, 2011, $1.4 million or 12.7% of the allowance for credit losses was considered to be unallocated, compared to $874,000 or 8.2% at December 31, 2010. We consider the current unallocated amount to be at or near a maximum level and, absent any material deterioration in credit quality from recent trends, or material growth in the loan and lease portfolio, some portion of this unallocated allowance may be reduced by future credit losses, which would have the effect of lowering the amount of provision expense relative to net charge-offs compared to recent quarters (e.g. less than dollar-for-dollar), as was the case in the first quarter of 2011 when the provision for credit losses equaled 97.6% of net charge-offs.
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The following table presents certain asset quality ratios for the periods indicated:
For three months
ended March 31, |
||||||||
2011 | 2010 | |||||||
Net loans and leases charged-off to average loans and leases, annualized |
0.09 | % | 0.35 | % | ||||
Provision for credit losses to average loans and leases, annualized |
0.09 | % | 0.49 | % | ||||
Allowance for credit losses to period-end loans and leases |
1.22 | % | 1.07 | % | ||||
Allowance for credit losses to non-performing loans and leases |
132.5 | % | 101.3 | % | ||||
Non-performing loans and leases to period-end loans and leases |
0.92 | % | 1.06 | % | ||||
Non-performing assets to period-end assets |
0.59 | % | 0.69 | % |
Non-interest Income
The following table sets forth certain information on non-interest income for the periods indicated, dollars in thousands:
Three months ended March 31, | ||||||||||||||||
Change | ||||||||||||||||
2011 | 2010 | $ | % | |||||||||||||
Investment management income |
$ | 1,916 | $ | 1,807 | $ | 109 | 6.0 | % | ||||||||
Service charges on deposit accounts |
1,010 | 1,050 | (40 | ) | (3.8 | )% | ||||||||||
Card-related fees |
653 | 591 | 62 | 10.5 | % | |||||||||||
Insurance agency |
| 346 | (346 | ) | (100.0 | )% | ||||||||||
Bank-owned life insurance |
254 | 269 | (15 | ) | (5.6 | )% | ||||||||||
Gain on the sale of loans |
288 | 193 | 95 | 49.2 | % | |||||||||||
Other non-interest income |
465 | 305 | 160 | 52.5 | % | |||||||||||
Total non-interest income |
$ | 4,586 | $ | 4,561 | $ | 25 | 0.55 | % | ||||||||
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, we sold substantially all of the assets of our insurance agency subsidiary, Ladds 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 Ladds transaction. 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 Ladds operations had no material net effect on the first quarters financial results.
Non-interest income (excluding the gain on the Ladds 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
The following table sets forth certain information on non-interest expenses for the periods indicated, dollars in thousands:
For three months ended March 31, | ||||||||||||||||
Change | ||||||||||||||||
2011 | 2010 | $ | % | |||||||||||||
Salaries and benefits |
$ | 5,530 | $ | 5,569 | $ | (39 | ) | (0.7 | )% | |||||||
Occupancy and equipment |
1,830 | 1,840 | (10 | ) | (0.5 | )% | ||||||||||
Communication expense |
150 | 176 | (26 | ) | (14.8 | )% | ||||||||||
Office supplies and postage |
284 | 269 | 15 | 5.6 | % | |||||||||||
Marketing expense |
263 | 293 | (30 | ) | (10.2 | )% | ||||||||||
Amortization of intangible assets |
241 | 290 | (49 | ) | (16.9 | )% | ||||||||||
Professional fees |
824 | 740 | 84 | 11.4 | % | |||||||||||
FDIC insurance |
393 | 402 | (9 | ) | (2.2 | )% | ||||||||||
Other non-interest expenses |
1,464 | 1,382 | 82 | 5.9 | % | |||||||||||
Total non-interest expenses |
$ | 10,979 | $ | 10,961 | $ | 18 | 0.2 | % | ||||||||
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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 Ladds in the fourth quarter.
The Companys 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.
Income Taxes
The Companys 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 Ladds transaction).
Comparison of Financial Condition at March 31, 2011 and December 31, 2010
General
Total assets were $1.5 billion at March 31, 2011, which is consistent with December 31, 2010.
Securities available-for-sale increased $39.1 million, and total loans and leases, net of unearned income and deferred costs, decreased $20.1 million in the first quarter of 2011, due to the weak loan demand across all loan categories, an exceptionally competitive lending environment, seasonal factors, and the planned run off of our lease portfolio.
Securities
Investment securities totaled $453.5 million at March 31, 2011, compared with $414.4 million at December 31, 2010. Our portfolio is comprised entirely of investment grade securities, most of which are rated AAA by one or more of the nationally recognized rating agencies. The breakdown of our securities portfolio at March 31, 2011 is 80% 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 average life of the mortgage-backed securities portfolio is approximately 4 years. We do not invest in any securities backed by sub-prime, Alt-A or other high-risk mortgages. We do not hold any preferred stock, corporate debt or trust preferred securities in its investment portfolio.
We had net unrealized gains of approximately $5.8 million in its securities portfolio at March 31, 2011, compared with net unrealized gains of $6.0 million at December 31, 2010.
Loans and Leases
Total loans and leases, net of unearned income and deferred costs, were $878.4 million at March 31, 2011, compared with $898.5 million at December 31, 2010.
Residential mortgages outstanding decreased $4.6 million from the end of 2010. Originations of residential mortgages totaled $18.2 million in the first quarter, compared with $19.3 million in the year-ago quarter and $38.6 million in 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.
Leases (net of unearned income) decreased $4.5 million in the first quarter of 2011 to $37.9 million as a result of our previously announced decision to cease new lease originations.
Indirect auto loans decreased in the first quarter and were $170.2 million as of March 31, 2011. We originated $15.6 million of indirect auto loans in the first quarter, compared with $17.2 million in the year-ago quarter and $14.5 million in the fourth quarter of 2010. We originate auto loans through a network of reputable, well established automobile dealers located in
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Central and Western New York. Applications received through our indirect lending program are subject to the same comprehensive underwriting criteria and procedures as employed in our direct lending programs.
The following table sets forth the composition of our loan and lease portfolio at the dates indicated, dollars in thousands:
March 31, 2011 | Percent | December 31, 2010 | Percent | |||||||||||||
Residential real estate |
$ | 330,330 | 37.7 | % | $ | 334,967 | 37.4 | % | ||||||||
Commercial loans |
128,461 | 14.7 | % | 133,787 | 14.9 | % | ||||||||||
Commercial real estate |
117,500 | 13.4 | % | 116,066 | 13.0 | % | ||||||||||
Leases (net of unearned income) |
37,926 | 4.3 | % | 42,466 | 4.8 | % | ||||||||||
Indirect auto |
170,239 | 19.5 | % | 176,125 | 19.7 | % | ||||||||||
Other consumer loans |
90,617 | 10.4 | % | 91,619 | 10.2 | % | ||||||||||
Total loans and leases |
875,073 | 100.0 | % | 895,030 | 100.0 | % | ||||||||||
Net deferred loan costs |
3,329 | 3,507 | ||||||||||||||
878,402 | 898,537 | |||||||||||||||
Allowance for credit losses |
(10,678 | ) | (10,683 | ) | ||||||||||||
Net loans and leases |
$ | 867,724 | $ | 887,854 | ||||||||||||
Deposits
Deposits increased $28.8 million or 2.5% 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.
The following table sets forth the composition of our deposits by business line at the dates indicated, dollars in thousands:
March 31, 2011 | ||||||||||||||||||||
Retail | Commercial | Municipal | Total | Percent | ||||||||||||||||
Non-interest checking |
$ | 44,937 | $ | 115,371 | $ | 10,046 | $ | 170,354 | 14.6 | % | ||||||||||
Interest checking |
107,117 | 8,798 | 36,143 | 152,058 | 13.1 | % | ||||||||||||||
Total checking |
152,054 | 124,169 | 46,189 | 322,412 | 27.7 | % | ||||||||||||||
Savings |
90,583 | 12,123 | 3,093 | 105,799 | 9.1 | % | ||||||||||||||
Money market |
88,135 | 127,915 | 176,938 | 392,988 | 33.8 | % | ||||||||||||||
Time deposits |
252,542 | 27,693 | 61,916 | 342,151 | 29.4 | % | ||||||||||||||
Total deposits |
$ | 583,314 | $ | 291,900 | $ | 288,136 | $ | 1,163,350 | 100.0 | % | ||||||||||
December 31, 2010 | ||||||||||||||||||||
Retail | Commercial | Municipal | Total | Percent | ||||||||||||||||
Non-interest checking |
$ | 41,962 | $ | 133,979 | $ | 3,977 | $ | 179,918 | 15.9 | % | ||||||||||
Interest checking |
109,682 | 12,906 | 29,306 | 151,894 | 13.3 | % | ||||||||||||||
Total checking |
151,644 | 146,885 | 33,283 | 331,812 | 29.2 | % | ||||||||||||||
Savings |
88,785 | 11,646 | 2,668 | 103,099 | 9.1 | % | ||||||||||||||
Money market |
88,870 | 109,282 | 159,733 | 357,885 | 31.5 | % | ||||||||||||||
Time deposits |
257,489 | 23,677 | 60,636 | 341,802 | 30.2 | % | ||||||||||||||
Total deposits |
$ | 586,788 | $ | 291,490 | $ | 256,320 | $ | 1,134,598 | 100.0 | % | ||||||||||
Liquidity
Alliances liquidity primarily reflects the Banks ability to provide funds to meet loan and lease requests, to accommodate possible outflows in deposits, to take advantage of market interest rate opportunities, and to pay dividends to Alliance. Funding loan and lease commitments, providing for deposit outflows, settling other liabilities when they come due and managing of interest rate fluctuations require continuous analysis in order to match the maturities of specific categories of short-term loans and leases and investments with specific types of deposits, borrowings and other liabilities. Liquidity is normally considered in terms of the nature and mix of the Banks sources and uses of funds. Our Asset Liability Committee
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(ALCO) is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. As of March 31, 2011, liquidity as measured by the Bank is in compliance with and exceeds its policy guidelines.
Our principal sources of funds for operations are cash flows generated from earnings, deposit inflows, loan and lease repayments, investment amortization and maturities, borrowings from the Federal Home Loan Bank of New York (FHLB), and securities sold under repurchase agreements. During the three months ended March 31, 2011, cash and cash equivalents decreased by $2.1 million, as net cash used in investing activities of $19.7 million exceeded net cash provided by operating and financing activities of $17.6 million. Net cash used in investing activities primarily resulted from securities purchases exceeding maturities, sales and principal repayments by $40.2 million. Net cash provided by financing activities in the first quarter principally reflects a $28.8 million net increase in deposits, partly reduced by a net decrease in borrowings of $14.8 million and cash dividends of $1.4 million. Net cash from operating activities was primarily provided by net income in the amount of $3.3 million and proceeds from sale of loans and leases held-for-sale of $12.4 million, partly reduced by originations of loans held-for-sale of $9.6 million.
As a member of the FHLB, we are eligible to borrow up to a specific credit limit which is determined by the amount of our residential mortgages, commercial mortgages and investment securities that have been pledged as collateral. As of March 31, 2011, our credit limit with the FHLB was $313.7 million. The total of our outstanding borrowings from the FHLB on that date was $105.0 million.
We had a $145.4 million line of credit at March 31, 2011 with the Federal Reserve Bank of New York through its Discount Window. Alliance has pledged indirect auto loans and investment securities totaling $170.7 million and $6.5 million, respectively, at March 31, 2011. At March 31, 2011, we also had available $78.5 million of unsecured federal funds lines of credit with other financial institutions. We did not draw any amounts on any of these lines during the quarter other than an overnight test to confirm their availability. There were no amounts outstanding on any of these lines at March 31, 2011.
Capital Resources
We use certain non-GAAP financial measures, such as the Tangible Common Equity to Tangible Assets ratio (TCE), to provide information for investors to effectively analyze financial trends of ongoing business activities, and to enhance comparability with peers across the financial sector. We believe TCE is useful because it is a measure utilized by regulators, market analysts and investors in evaluating a companys financial condition and capital strength. TCE, as defined by us, represents common equity less goodwill and intangible assets. A reconciliation from the our GAAP Total Equity to Total Assets ratio to the Non-GAAP Tangible Common Equity to Tangible Assets ratio is presented below, dollars in thousands:
March 31, 2011 | ||||
Total assets |
$ | 1,469,176 | ||
Less: Goodwill and intangible assets, net |
39,241 | |||
Tangible assets (non-GAAP) |
$ | 1,429,935 | ||
Total Common Equity |
135,028 | |||
Less: Goodwill and intangible assets, net |
39,241 | |||
Tangible Common Equity (non-GAAP) |
95,787 | |||
Total Equity/Total Assets |
9.19 | % | ||
Tangible Common Equity/Tangible Assets (non-GAAP) |
6.70 | % |
Shareholders equity was $135.0 million at March 31, 2011, compared with $133.1 million at December 31, 2010. Net income increased shareholders equity by $3.3 million during the quarter which was partially offset by dividends declared of $1.4 million. In February 2011, we announced that our Board of Directors declared a quarterly dividend of $0.30 per common share.
The Banks Tier 1 leverage ratio was 7.79% and its total risk-based capital ratio was 14.15% at the end of the first quarter, both of which comfortably exceeded the regulatory thresholds required to be classified as a well-capitalized institution, which are 5.0% and 10.0%, respectively. As provided above, our tangible common equity capital ratio was 6.70% at March 31, 2011.
Alliance and its banking subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines
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and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require Alliance and its subsidiary bank to maintain minimum amounts and ratios (set forth in the following tables) of total and Tier 1 Capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 Capital (as defined) to average assets (as defined).
As of December 31, 2010, the most recent notification from the Office of the Comptroller of the Currency categorized the Bank as well-capitalized, under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the tables below. Management believes that, as of March 31, 2011, Alliance and the Bank met all capital adequacy requirements to which they were subject.
The following table compares our actual capital amounts and ratios with those needed to qualify for the well capitalized category, which is the highest capital category as defined in the regulations, dollars in thousands:
Actual | For
Capital Adequacy Purposes |
To Be Well
Capitalized Under Prompt Corrective Action Provisions |
||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||||||||
As of March 31, 2011 |
||||||||||||||||||||||||
Total risk-based capital |
||||||||||||||||||||||||
Alliance |
$ | 129,934 | 15.05 | % | $ | 69,050 | ³8.00 | % | N/A | N/A | ||||||||||||||
Bank |
121,174 | 14.15 | % | 68,500 | ³8.00 | % | 85,625 | ³10.00 | % | |||||||||||||||
Tier 1 capital |
||||||||||||||||||||||||
Alliance |
119,150 | 13.80 | % | 34,525 | ³4.00 | % | N/A | N/A | ||||||||||||||||
Bank |
110,493 | 12.90 | % | 34,250 | ³4.00 | % | 51,375 | ³6.00 | % | |||||||||||||||
Leverage |
||||||||||||||||||||||||
Alliance |
119,150 | 8.36 | % | 57,010 | ³4.00 | % | N/A | N/A | ||||||||||||||||
Bank |
110,493 | 7.79 | % | 56,726 | ³4.00 | % | 70,908 | ³5.00 | % | |||||||||||||||
As of December 31, 2010 |
||||||||||||||||||||||||
Total risk-based capital |
||||||||||||||||||||||||
Alliance |
$ | 127,629 | 14.65 | % | $ | 69,684 | ³8.00 | % | N/A | N/A | ||||||||||||||
Bank |
119,203 | 13.79 | % | 69,136 | ³8.00 | % | $ | 86,420 | ³10.00 | % | ||||||||||||||
Tier 1 capital |
||||||||||||||||||||||||
Alliance |
116,943 | 13.43 | % | 34,842 | ³4.00 | % | N/A | N/A | ||||||||||||||||
Bank |
108,517 | 12.56 | % | 34,568 | ³4.00 | % | 51,852 | ³6.00 | % | |||||||||||||||
Leverage |
||||||||||||||||||||||||
Alliance |
116,943 | 8.28 | % | 56,493 | ³4.00 | % | N/A | N/A | ||||||||||||||||
Bank |
108,517 | 7.72 | % | 56,202 | ³4.00 | % | 70,253 | ³5.00 | % |
Application of Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP and follow practices accepted within the banking industry. Application of these principles 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 as of the date 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. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and information used to record valuation adjustments for certain assets and liabilities are based on quoted market prices or are provided by other third-party sources, when available. When third party information is not available, valuation adjustments are estimated in good faith by management.
The most significant accounting policies followed by Alliance are presented in Note 1 to the consolidated financial statements included in the 2010 Annual Report on Form 10-K (the Consolidated Financial Statements). These policies, along with the
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disclosures presented in the other financial statement notes and in this discussion, provide information on how significant assets and liabilities are valued in the financial statements and how those values are determined. 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 and lease losses, accrued income taxes, and the impairment analysis of goodwill and other intangible assets to be the accounting areas that require the most subjective and complex judgments, and as such could be the most subject to revision as new information becomes available.
The allowance for credit losses represents managements estimate of probable credit losses in the loan and lease portfolio. Determining the amount of the allowance for credit losses is considered a critical accounting estimate because it requires significant judgment and the use of estimates related to the amount and timing of expected future cash flows on impaired loans and leases, estimated losses on pools of homogeneous loans and leases based on historical loss experience, and consideration of current economic trends and conditions, all of which may be susceptible to significant change. The loan and lease portfolio also represents the largest asset type on the consolidated balance sheet. Note 1 to the Consolidated Financial Statements in this Quarterly Report on Form 10-Q describes the methodology used to determine the allowance for credit losses, and a discussion of the factors driving changes in the amount of the allowance for credit losses is included in this report.
We account for income taxes using the asset and liability approach. Under this approach, deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when such amounts are realized or settled. We must assess the likelihood that a portion or all of the deferred tax assets will not be realized. In doing so, judgments and estimates must be made regarding the projection of future taxable income. If necessary, a valuation allowance is established to reduce the deferred tax assets to the amount that is more likely than not to be realized.
In computing the income tax provision, estimates and assumptions must be made regarding the deductibility of certain expenses. It is possible that these estimates and assumptions may be disallowed as part of an examination by the various taxing authorities that we are subject to, resulting in additional income tax expense in future periods. In addition, we maintain a reserve related to uncertain tax positions. These uncertain tax positions are evaluated each reporting period to determine the level of reserve that is appropriate.
We utilize significant estimates and assumptions in determining the fair value of its goodwill and intangible assets for purposes of impairment testing. The valuation requires the use of assumptions, including among others, discount rates, rates of return on assets, account attrition and costs of servicing. Impairment testing for goodwill requires that the fair value of each of our reporting units be compared to the carrying amount of its net assets, including goodwill. Determining the fair value of a reporting unit requires us to use a high degree of subjective judgment. We utilize both market-based valuation multiples and discounted cash flow valuation models that incorporate such variables as revenue growth rates, expense trends, interest rates and terminal values. Based upon an evaluation of key data and market factors, we select the specific variables to be incorporated into the valuation model. Future changes in the economic environment or operations of our reporting units could cause changes to these variables, which could result in impairment being identified.
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Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates or prices such as interest rates, foreign currency exchange rates, commodity prices, and equity prices. Our market risk arises principally from interest rate risk in its lending, investing, deposit gathering and borrowing activities. Other types of market risks do not arise in the normal course of our business activities.
The Banks ALCO is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and manage exposure to interest rate risk. The policies and guidelines established by the ALCO are reviewed and approved by the Companys Board of Directors annually.
Interest rate risk is monitored primarily through financial modeling of net interest income and net portfolio value estimation (discounted present value of assets minus discounted present value of liabilities). Both measures are highly assumption dependent and change regularly as the balance sheet and interest rates change; however, taken together, they represent a reasonably comprehensive view of the magnitude of interest rate risk, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. The key assumptions employed by these measures are analyzed and reviewed monthly by the ALCO.
The table that follows is provided pursuant to the market risk disclosure rules set forth in Item 305 of Regulation S-K of the Securities and Exchange Commission. The information provided in the following table is based on significant estimates and assumptions and constitutes, like certain other statements included herein, a forward-looking statement. The base case (no rate change) information in the table shows (1) an estimate of our net portfolio value at March 31, 2011 arrived at by discounting estimated future cash flows at current market rates and (2) an estimate of net interest income for the twelve months ending March 31, 2012 assuming that maturing assets or liabilities are replaced with new balances of the same type, in the same amount, and at current (March 31, 2011) rate levels and repricing balances are adjusted to current (March 31, 2011) rate levels. The rate change information (rate shocks) in the table shows estimates of net portfolio value at March 31, 2011 and net interest income for the twelve months ending March 31, 2012 assuming instantaneous rate changes of up 100, 200, and 300 basis points and down 100 basis points. Cash flows for non-maturity deposits are based on a decay or runoff rate based on average account age. Rate changes in the rate shock scenario are assumed to be shock or immediate changes and occur uniformly across the yield curve. In projecting future net interest income under the rate shock scenarios, activity is simulated by replacing maturing balances with new balances of the same type, in the same amount, but at the assumed post shock rate levels. Balances that reprice are assumed to reprice at post shock rate levels.
Based on the foregoing assumptions and as depicted in the table that follows, an immediate increase in interest rates of 100, 200, or 300 basis points would have a negative effect on net interest income over a twelve month time period. This is principally because the Banks interest-bearing deposit accounts are assumed to reprice faster than its loans and investment securities. However, if the Bank does not increase the rates paid on its deposit accounts as quickly or to the same magnitude as increases in market interest rates, the negative impact on net interest income will likely be lower. Over a longer period of time, and assuming that interest rates remain stable after the initial rate increase and the Bank purchases securities and originates loans at yields higher than those maturing and reprices loans at higher yields, the impact of an increase in interest rates should be positive. This occurs primarily because with the passage of time more loans and investment securities will reprice at the higher rates and there will be no offsetting increase in interest expense for those loans and investment securities funded by noninterest-bearing checking deposits and capital. Generally, the reverse should be true of an immediate decrease in interest rates of 100 basis points. However, the positive impact on net interest income of a decline in interest rates of 100 basis points is currently constrained by the absolute low level of deposit and borrowing rates.
Net Portfolio Value at Mar 31, 2011 | Net Interest Income Twelve Months Ending Mar 31, 2012 |
|||||||||||||||||||||||
Change from Base | Change from Base | |||||||||||||||||||||||
Rate Change Scenario |
Amount | Dollar | Percent | Amount | Dollar | Percent | ||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
+300 basis point rate shock |
$ | 279,078 | $ | (42,091 | ) | (13.1 | )% | $ | 33,548 | $ | (12,378 | ) | (27.0 | )% | ||||||||||
+200 basis point rate shock |
289,913 | (31,256 | ) | (9.7 | )% | 37,585 | (8,341 | ) | (18.2 | )% | ||||||||||||||
+100 basis point rate shock |
299,297 | (21,872 | ) | (6.8 | )% | 41,809 | (4,117 | ) | (9.0 | )% | ||||||||||||||
Base case (no rate change) |
321,169 | | | % | 45,926 | | | % | ||||||||||||||||
-100 basis point rate shock |
305,367 | (15,802 | ) | (4.9 | )% | 45,275 | (651 | ) | (1.4 | )% |
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Item 4. | Controls and Procedures |
Management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Alliances disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) ), as of the end of the period covered by this report. Based upon the evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is (i) recorded, processed, summarized and reported as and when required, and (ii) accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely discussion regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes in Alliances internal control over financial reporting that occurred during the last fiscal quarter that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Item 1. | Legal Proceedings |
None.
Item 1A | Risk Factors |
For a summary of risk factors relevant to our operations, see Part I, Item 1A, Risk Factors in our 2010 Annual Report on Form 10-K. There are no material changes in the risk factors relevant to our operations.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
a) | Not applicable |
b) | Not applicable |
c) | Not applicable |
Item 3. | Defaults Upon Senior Securities |
None.
Item 4. | Removed and Reserved |
Item 5. | Other Information |
None.
Item 6. | Exhibits |
The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed in the Exhibit Index attached hereto and are incorporated herein by reference.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ALLIANCE FINANCIAL CORPORATION | ||
DATE: May 6, 2011 | /s/ Jack H. Webb | |
Jack H. Webb Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) | ||
DATE: May 6, 2011 | /s/ J. Daniel Mohr | |
J. Daniel Mohr Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) |
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EXHIBIT INDEX
Exhibit |
Exhibit | |
3.1 | Restated Certificate of Incorporation of Alliance (incorporated herein by reference to exhibit 3.1 to Alliances Current Report on Form 8-K filed with the Securities and Exchange Commission (SEC) on August 27, 2009) | |
3.2 | Amended and Restated Bylaws of Alliance (incorporated herein by reference to exhibit 3.2 to Alliances Annual Report on Form 10-K filed with the SEC on March 14, 2011) | |
4.1 | Rights Agreement dated October 19, 2001 between Alliance Financial Corporation and American Stock Transfer & Trust Company, including the Certificate of Amendment to Alliances Certificate of Incorporation, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B, and C, respectively (incorporated herein by reference to exhibit 4.1 to Alliances Form 8-A12G filed with the SEC on October 25, 2001) | |
31.1* | Certification of Jack H. Webb, Chairman of the Board, President and Chief Executive Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2* | Certification of J. Daniel Mohr, Executive Vice President and Chief Financial Officer of the Registrant, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1* | Certification of Jack H. Webb, Chairman of the Board, President and Chief Executive Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2* | Certification of J. Daniel Mohr, Executive Vice President and Chief Financial Officer of the Registrant, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Filed herewith |
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