Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - ALLIANCE FINANCIAL CORP /NY/ | Financial_Report.xls |
EX-31.2 - EX-31.2 - ALLIANCE FINANCIAL CORP /NY/ | d334460dex312.htm |
EX-32.1 - EX-32.1 - ALLIANCE FINANCIAL CORP /NY/ | d334460dex321.htm |
EX-31.1 - EX-31.1 - ALLIANCE FINANCIAL CORP /NY/ | d334460dex311.htm |
EX-32.2 - EX-32.2 - ALLIANCE FINANCIAL CORP /NY/ | d334460dex322.htm |
Table of Contents
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, 2012
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 x 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 3, 2012 was 4,784,698 shares.
Table of Contents
TABLE OF CONTENTS | ||||||
Page Number(s) | ||||||
i | ||||||
Part I. |
FINANCIAL INFORMATION | |||||
Item 1. |
Financial Statements (All Unaudited) | |||||
Consolidated Balance Sheets | 1 | |||||
Consolidated Statements of Comprehensive Income | 2 | |||||
Consolidated Statements of Changes in Shareholders Equity | 3 | |||||
Consolidated Statements of Cash Flow | 4 | |||||
Notes to Consolidated Financial Statements | 5-20 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 21-34 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 35 | ||||
Item 4. |
Controls and Procedures | 36 | ||||
Part II. |
OTHER INFORMATION | |||||
Item 1. |
Legal Proceedings | 37 | ||||
Item 1A. |
Risk Factors | 37 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 37 | ||||
Item 3. |
Defaults Upon Senior Securities | 37 | ||||
Item 4. |
Mine Safety Disclosures | 37 | ||||
Item 5. |
Other Information | 37 | ||||
Item 6. |
Exhibits | 37 | ||||
Signatures | ||||||
Exhibits |
Table of Contents
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.
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 Federal Deposit Insurance Corporation (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 (SEC) 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.
- i -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(In thousands, except share data)
March 31, 2012 | December 31, 2011 | |||||||
Assets |
||||||||
Cash and due from banks |
$ | 90,199 | $ | 52,802 | ||||
Securities available-for-sale |
346,405 | 374,306 | ||||||
Federal Home Loan Bank of New York (FLHB) and Federal Reserve Bank (FRB) stock |
8,040 | 8,478 | ||||||
Loans and leases held-for-sale |
451 | 1,217 | ||||||
Loans and leases, net of unearned income and deferred costs |
869,893 | 872,721 | ||||||
Allowance for credit losses |
(9,358 | ) | (10,769 | ) | ||||
|
|
|
|
|||||
Net loans and leases |
860,535 | 861,952 | ||||||
Premises and equipment, net |
17,404 | 17,541 | ||||||
Accrued interest receivable |
4,330 | 3,960 | ||||||
Bank-owned life insurance |
29,677 | 29,430 | ||||||
Goodwill |
30,844 | 30,844 | ||||||
Intangible assets, net |
7,473 | 7,694 | ||||||
Other assets |
20,236 | 20,866 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,415,594 | $ | 1,409,090 | ||||
|
|
|
|
|||||
Liabilities and shareholders equity |
||||||||
Liabilities |
||||||||
Deposits: |
||||||||
Non-interest-bearing deposits |
$ | 190,566 | $ | 185,736 | ||||
Interest-bearing deposits |
910,358 | 897,329 | ||||||
|
|
|
|
|||||
Total deposits |
1,100,924 | 1,083,065 | ||||||
Borrowings |
125,540 | 136,310 | ||||||
Accrued interest payable |
1,101 | 1,578 | ||||||
Other liabilities |
17,263 | 18,366 | ||||||
Junior subordinated obligations issued to unconsolidated subsidiary trusts |
25,774 | 25,774 | ||||||
|
|
|
|
|||||
Total liabilities |
1,270,602 | 1,265,093 | ||||||
Shareholders equity |
||||||||
Preferred stock par value $1.00 per share; 900,000 shares authorized, none issued and outstanding |
| | ||||||
Preferred stock par value $1.00 per 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, 5,107,010 and 5,091,553 shares issued; and 4,784,698 and 4,769,241 shares outstanding, respectively |
5,107 | 5,092 | ||||||
Surplus |
47,201 | 47,147 | ||||||
Undivided profits |
101,035 | 99,879 | ||||||
Accumulated other comprehensive income |
3,822 | 3,951 | ||||||
Directors stock-based deferred compensation plan (137,490 and 134,260 shares, respectively) |
(3,517 | ) | (3,416 | ) | ||||
Treasury stock, at cost: 322,312 shares |
(8,656 | ) | (8,656 | ) | ||||
|
|
|
|
|||||
Total shareholders equity |
144,992 | 143,997 | ||||||
|
|
|
|
|||||
Total liabilities & shareholders equity |
$ | 1,415,594 | $ | 1,409,090 | ||||
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
- 1 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands, except per share data)
Three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Interest income: |
||||||||
Interest and fees on loans and leases |
$ | 9,825 | $ | 10,662 | ||||
Federal funds sold and interest bearing deposits |
34 | 4 | ||||||
Interest and dividends on taxable securities |
1,902 | 2,860 | ||||||
Interest and dividends on nontaxable securities |
702 | 736 | ||||||
|
|
|
|
|||||
Total interest income |
12,463 | 14,262 | ||||||
Interest expense: |
||||||||
Deposits: |
||||||||
Savings accounts |
32 | 58 | ||||||
Money market accounts |
278 | 447 | ||||||
Time accounts |
1,140 | 1,487 | ||||||
NOW accounts |
38 | 68 | ||||||
|
|
|
|
|||||
Total deposits |
1,488 | 2,060 | ||||||
Borrowings: |
||||||||
Repurchase agreements |
205 | 207 | ||||||
FHLB advances |
756 | 855 | ||||||
Junior subordinated obligations issued to unconsolidated subsidiary trusts |
173 | 157 | ||||||
|
|
|
|
|||||
Total interest expense |
2,622 | 3,279 | ||||||
Net interest income |
9,841 | 10,983 | ||||||
Provision for credit losses |
| 200 | ||||||
|
|
|
|
|||||
Net interest income after provision for credit losses |
9,841 | 10,783 | ||||||
Non-interest income: |
||||||||
Investment management income |
1,855 | 1,916 | ||||||
Service charges on deposit accounts |
1,043 | 1,010 | ||||||
Card-related fees |
651 | 653 | ||||||
Income from bank-owned life insurance |
247 | 254 | ||||||
Gain on the sale of loans |
358 | 288 | ||||||
Other non-interest income |
322 | 465 | ||||||
|
|
|
|
|||||
Total non-interest income |
4,476 | 4,586 | ||||||
Non-interest expense: |
||||||||
Salaries and employee benefits |
5,691 | 5,530 | ||||||
Occupancy and equipment expense |
1,901 | 1,830 | ||||||
Communication expense |
159 | 150 | ||||||
Office supplies and postage expense |
282 | 284 | ||||||
Marketing expense |
238 | 263 | ||||||
Amortization of intangible assets |
221 | 241 | ||||||
Professional fees |
777 | 824 | ||||||
FDIC insurance premium |
215 | 393 | ||||||
Other non-interest expense |
1,404 | 1,464 | ||||||
|
|
|
|
|||||
Total non-interest expense |
10,888 | 10,979 | ||||||
Income before income tax expense |
3,429 | 4,390 | ||||||
Income tax expense |
790 | 1,084 | ||||||
|
|
|
|
|||||
Net income |
$ | 2,639 | $ | 3,306 | ||||
|
|
|
|
|||||
Net income per share: |
||||||||
Basic earnings per share |
$ | 0.55 | $ | 0.70 | ||||
Diluted earnings per share |
$ | 0.55 | $ | 0.70 | ||||
Cash dividends declared per share |
$ | 0.31 | $ | 0.30 | ||||
Comprehensive income |
$ | 2,510 | $ | 3,232 | ||||
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
- 2 -
Table of Contents
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, 2011 |
4,729,035 | $ | 5,051 | $ | 45,620 | $ | 92,380 | $ | 1,713 | $ | (8,656 | ) | $ | (2,977 | ) | $ | 133,131 | |||||||||||||||
|
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|
|
|
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|
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|
|
|
|
|
|
|||||||||||||||||
Net income |
| | | 3,306 | | | | 3,306 | ||||||||||||||||||||||||
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 (net of tax) |
| | | | 31 | | | 31 | ||||||||||||||||||||||||
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 | ) | | |||||||||||||||||||||||
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|
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|
|||||||||||||||||
Balance at March 31, 2011 |
4,745,491 | $ | 5,068 | $ | 45,805 | $ | 94,263 | $ | 1,639 | $ | (8,656 | ) | $ | (3,091 | ) | $ | 135,028 | |||||||||||||||
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|
|||||||||||||||||
Balance at January 1, 2012 |
4,769,241 | $ | 5,092 | $ | 47,147 | $ | 99,879 | $ | 3,951 | $ | (8,656 | ) | $ | (3,416 | ) | $ | 143,997 | |||||||||||||||
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|
|||||||||||||||||
Net income |
| | | 2,639 | | | | 2,639 | ||||||||||||||||||||||||
Change in unrealized appreciation in available-for-sale securities (net of tax) |
| | | | (183 | ) | | | (183 | ) | ||||||||||||||||||||||
Change in accumulated unrealized losses and prior service costs for retirement plans (net of tax) |
| | | | 54 | | | 54 | ||||||||||||||||||||||||
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|
|||||||||||||||||
Retirement of common stock |
(3,008 | ) | (3 | ) | (90 | ) | | | | | (93 | ) | ||||||||||||||||||||
Issuance of restricted stock |
18,465 | 18 | (18 | ) | | | | | | |||||||||||||||||||||||
Amortization of restricted stock |
| | 119 | | | | | 119 | ||||||||||||||||||||||||
Tax benefit of stock-based compensation |
| | (58 | ) | | | | | (58 | ) | ||||||||||||||||||||||
Cash dividend $0.31 per common share |
| | | (1,483 | ) | | | | (1,483 | ) | ||||||||||||||||||||||
Directors deferred stock plan purchase |
| | 101 | | | | (101 | ) | | |||||||||||||||||||||||
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Balance at March 31, 2012 |
4,784,698 | $ | 5,107 | $ | 47,201 | $ | 101,035 | $ | 3,822 | $ | (8,656 | ) | $ | (3,517 | ) | $ | 144,992 | |||||||||||||||
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The accompanying notes are an integral part of the consolidated financial statements.
- 3 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flow (Unaudited)
Three months ended March 31, | ||||||||
(In thousands) | 2012 | 2011 | ||||||
Operating Activities: |
||||||||
Net Income |
$ | 2,639 | $ | 3,306 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Provision for credit losses |
| 200 | ||||||
Depreciation expense |
488 | 557 | ||||||
Increase in surrender value of life insurance |
(247 | ) | (254 | ) | ||||
Provision (benefit) for deferred income taxes |
642 | (499 | ) | |||||
Amortization of investment security discounts and premiums, net |
941 | 873 | ||||||
Net gain on sale of premises and equipment |
(2 | ) | | |||||
Proceeds from the sale of loans held-for-sale |
16,982 | 12,379 | ||||||
Origination of loans held-for-sale |
(15,985 | ) | (9,579 | ) | ||||
Gain on sale of loans held-for-sale |
(358 | ) | (288 | ) | ||||
Gain on foreclosed real estate |
(23 | ) | (67 | ) | ||||
Amortization of capitalized servicing rights |
120 | 106 | ||||||
Amortization of intangible assets |
221 | 241 | ||||||
Restricted stock expense, net |
119 | 120 | ||||||
Amortization of prepaid FDIC insurance premium |
194 | 365 | ||||||
Change in other assets and liabilities |
(2,219 | ) | (2,218 | ) | ||||
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|
|
|
|||||
Net cash provided by operating activities |
3,512 | 5,242 | ||||||
Investing Activities: |
||||||||
Proceeds from maturities, redemptions, calls and principal repayments of investment securities available-for-sale |
26,829 | 24,629 | ||||||
Purchase of investment securities available-for-sale |
| (64,794 | ) | |||||
Purchase of FHLB and FRB stock |
(16 | ) | (266 | ) | ||||
Redemption of FHLB stock |
454 | 806 | ||||||
Net decrease in loans and leases |
1,366 | 19,801 | ||||||
Purchases of premises and equipment |
(353 | ) | (86 | ) | ||||
Proceeds from the sale of premises and equipment |
4 | | ||||||
Proceeds from disposition of foreclosed assets |
243 | 187 | ||||||
|
|
|
|
|||||
Net cash provided by (used in) investing activities |
28,527 | (19,723 | ) | |||||
Financing Activities: |
||||||||
Net increase in checking, savings and money market accounts |
64,318 | 28,403 | ||||||
Net (decrease) increase in time accounts |
(46,459 | ) | 349 | |||||
Net decrease in short-term borrowings |
(770 | ) | (4,821 | ) | ||||
Payments on long-term borrowings |
(10,000 | ) | (10,000 | ) | ||||
Retirement of common stock |
(93 | ) | (41 | ) | ||||
Tax (provision) benefit for stock-based compensation |
(58 | ) | 9 | |||||
Purchase of shares for directors deferred stock-based plan |
(101 | ) | (114 | ) | ||||
Cash dividends paid to common shareholders |
(1,479 | ) | (1,419 | ) | ||||
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|
|
|||||
Net cash provided by financing activities |
5,358 | 12,366 | ||||||
|
|
|
|
|||||
Net increase (decrease) in cash and cash equivalents |
37,397 | (2,115 | ) | |||||
Cash and cash equivalents at beginning of period |
52,802 | 32,501 | ||||||
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|
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Cash and cash equivalents at end of period |
$ | 90,199 | $ | 30,386 | ||||
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|
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Supplemental Disclosures of Cash Flow Information: |
||||||||
Interest received during the period |
$ | 12,093 | $ | 13,423 | ||||
Interest paid during the period |
3,099 | 3,587 | ||||||
Income taxes |
5 | 492 | ||||||
Non-cash investing activities: |
||||||||
Change in unrealized gain on available-for-sale securities |
(131 | ) | (172 | ) | ||||
Transfer of loans to other real estate and repossessed assets |
51 | 129 | ||||||
Non-cash financing activities: |
||||||||
Common dividend declared and unpaid |
1,483 | 1,423 |
The accompanying notes are an integral part of the consolidated financial statements.
- 4 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Nature of Operations
Alliance Financial Corporation (the Company or Alliance) 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, 2011 and for the three-year period then ended, included in the Alliances Annual Report on Form 10-K for the year ended December 31, 2011. 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, 2012 and 2011. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results anticipated for the year.
2. Securities
The amortized cost and estimated fair value of securities for the dates indicated (in thousands):
March 31, 2012 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
Debt Securities: |
||||||||||||||||
Obligations of U.S. government-sponsored corporations |
$ | 1,794 | $ | 41 | $ | | $ | 1,835 | ||||||||
Obligations of states and political subdivisions |
76,776 | 4,145 | 2 | 80,919 | ||||||||||||
Mortgage-backed securities residential |
253,728 | 6,918 | 100 | 260,546 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total debt securities |
332,298 | 11,104 | 102 | 343,300 | ||||||||||||
Stock Investments: |
||||||||||||||||
Mutual funds |
3,000 | 109 | 4 | 3,105 | ||||||||||||
|
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|
|
|
|
|
|||||||||
Total stock investments |
3,000 | 109 | 4 | 3,105 | ||||||||||||
|
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|
|
|
|
|
|
|||||||||
Total available-for-sale |
$ | 335,298 | $ | 11,213 | $ | 106 | $ | 346,405 | ||||||||
|
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- 5 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2011 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
Debt Securities: |
||||||||||||||||
Obligations of U.S. government-sponsored corporations |
$ | 3,134 | $ | 56 | $ | | $ | 3,190 | ||||||||
Obligations of states and political subdivisions |
77,541 | 4,759 | 1 | 82,299 | ||||||||||||
Mortgage-backed securities residential |
279,393 | 6,483 | 170 | 285,706 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total debt securities |
360,068 | 11,298 | 171 | 371,195 | ||||||||||||
Stock Investments: |
||||||||||||||||
Mutual funds |
3,000 | 113 | 2 | 3,111 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total stock investments |
3,000 | 113 | 2 | 3,111 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total available-for-sale |
$ | 363,068 | $ | 11,411 | $ | 173 | $ | 374,306 | ||||||||
|
|
|
|
|
|
|
|
As of March 31, 2012 and December 31, 2011, 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, 2012 and December 31, 2011, securities with a carrying value of $343.3 million and $361.8 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 2012 and 2011, 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, 2012 | ||||||||
Amortized Cost | Estimated Fair Value | |||||||
Due in one year or less |
$ | 90,963 | $ | 93,136 | ||||
Due after one year through five years |
160,730 | 165,244 | ||||||
Due after five years through ten years |
63,766 | 67,284 | ||||||
Due after ten years |
16,839 | 17,636 | ||||||
|
|
|
|
|||||
Total debt securities |
$ | 332,298 | $ | 343,300 | ||||
|
|
|
|
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, 2012 | ||||||||||||||||||||||||
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 |
$ | 420 | $ | 2 | $ | | $ | | $ | 420 | $ | 2 | ||||||||||||
Mortgage-backed securities residential |
6,584 | 17 | 1,434 | 83 | 8,018 | 100 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal, debt securities |
7,004 | 19 | 1,434 | 83 | 8,438 | 102 | ||||||||||||||||||
Mutual funds |
496 | 4 | | | 496 | 4 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 7,500 | $ | 23 | $ | 1,434 | $ | 83 | $ | 8,934 | $ | 106 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
- 6 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 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 |
$ | 192 | $ | 1 | $ | | $ | | $ | 192 | $ | 1 | ||||||||||||
Mortgage-backed securities residential |
28,746 | 70 | 4,144 | 100 | 32,890 | 170 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal debt securities |
28,938 | 71 | 4,144 | 100 | 33,082 | 171 | ||||||||||||||||||
Mutual funds |
497 | 2 | | | 497 | 2 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total temporarily impaired securities |
$ | 29,435 | $ | 73 | $ | 4,144 | $ | 100 | $ | 33,579 | $ | 173 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Management does not believe any individual unrealized loss as of March 31, 2012 represents an other-than-temporary impairment. A total of 9 available-for-sale securities were in a continuous unrealized loss position for less than 12 months and 2 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.
3. Loans and Leases
Major classifications of loans and leases at the dates indicated (in thousands):
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Residential real estate |
$ | 313,803 | $ | 316,823 | ||||
Commercial loans |
147,334 | 151,420 | ||||||
Commercial real estate |
126,456 | 126,863 | ||||||
Leases |
20,843 | 28,842 | ||||||
Consumer |
||||||||
Indirect auto loans |
171,822 | 158,813 | ||||||
Home equity line of credit |
78,268 | 78,624 | ||||||
Other consumer loans |
10,339 | 11,152 | ||||||
|
|
|
|
|||||
Total |
868,865 | 872,537 | ||||||
Less: Unearned income |
(2,504 | ) | (3,206 | ) | ||||
Net deferred loan costs |
3,532 | 3,390 | ||||||
|
|
|
|
|||||
Total loans and leases |
869,893 | 872,721 | ||||||
Allowance for credit losses |
(9,358 | ) | (10,769 | ) | ||||
|
|
|
|
|||||
Net loans and leases |
$ | 860,535 | $ | 861,952 | ||||
|
|
|
|
Non-accrual and Past Due Loans and Leases
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):
- 7 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012 | ||||||||||||
Non-accrual | Greater than 90 Days Past Due and Still Accruing |
Nonperforming Loans and Leases |
||||||||||
Commercial |
$ | 1,787 | $ | | $ | 1,787 | ||||||
Commercial real estate |
3,847 | | 3,847 | |||||||||
Leases |
83 | 12 | 95 | |||||||||
Residential real estate |
2,649 | | 2,649 | |||||||||
Consumer: |
||||||||||||
Indirect |
270 | | 270 | |||||||||
Home equity line of credit |
177 | | 177 | |||||||||
Other |
91 | | 91 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 8,904 | $ | 12 | $ | 8,916 |
December 31, 2011 | ||||||||||||
Non-accrual | Greater than 90 Days Past Due and Still Accruing |
Nonperforming Loans and Leases |
||||||||||
Commercial |
$ | 3,401 | $ | | $ | 3,401 | ||||||
Commercial real estate |
4,051 | | 4,051 | |||||||||
Leases |
107 | | 107 | |||||||||
Residential real estate |
3,062 | | 3,062 | |||||||||
Consumer: |
||||||||||||
Indirect |
293 | | 293 | |||||||||
Home equity line of credit |
270 | | 270 | |||||||||
Other |
103 | | 103 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 11,287 | $ | | $ | 11,287 |
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, 2012 | ||||||||||||||||||||||||
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 |
$ | 363 | $ | 190 | $ | 1,269 | $ | 1,822 | $ | 145,512 | $ | 147,334 | ||||||||||||
Commercial real estate |
1,814 | 301 | 1,790 | 3,905 | 122,551 | 126,456 | ||||||||||||||||||
Leases, net of unearned income |
80 | | 26 | 106 | 18,233 | 18,339 | ||||||||||||||||||
Residential real estate |
3,481 | 603 | 2,649 | 6,733 | 307,070 | 313,803 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Indirect |
423 | 46 | 36 | 505 | 171,317 | 171,822 | ||||||||||||||||||
Home equity line of credit |
127 | 121 | 38 | 286 | 77,982 | 78,268 | ||||||||||||||||||
Other |
90 | 14 | | 104 | 10,235 | 10,339 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 6,378 | $ | 1,275 | $ | 5,808 | $ | 13,461 | $ | 852,900 | $ | 866,361 |
- 8 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 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 |
$ | 390 | $ | 173 | $ | 1,327 | $ | 1,890 | $ | 149,530 | $ | 151,420 | ||||||||||||
Commercial real estate |
262 | | 1,873 | 2,135 | 124,728 | 126,863 | ||||||||||||||||||
Leases, net of unearned income |
39 | | 18 | 57 | 25,579 | 25,636 | ||||||||||||||||||
Residential real estate |
3,743 | 377 | 3,062 | 7,182 | 309,641 | 316,823 | ||||||||||||||||||
Consumer: |
||||||||||||||||||||||||
Indirect |
728 | 76 | 67 | 871 | 157,942 | 158,813 | ||||||||||||||||||
Home equity line of credit |
141 | 33 | 123 | 297 | 78,327 | 78,624 | ||||||||||||||||||
Other |
80 | 53 | 6 | 139 | 11,013 | 11,152 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 5,383 | $ | 712 | $ | 6,476 | $ | 12,571 | $ | 856,760 | $ | 869,331 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Credit Losses
The following tables summarize activity in the allowance for credit losses for the periods indicated (in thousands):
March 31, 2012 | ||||||||||||||||||||||||||||
Commercial & Commercial Real Estate |
Leases, net |
Residential Real Estate |
Consumer Indirect |
Consumer Other |
Unallocated | Total | ||||||||||||||||||||||
Allowance for credit losses: |
||||||||||||||||||||||||||||
Beginning balance |
$ | 6,994 | $ | 503 | $ | 750 | $ | 784 | $ | 747 | $ | 991 | $ | 10,769 | ||||||||||||||
Charge-offs |
(1,590 | ) | | (73 | ) | (59 | ) | (175 | ) | (1,897 | ) | |||||||||||||||||
Recoveries |
238 | 61 | 7 | 59 | 121 | 486 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Net charge-offs |
(1,352 | ) | 61 | (66 | ) | | (54 | ) | (1,411 | ) | ||||||||||||||||||
Provision |
(625 | ) | (265 | ) | 154 | 24 | 3 | 709 | | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Ending Balance |
$ | 5,017 | $ | 299 | $ | 838 | $ | 808 | $ | 696 | $ | 1,700 | $ | 9,358 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Loans and Leases
The following table presents information related to impaired loans and leases by class as of the dates indicated (in thousands):
- 9 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||
Unpaid Contractual Principal Balance(1) |
Recorded Investment |
Related Allowance |
Unpaid Contractual Principal Balance(1) |
Recorded Investment |
Related Allowance |
|||||||||||||||||||
With no related allowance recorded: |
||||||||||||||||||||||||
Commercial |
$ | 4,069 | $ | 3,220 | $ | 1,962 | $ | 1,143 | ||||||||||||||||
Leases |
105 | 65 | 191 | 83 | ||||||||||||||||||||
Residential real estate |
1,523 | 1,449 | 1,533 | 1,457 | ||||||||||||||||||||
Consumer other |
39 | 39 | 41 | 41 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
5,736 | 4,773 | 3,727 | 2,724 | |||||||||||||||||||||
With an allowance recorded: |
||||||||||||||||||||||||
Commercial |
4,480 | 2,020 | 67 | 7,150 | 5,932 | $ | 2,077 | |||||||||||||||||
Leases |
34 | 18 | 5 | 40 | 24 | 10 | ||||||||||||||||||
Residential real estate |
552 | 552 | 21 | 405 | 405 | 11 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
5,066 | 2,590 | 93 | 7,595 | 6,361 | 2,098 | |||||||||||||||||||
Total: |
||||||||||||||||||||||||
Commercial |
8,549 | 5,240 | 67 | 9,112 | 7,075 | 2,077 | ||||||||||||||||||
Leases |
139 | 83 | 5 | 231 | 107 | 10 | ||||||||||||||||||
Residential real estate |
2,075 | 2,001 | 21 | 1,938 | 1,862 | 11 | ||||||||||||||||||
Consumer other |
39 | 39 | | 41 | 41 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
$ | 10,802 | $ | 7,363 | $ | 93 | $ | 11,322 | $ | 9,085 | $ | 2,098 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Unpaid contractual principal balance has not been reduced by any partial charge-offs taken on loans and leases. |
The allocation of the allowance for credit losses summarized on the basis of Alliances impairment methodology was as follows at the dates indicated (in thousands):
Commercial & Commercial Real Estate |
Leases | Residential Real Estate |
Consumer Indirect |
Consumer Other |
Total | |||||||||||||||||||
March 31, 2012 |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 67 | $ | 5 | $ | 21 | $ | | $ | | $ | 93 | ||||||||||||
Collectively evaluated for impairment |
4,950 | 294 | 817 | 808 | 696 | 7,565 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allocated |
$ | 5,017 | $ | 299 | $ | 838 | $ | 808 | $ | 696 | 7,658 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Unallocated |
1,700 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Total |
$ | 9,358 | ||||||||||||||||||||||
|
|
|||||||||||||||||||||||
December 31, 2011 |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 2,077 | $ | 10 | $ | 11 | $ | | $ | | $ | 2,098 | ||||||||||||
Collectively evaluated for impairment |
4,917 | 493 | 739 | 784 | 747 | 7,680 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allocated |
$ | 6,994 | $ | 503 | $ | 750 | $ | 784 | $ | 747 | 9,778 | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Unallocated |
991 | |||||||||||||||||||||||
|
|
|||||||||||||||||||||||
Total |
$ | 10,769 | ||||||||||||||||||||||
|
|
The recorded investment in loans and leases summarized on the basis of Alliances impairment methodology at the dates indicated was as follows (in thousands):
Commercial & Commercial Real Estate |
Leases | Residential Real Estate |
Consumer Indirect |
Consumer Other |
Total | |||||||||||||||||||
March 31, 2012 |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 5,240 | $ | 83 | $ | 2,001 | $ | | $ | 39 | $ | 7,363 | ||||||||||||
Collectively evaluated for impairment |
268,550 | 18,256 | 311,802 | 171,822 | 88,568 | 858,998 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 273,790 | $ | 18,339 | $ | 313,803 | $ | 171,822 | $ | 88,607 | $ | 866,361 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
December 31, 2011 |
||||||||||||||||||||||||
Individually evaluated for impairment |
$ | 7,075 | $ | 107 | $ | 1,862 | $ | | $ | 41 | $ | 9,085 | ||||||||||||
Collectively evaluated for impairment |
271,208 | 25,529 | 314,961 | 158,813 | 89,735 | 860,246 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 278,283 | $ | 25,636 | $ | 316,823 | $ | 158,813 | $ | 89,776 | $ | 869,331 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
- 10 -
Table of Contents
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, |
||||||||
2012 | 2011 | |||||||
Commercial |
$ | 6,157 | $ | 2,210 | ||||
Leases |
95 | 420 | ||||||
Residential real estate |
1,932 | 1,044 | ||||||
Consumer other |
40 | | ||||||
|
|
|
|
|||||
Total |
$ | 8,224 | $ | 3,674 |
The following table presents interest income recognized on impaired loans while they were considered to be impaired for the periods indicated (in thousands):
For the three months ended |
||||
March 31, 2012 | ||||
Commercial |
$ | 3 | ||
Residential real estate |
24 | |||
|
|
|||
$ | 27 |
There was no interest recognized on impaired loans while they were considered impaired in 2011.
Troubled Debt Restructurings
The following table presents the recorded investment in troubled debt restructured loans and leases as of March 31, 2012 and December 31, 2011 based on payment performance status (in thousands):
March 31, 2012 | ||||||||||||||||||||
Commercial & Commercial Real Estate |
Leases | Residential Real Estate |
Consumer Other |
Total | ||||||||||||||||
Performing |
$ | 210 | $ | | $ | 1,700 | $ | 39 | $ | 1,949 | ||||||||||
Nonperforming |
1,141 | 18 | 301 | | 1,460 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,351 | $ | 18 | $ | 2,001 | $ | 39 | $ | 3,409 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2011 | ||||||||||||||||||||
Commercial & Commercial Real Estate |
Leases | Residential Real Estate |
Consumer Other |
Total | ||||||||||||||||
Performing |
$ | 211 | $ | | $ | 1,401 | $ | 41 | $ | 1,653 | ||||||||||
Nonperforming |
2,216 | 33 | 461 | | 2,710 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 2,427 | $ | 33 | $ | 1,862 | $ | 41 | $ | 4,363 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Troubled debt restructured loans and leases are considered impaired and are included in the previous impaired loans and leases disclosures in this footnote. As of March 31, 2012, the Company has not committed to lend additional amounts to customers with outstanding loans and leases that are classified as troubled debt restructurings.
During the three month period ending March 31, 2012 and March 31, 2011, certain loans and lease modifications were executed which constituted troubled debt restructurings. Substantially all of these modifications included one or a combination of the following: an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; temporary reduction in the interest rate; change in scheduled payment amount; permanent reduction of the principal of the loan; or an extension of additional credit for payment of delinquent real estate taxes.
- 11 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The following table summarizes troubled debt restructurings that occurred during the periods indicated (in thousands):
For the three months ending March 31, 2012 | ||||||||||||
Number of Loans |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
||||||||||
Commercial |
2 | $ | 371 | $ | 371 | |||||||
Residential real estate |
1 | 146 | 150 | |||||||||
|
|
|
|
|
|
|||||||
3 | $ | 517 | $ | 521 |
For three months ending March 31, 2011 | ||||||||||||
Number of Loans |
Pre-Modification Outstanding Recorded Investment |
Post-Modification Outstanding Recorded Investment |
||||||||||
Commercial |
2 | $ | 216 | $ | 228 | |||||||
Residential real estate |
3 | 194 | 269 | |||||||||
|
|
|
|
|
|
|||||||
5 | $ | 410 | $ | 497 |
The troubled debt restructurings described above required a net allocation of the allowance for credit losses of $22,000 and $8,000 at March 31, 2012 and March 31, 2011, respectively. There were no charge-offs recorded on loans and leases modified during the three months ended March 31, 2012 and March 31, 2011, respectively.
The following table summarizes the troubled debt restructurings for which there was a payment default within 12 months following the date of the restructuring for the periods indicated (in thousands):
For the three months ending March 31, 2012 |
For the three months ending March 31, 2011 |
|||||||||||||||
Number of Loans |
Recorded Investment |
Number of Loans |
Recorded Investment |
|||||||||||||
Commercial |
2 | $ | 658 | 1 | $ | 127 | ||||||||||
Residential real estate |
| | 1 | 126 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
2 | $ | 658 | 2 | $ | 253 |
Loans and leases are considered to be in payment default once it is greater than 30 days contractually past due under the modified terms. The troubled debt restructurings described above that subsequently defaulted resulted in a net allocation of the allowance for credit losses of $14,000 and $0 for the three months ending March 31, 2012 and March 31, 2011, respectively. Charge-offs of $1.3 million and $0 were recorded on these defaulted troubled debt restructurings at March 31, 2012 and March 31, 2011, respectively.
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:
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Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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 $250,000. In some instances, the commercial loans and lease portfolios were further segmented from their risk grade categories into groups of homogeneous pools based on similar risk and loss characteristics. In 2011, the Company segmented certain pass and not rated construction contractor loans into their own pool based on the unique risk and loss characteristics. Loans and leases to municipalities are segregated into a separate risk category. Loans and leases were classified in these risk categories based upon industry characteristics and type of underlying collateral and are monitored under the same risk rating process as other commercial loans and leases.
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, 2012 | December 31, 2011 | |||||||||||||||
Commercial and Commercial Real Estate Loans |
Commercial Leases |
Commercial and Commercial Real Estate Loans |
Commercial Leases |
|||||||||||||
Credit risk profile by internally assigned grade: |
||||||||||||||||
Pass |
$ | 219,511 | $ | 7,417 | $ | 220,226 | $ | 13,759 | ||||||||
Special mention |
11,964 | 24 | 13,421 | 259 | ||||||||||||
Substandard |
9,774 | 272 | 10,074 | 371 | ||||||||||||
Substandard individually evaluated for impairment |
5,240 | 83 | 7,075 | 107 | ||||||||||||
Not rated |
14,470 | 230 | 14,521 | 421 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
260,959 | 8,026 | 265,317 | 14,917 | |||||||||||||
Credit risk profile using other credit quality indicators: |
||||||||||||||||
Loans and leases to municipal entities |
11,759 | 10,313 | 11,908 | 10,719 | ||||||||||||
Certain construction contractor loans |
1,072 | N/A | 1,058 | N/A | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 273,790 | $ | 18,339 | $ | 278,283 | $ | 25,636 | |||||||||
|
|
|
|
|
|
|
|
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.
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Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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, 2012 | ||||||||||||||||
Residential Real Estate |
Indirect | Home Equity Line of Credit |
Other Consumer |
|||||||||||||
Performing |
$ | 311,154 | $ | 171,552 | $ | 78,091 | $ | 10,248 | ||||||||
Nonperforming |
2,649 | 270 | 177 | 91 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 313,803 | $ | 171,822 | $ | 78,268 | $ | 10,339 | ||||||||
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||
Residential Real Estate |
Indirect | Home Equity Line of Credit |
Other Consumer |
|||||||||||||
Performing |
$ | 313,761 | $ | 158,520 | $ | 78,354 | $ | 11,049 | ||||||||
Nonperforming |
3,062 | 293 | 270 | 103 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 316,823 | $ | 158,813 | $ | 78,624 | $ | 11,152 | ||||||||
|
|
|
|
|
|
|
|
4. Deposits
Deposits consisted of the following at the periods indicated (in thousands):
March 31, 2012 | December 31, 2011 | |||||||
Non-interest-bearing checking |
$ | 190,566 | $ | 185,736 | ||||
Interest-bearing checking |
148,850 | 145,885 | ||||||
Savings accounts |
110,667 | 107,311 | ||||||
Money market accounts |
383,167 | 330,000 | ||||||
Time accounts |
267,674 | 314,133 | ||||||
|
|
|
|
|||||
Total deposits |
$ | 1,100,924 | $ | 1,083,065 | ||||
|
|
|
|
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 Accounting Standards Codification 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.
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Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Basic and diluted net income per common share calculations are as follows (in thousands, except per share data):
For three months ended March 31, |
||||||||
2012 | 2011 | |||||||
Basic: |
||||||||
Net income available to common shareholders |
$ | 2,639 | $ | 3,306 | ||||
Less: Dividends and undistributed earnings allocated to unvested restricted shares |
(44 | ) | (53 | ) | ||||
|
|
|
|
|||||
Net earnings allocated to common shareholders |
$ | 2,595 | $ | 3,253 | ||||
|
|
|
|
|||||
Weighted average common shares outstanding, including shares considered participating securities |
4,774,204 | 4,735,630 | ||||||
Less: average participating securities |
(75,637 | ) | (73,586 | ) | ||||
|
|
|
|
|||||
Weighted average shares |
4,698,567 | 4,662,044 | ||||||
Net income per common share basic |
$ | 0.55 | $ | 0.70 | ||||
|
|
|
|
|||||
Diluted: |
||||||||
Net earnings allocated to common shareholders |
$ | 2,595 | $ | 3,253 | ||||
|
|
|
|
|||||
Weighted average common shares outstanding for basic earnings per common share |
4,698,567 | 4,662,044 | ||||||
Incremental shares from assumed conversion of stock options |
| 8,630 | ||||||
|
|
|
|
|||||
Average common shares outstanding diluted |
4,698,567 | 4,670,674 | ||||||
Net income per common share diluted |
$ | 0.55 | $ | 0.70 | ||||
|
|
|
|
Dividends of $26,000 and $25,000 were paid on unvested shares with non-forfeitable dividend rights for the quarters ending March 31, 2012 and 2011, respectively. There were no anti-dilutive stock options for the three months ended March 31, 2011.
6. Other Comprehensive (Loss) Income
The components of other comprehensive (loss) income, net of tax, for the periods indicated were as follows (in thousands):
For three months ending March 31, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Pre-tax amount |
Tax expense (benefit) |
Net-of-tax amount |
Pre-tax amount |
Tax expense (benefit) |
Net-of-tax amount |
|||||||||||||||||||
Net unrealized securities losses arising during the period |
$ | (131 | ) | $ | 52 | $ | (183 | ) | $ | (172 | ) | $ | (67 | ) | $ | (105 | ) | |||||||
Retirement plan liabilities |
89 | 35 | 54 | 51 | 20 | 31 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Other comprehensive loss |
$ | (42 | ) | $ | 87 | $ | (129 | ) | $ | (121 | ) | $ | (47 | ) | $ | (74 | ) | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net income |
2,639 | 3,306 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Comprehensive income |
$ | 2,510 | $ | 3,232 | ||||||||||||||||||||
|
|
|
|
7. Employee and Director Benefit Plans
Defined Benefit Plan and Post-Retirement Benefits
Alliance has a noncontributory defined benefit pension plan (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
- 15 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(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.
Post-retirement medical and life insurance benefits (Post-retirement Plan) are available to certain retirees and their spouses, if applicable.
Supplemental Retirement Plans
Alliance has supplemental executive retirement plans (SRP) 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.
The components of all of the plans net periodic costs for the three months ended March 31, 2012 and 2011 are as follows (in thousands):
Pension Plan | Post-retirement Plan |
SRP Plan | Directors Retirement Plan |
|||||||||||||||||||||||||||||
2012 | 2011 | 2012 | 2011 | 2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||
Service cost |
$ | | $ | | $ | | $ | | $ | 22 | $ | 22 | $ | 18 | $ | 23 | ||||||||||||||||
Interest cost |
67 | 72 | 45 | 56 | 43 | 48 | 12 | 14 | ||||||||||||||||||||||||
Expected return on assets |
(87 | ) | (97 | ) | | | | | | | ||||||||||||||||||||||
Amortization of unrecognized actuarial loss |
55 | 31 | 4 | 5 | 17 | 1 | 7 | 7 | ||||||||||||||||||||||||
Amortization of unrecognized prior service cost |
| | (11 | ) | (11 | ) | 5 | 6 | 12 | 12 | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Net periodic plan cost |
$ | 35 | $ | 6 | $ | 38 | $ | 50 | $ | 87 | $ | 77 | $ | 49 | $ | 56 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 (Level 2). The fair value of mutual fund securities available-for-sale are determined by obtaining quoted prices on nationally recognized securities exchanges when available (Level 1).
- 16 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Assets measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurements at March 31, 2012 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 |
$ | 1,835 | $ | | $ | 1,835 | ||||||
Obligations of states and political subdivisions |
80,919 | | 80,919 | |||||||||
Mortgage-backed securities residential |
260,546 | | 260,546 | |||||||||
|
|
|
|
|
|
|||||||
Total debt securities |
343,300 | | 343,300 | |||||||||
Stock Investments: |
||||||||||||
Mutual Funds |
3,105 | 3,105 | | |||||||||
|
|
|
|
|
|
|||||||
Total stock investments |
3,105 | 3,105 | | |||||||||
|
|
|
|
|
|
|||||||
Total available-for-sale |
$ | 346,405 | $ | 3,105 | $ | 343,300 | ||||||
|
|
|
|
|
|
|||||||
Fair Value Measurements at December 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 |
$ | 3,190 | $ | | $ | 3,190 | ||||||
Obligations of states and political subdivisions |
82,299 | | 82,299 | |||||||||
Mortgage-backed securities residential |
285,706 | | 285,706 | |||||||||
|
|
|
|
|
|
|||||||
Total debt securities |
371,195 | | 371,195 | |||||||||
Stock Investments: |
||||||||||||
Mutual Funds |
3,111 | 3,111 | | |||||||||
|
|
|
|
|
|
|||||||
Total stock investments |
3,111 | 3,111 | | |||||||||
|
|
|
|
|
|
|||||||
Total available-for-sale |
$ | 374,306 | $ | 3,111 | $ | 371,195 | ||||||
|
|
|
|
|
|
Assets Measured on a Non-Recurring Basis
Impaired loans and leases At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value generally receive specific allocations of the allowance for loan losses. For collateral dependent loans, fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrowers financial statements, or aging reports, adjusted or discounted based on managements historical knowledge, changes in market conditions from the time of the valuation, and managements expertise and knowledge of the client and clients business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
Assets measured at fair value on a non-recurring basis by fair value measurement used are summarized below (in thousands):
- 17 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
At March 31, 2012 | At December 31, 2011 | |||||||||||||||
Fair Value | Significant unobservable inputs (Level 3) |
Fair Value | Significant unobservable inputs (Level 3) |
|||||||||||||
Impaired loans and leases: |
||||||||||||||||
Commercial |
$ | 1,694 | $ | 1,694 | $ | 3,855 | $ | 3,855 | ||||||||
Leases |
13 | 13 | 14 | 14 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,707 | $ | 1,707 | $ | 3,869 | $ | 3,869 |
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 $1.8 million with a valuation allowance of $55,000 at March 31, 2012. At December 31, 2011, impaired loans had a carrying amount of $6.0 million with a valuation allowance of $2.1 million. Changes in fair value recognized for partial charge-offs of loans and leases and impairment reserves on loans and leases was a net increase of $86,000 and a net decrease of $35,000 for the three months ended March 31, 2012 and 2011, respectively.
The fair value of impaired commercial loans was measured based upon real estate appraisals primarily using the sales comparison approach. Unobservable inputs included adjustments for differences between the comparable sales averaging 9%. For two commercial loans with outstanding recorded investments less than $100,000, the appraised real estate value was discounted by a weighted average of 21% by management due to the appraisals being greater than 2 years old. The fair value of our impaired lease receivable was based upon a sales comparison approach of the equipment collateral.
The carrying amounts and estimated fair value of financial instruments at March 31, 2012 are as follows (in thousands):
Fair Value Measurements Using: | ||||||||||||||||
Quoted market prices in active markets for identical assets Level 1 |
Significant other observable inputs Level 2 |
Significant unobservable inputs Level 3 |
Carrying Amount |
|||||||||||||
Financial Assets: |
||||||||||||||||
Cash and cash equivalents |
$ | 90,199 | | | $ | 90,199 | ||||||||||
FHLB and FRB stock |
N/A | N/A | N/A | 8,040 | ||||||||||||
Loans held for sale |
| 451 | | 451 | ||||||||||||
Net loans and leases(1) |
| | 905,536 | 860,535 | ||||||||||||
Accrued interest receivable |
| 1,805 | 2,525 | 4,330 | ||||||||||||
Financial Liabilities: |
||||||||||||||||
Deposits |
833,250 | 269,098 | | 1,100,924 | ||||||||||||
Borrowings |
| 131,815 | | 125,540 | ||||||||||||
Junior subordinated obligations |
| | 10,830 | 25,774 | ||||||||||||
Accrued interest payable |
3 | 1,015 | 83 | 1,101 |
(1) | includes impaired loans and leases |
- 18 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
The carrying amounts and estimated fair values of financial instruments at December 31, 2011 are as follows (in thousands):
Estimated Fair Value |
Carrying Amount |
|||||||
Financial Assets: |
||||||||
Cash and cash equivalents |
$ | 52,802 | $ | 52,802 | ||||
FHLB and FRB stock |
N/A | 8,478 | ||||||
Loans held for sale |
1,217 | 1,217 | ||||||
Net loans and leases(1) |
907,357 | 861,952 | ||||||
Accrued interest receivable |
3,960 | 3,960 | ||||||
Financial Liabilities: |
||||||||
Deposits |
$ | 1,085,608 | $ | 1,083,065 | ||||
Borrowings |
143,150 | 136,310 | ||||||
Junior subordinated obligations |
10,979 | 25,774 | ||||||
Accrued interest payable |
1,578 | 1,578 |
(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.
The Company 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 and are classified as Level 1.
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
The fair value of our fixed-rate and adjustable-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 resulting in a Level 3 classification. 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 loans held for sale approximates carrying value resulting in a Level 2 classification.
Accrued Interest Receivable
The fair value of accrued interest approximates carrying value. The fair value level classification is consistent with the related financial instrument.
- 19 -
Table of Contents
Alliance Financial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
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 resulting in a Level 1 classification. 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 resulting in a Level 2 classification.
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 resulting in a Level 2 classification.
Junior Subordinated Obligations
The fair value of trust preferred debentures has been estimated using a discounted cash flow analysis to maturity resulting in a Level 3 classification.
Accrued Interest Payable
The fair value of accrued interest approximates carrying value. The fair value level classification is consistent with the related financial instrument.
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.
- 20 -
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, 2012:
| Total assets were $1.4 billion and total deposits were $1.1 billion, compared to $1.4 billion and $1.1 billion for the fourth quarter of 2011, respectively. |
| Net income was $2.6 million in 2012, compared to $3.3 million in the first quarter of 2011. |
| Net income per diluted share was $0.55 in 2012, compared with $0.70 in the first quarter of 2011. |
| The tax-equivalent net interest margin was 3.22% in 2012 and 3.44% in the first quarter of 2011. |
| There was no provision for credit losses in 2012, compared to $200,000 in the first quarter of 2011. |
| Total non-performing assets were $9.2 million or 0.65% of total assets at March 31, 2012 compared with $11.7 million, or 0.83% of total assets, at December 31, 2011. |
| Non-interest income was 31.3% of total revenue in 2012 compared with 29.5% in the first quarter of 2011. |
| Our efficiency ratio was 76.1% in 2012 compared with 70.5% in the first quarter of 2011. |
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, 2012 and 2011
General
Net income for the quarter ended March 31, 2012 was $2.6 million or $0.55 per diluted share compared to $3.3 million or $0.70 per diluted share in the year-ago quarter. The return on average assets and return on average shareholders equity were 0.74% and 7.51%, respectively, for the first quarter of 2012, compared to 0.90% and 10.27%, respectively, for the first quarter of 2011.
Net Interest Income
Net interest income totaled $9.8 million in the three months ended March 31, 2012, compared to $11.0 million in the year-ago quarter, and $10.0 million in fourth quarter of 2011. The decrease in net-interest income in the first quarter resulted from declines in the net interest margin and average interest-earning assets.
Average interest-earning assets decreased $51.0 million or 3.8% in the first quarter of 2012 compared with the year-ago quarter, with an $82.6 million decrease in securities and a $16.0 million decrease in loans and leases offsetting a $47.7 million increase in interest-earning cash balances. Average interest-earning assets decreased $15.4 million or 1.2% in the first quarter of 2012 compared with the fourth quarter of 2011, with a $32.6 million decrease in securities and a $7.4 million decrease in loans and leases offsetting a $24.7 million increase in interest-earning cash balances. Total average loans and leases were 67.1% of total interest-earning assets in the first quarter of 2012, compared to 65.7% in the year-ago quarter and 66.8% in the fourth quarter of 2011.
The tax-equivalent net interest margin was 3.22% in the first quarter, compared to 3.44% in the year-ago quarter and 3.24% in the fourth quarter of 2011. The tax-equivalent yield on interest-earning assets decreased 39 basis points in the first quarter compared to the year-ago quarter, which was partially offset by a 17 basis point decrease in our cost of interest-bearing liabilities over the same period. The tax-equivalent yield on interest-earning assets decreased 11 basis points in the first quarter of 2012 compared to the fourth quarter of 2011, which was substantially offset by a 10 basis point decrease in our cost of interest-bearing liabilities over the same period. The tax-equivalent yield on our interest-earning assets was 4.04% in the first
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Table of Contents
quarter of 2012, compared to 4.43% in the year-ago quarter and 4.15% in the fourth quarter of 2011. Our cost of interest-bearing liabilities was 0.98 % in the first quarter of 2012, compared to 1.15% in the year-ago quarter and 1.08% in the fourth quarter of 2011.
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 four years. This persistently low interest rate environment has caused an ongoing decline over the past four 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 30 basis points in the first quarter of 2012 compared to the year-ago quarter. The yield on our commercial loans and consumer (including indirect) loans decreased 31 basis points and 48 basis points, respectively, in the first quarter of 2012 compared to the first quarter of 2011.
The cost of our interest-bearing liabilities decreased in the first quarter of 2012 compared to the year-ago quarter due to a combination of the low interest rate environment, our deposit pricing strategies and a deposit mix that remains heavily weighted in low-cost interest-bearing transaction accounts (demand, savings and money market) whose rates can be immediately changed at our discretion. Average interest-bearing transaction accounts comprised 67.7% of total average interest-bearing deposits in the first quarter, compared to 65.2% in the year-ago period and 65.3% in the fourth quarter of 2011. The average cost of money market and time deposits dropped 16 basis points and 20 basis points, respectively in the first quarter compared to the year-ago quarter.
Our liability mix remained favorably weighted towards transaction accounts in the first quarter as retail and municipal depositors continue to refrain from locking up funds in time accounts at what are very low, yet competitive rates, and also because of the buildup of cash on corporate customers balance sheets. The aggregate average balance of transaction accounts (including non-interest bearing demand deposits) was $806.9 million or 73.3% of total deposits in the first quarter, compared with $814.1 million or 70.5% in the year-ago quarter and $792.2 million or 71.2% in the fourth quarter of 2011. Average time account balances in the first quarter were $294.6 million or 26.7% of total average deposits, compared with $340.9 million or 29.5% in the year-ago quarter and $320.3 million or 28.8% in the fourth quarter of 2011. Our ability to gather and retain transaction deposits in recent years 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. Environmental factors such as equity market volatility, risk aversion among retail investors and a build-up of cash on corporate balance sheets have also played a role in the growth in our transaction accounts.
Our tax-equivalent net interest margin declined over the course of 2011 and into the first quarter of 2012 as decreases in the cost of our interest-bearing liabilities did not keep pace with declines in the yield on our interest-earning assets. The declining trend in our net interest margin that we have experienced in recent quarters is likely to continue in coming quarters as the persistently low interest rate environment continues to negatively affect the return on our loan and investment portfolios, while our ability to further reduce our funding costs is limited. Also, we expect that weak economic conditions, uneven loan demand, competition and historically low interest rates will likely weigh on asset growth and earnings in the financial sector for the foreseeable future.
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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, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Average Balance |
Interest Earned/ Paid |
Yield Rate |
Average Balance |
Interest Earned/ Paid |
Yield Rate |
|||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||
Interest earning assets: |
||||||||||||||||||||||||
Federal funds sold |
$ | 63,632 | $ | 34 | 0.21 | % | $ | 15,971 | $ | 4 | 0.09 | % | ||||||||||||
Taxable investment securities |
272,933 | 1,790 | 2.62 | % | 353,856 | 2,731 | 3.09 | % | ||||||||||||||||
Nontaxable investment securities |
77,102 | 1,064 | 5.52 | % | 78,773 | 1,115 | 5.66 | % | ||||||||||||||||
FHLB and FRB stock |
8,355 | 113 | 5.40 | % | 8,453 | 129 | 6.09 | % | ||||||||||||||||
Residential real estate loans(1) |
314,394 | 3,984 | 5.07 | % | 332,497 | 4,306 | 5.18 | % | ||||||||||||||||
Commercial loans and commercial real estate |
260,190 | 3,015 | 4.63 | % | 230,629 | 2,874 | 4.98 | % | ||||||||||||||||
Nontaxable commercial loans |
11,751 | 169 | 5.75 | % | 9,157 | 117 | 5.12 | % | ||||||||||||||||
Taxable leases (net of unearned discount) |
12,093 | 170 | 5.63 | % | 26,866 | 395 | 5.88 | % | ||||||||||||||||
Nontaxable leases (net of unearned discount) |
10,464 | 169 | 6.45 | % | 12,575 | 204 | 6.48 | % | ||||||||||||||||
Indirect auto loans |
161,399 | 1,575 | 3.90 | % | 172,942 | 1,972 | 4.56 | % | ||||||||||||||||
Consumer loans |
89,179 | 858 | 3.85 | % | 90,776 | 903 | 3.98 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-earning assets |
1,281,492 | 12,941 | 4.04 | % | 1,332,495 | 14,750 | 4.43 | % | ||||||||||||||||
Non-interest earning assets: |
||||||||||||||||||||||||
Other assets |
135,054 | 135,701 | ||||||||||||||||||||||
Less: Allowance for credit losses |
(10,755 | ) | (10,978 | ) | ||||||||||||||||||||
Net unrealized gains on securities available-for-sale |
11,582 | 4,938 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 1,417,373 | $ | 1,462,156 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Liabilities and shareholders equity: |
||||||||||||||||||||||||
Interest bearing liabilities: |
||||||||||||||||||||||||
Demand deposits |
$ | 151,693 | $ | 38 | 0.10 | % | $ | 157,684 | $ | 68 | 0.17 | % | ||||||||||||
Savings deposits |
107,782 | 32 | 0.12 | % | 102,646 | 58 | 0.22 | % | ||||||||||||||||
MMDA deposits |
358,835 | 278 | 0.31 | % | 379,028 | 447 | 0.47 | % | ||||||||||||||||
Time deposits |
294,618 | 1,140 | 1.55 | % | 340,905 | 1,487 | 1.75 | % | ||||||||||||||||
Borrowings |
132,247 | 961 | 2.91 | % | 136,611 | 1,062 | 3.11 | % | ||||||||||||||||
Junior subordinated obligations issued to unconsolidated trusts |
25,774 | 173 | 2.69 | % | 25,774 | 157 | 2.43 | % | ||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||||||
Total interest-bearing liabilities |
1,070,949 | 2,622 | 0.98 | % | 1,142,648 | 3,279 | 1.15 | % | ||||||||||||||||
Non-interest bearing liabilities: |
||||||||||||||||||||||||
Demand deposits |
188,628 | 174,788 | ||||||||||||||||||||||
Other liabilities |
17,162 | 15,994 | ||||||||||||||||||||||
Shareholders equity |
140,634 | 128,726 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Total liabilities and shareholders equity |
$ | 1,417,373 | $ | 1,462,156 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
$ | 10,319 | $ | 11,471 | ||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest rate spread |
3.06 | % | 3.28 | % | ||||||||||||||||||||
Net interest margin |
3.22 | % | 3.44 | % | ||||||||||||||||||||
Federal tax exemption on non-taxable investment securities, loans and leases included in interest income |
478 | 488 | ||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Net interest income |
$ | 9,841 | $ | 10,983 | ||||||||||||||||||||
|
|
|
|
(1) | Includes loans held-for-sale |
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Rate/Volume Analysis
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, 2012 compared to March 31, 2011 Increase/(Decrease) Due To |
||||||||||||
Volume | Rate | Net Change |
||||||||||
Federal funds sold |
$ | 21 | $ | 9 | $ | 30 | ||||||
Taxable investment securities |
(565 | ) | (376 | ) | (941 | ) | ||||||
Non-taxable investment securities |
(24 | ) | (27 | ) | (51 | ) | ||||||
FHLB and FRB stock |
(1 | ) | (15 | ) | (16 | ) | ||||||
Residential real estate loans |
(232 | ) | (90 | ) | (322 | ) | ||||||
Commercial loans and commercial real estate |
1,134 | (993 | ) | 141 | ||||||||
Non-taxable commercial loans |
36 | 16 | 52 | |||||||||
Taxable leases (net of unearned income) |
(209 | ) | (16 | ) | (225 | ) | ||||||
Non-taxable leases (net of unearned income) |
(34 | ) | (1 | ) | (35 | ) | ||||||
Indirect auto loans |
(125 | ) | (272 | ) | (397 | ) | ||||||
Consumer loans |
(16 | ) | (29 | ) | (45 | ) | ||||||
|
|
|
|
|
|
|||||||
Total interest-earning assets |
$ | (15 | ) | $ | (1,794 | ) | $ | (1,809 | ) | |||
|
|
|
|
|
|
|||||||
Interest-bearing demand deposits |
$ | (3 | ) | $ | (27 | ) | $ | (30 | ) | |||
Savings deposits |
18 | (44 | ) | (26 | ) | |||||||
MMDA deposits |
(23 | ) | (146 | ) | (169 | ) | ||||||
Time deposits |
(188 | ) | (159 | ) | (347 | ) | ||||||
Borrowings |
(34 | ) | (67 | ) | (101 | ) | ||||||
Junior subordinated obligations issued to unconsolidated subsidiary trusts |
| 16 | 16 | |||||||||
|
|
|
|
|
|
|||||||
Total interest-bearing liabilities |
$ | (230 | ) | $ | (427 | ) | $ | (657 | ) | |||
|
|
|
|
|
|
|||||||
Net interest income tax equivalent |
$ | 215 | $ | (1,367 | ) | $ | (1,152 | ) | ||||
|
|
|
|
|
|
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Table of Contents
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:
March 31, 2012 | December 31, 2011 | March 31, 2011 | ||||||||||||||||||||||
$ | %(1) | $ | %(1) | $ | %(1) | |||||||||||||||||||
Delinquent loans and leases |
(Dollars in thousands) | |||||||||||||||||||||||
30 days past due |
$ | 4,481 | 0.52 | % | $ | 5,202 | 0.60 | % | $ | 6,538 | 0.75 | % | ||||||||||||
60 days past due |
966 | 0.11 | % | 584 | 0.06 | % | 940 | 0.11 | % | |||||||||||||||
90 days past due and still accruing |
12 | | | | 5 | | % | |||||||||||||||||
Non-accrual |
8,904 | 1.03 | % | 11,261 | 1.30 | % | 8,056 | 0.92 | % | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 14,363 | 1.66 | % | $ | 17,047 | 1.96 | % | $ | 15,539 | 1.78 | % | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | As a percentage of total loans and leases, excluding deferred costs |
The following table represents information concerning the aggregate amount of non-performing assets (in thousands):
March 31, 2012 | December 31, 2011 | March 31, 2011 | ||||||||||
Non-accruing loans and leases: |
||||||||||||
Residential real estate |
$ | 2,649 | $ | 3,062 | $ | 3,544 | ||||||
Commercial loans |
1,787 | 3,375 | 1,275 | |||||||||
Commercial real estate |
3,847 | 4,051 | 1,639 | |||||||||
Leases |
83 | 107 | 635 | |||||||||
Indirect auto |
270 | 293 | 292 | |||||||||
Other consumer loans |
268 | 373 | 671 | |||||||||
|
|
|
|
|
|
|||||||
Total non-accruing loans and leases |
8,904 | 11,261 | 8,056 | |||||||||
Accruing loans and leases delinquent 90 days or more |
12 | | 5 | |||||||||
|
|
|
|
|
|
|||||||
Total non-performing loans and leases |
8,916 | 11,261 | 8,061 | |||||||||
Other real estate and repossessed assets |
317 | 485 | 650 | |||||||||
|
|
|
|
|
|
|||||||
Total non-performing assets |
$ | 9,233 | $ | 11,746 | $ | 8,711 | ||||||
|
|
|
|
|
|
Delinquent loans and leases (including non-performing) decreased to $14.4 million at March 31, 2012, compared to $17.0 million at December 31, 2011 and $15.5 million at March 31, 2011. Non-performing assets were $9.2 million or 0.65% of total assets at March 31, 2012, compared with $11.7 million or 0.83% of total assets at December 31, 2011. The decline in non-performing assets resulted from a combination of certain loans returning to performing status and to write-downs of other non-performing loans, particularly one commercial relationship for which impairment reserves were largely established in the third and fourth quarters of 2011.
Included in non-performing assets at the end of the first quarter are non-performing loans and leases totaling $8.9 million, compared with $11.3 million at December 31, 2011 and $8.1 million at March 31, 2011. As previously disclosed in our third quarter 2011 earnings release and Form 10-Q, one commercial relationship totaling $3.6 million was placed on non-performing status during the third quarter, at which time an impairment reserve of $1.7 million was established. The relationship is comprised of a $3.0 million secured working capital line of credit and two first mortgages totaling $641,000. The line of credit is secured by receivables of the business and is also collateralized by second lien positions on the real estate securing the two first mortgages. During the fourth quarter, the borrowers business continued to weaken, which led to a $400,000 increase in our impairment reserve on this relationship to a total of $2.1 million, of which $1.0 million was charged off in the fourth quarter. Our exposure to this borrower at December 31, 2011, net of the write down recorded in the fourth quarter and included in non-performing assets, was $2.0 million, and the impairment reserve remaining on this net exposure was $1.1 million at the end of the fourth quarter. During the first quarter of 2012 further deterioration in the operations of the borrowers business caused the Company to allocate an additional impairment reserve of $200,000 to the relationship, and to write off the entire $1.3 million impaired amount, bringing the total amount written down to date on this relationship to $2.3 million. Our exposure to this borrower at March 31, 2012, net of the write downs recorded to date and included in non-performing assets, was $1.3 million, which is the estimated net fair value of the real estate collateral based on current appraisals.
Conventional residential mortgages comprised $2.6 million (40 loans) or 29.7% of non-performing loans and leases, and commercial loans and mortgages totaled $5.6 million (35 loans) or 63.2% of non-performing loans and leases at the end of the first quarter.
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As a recurring part of our portfolio management program, we identified approximately $9.8 million in potential problem loans at March 31, 2012 as compared to $10.2 million at December 31, 2011. 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, 2012, potential problem loans primarily consisted of commercial real estate, commercial loans and leases. There can be no assurance that additional loans will not become non-performing, require restructuring, or require increased provision for loan losses.
We have a loan and lease monitoring program that evaluates non-performing loans and leases and the loan and lease portfolio in general. The loan and lease review program 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.
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, 2012, there were $7.4 million in impaired loans for which $93,000 in related allowance for credit losses was allocated. There were $9.1 million in impaired loans for which $2.1 million in related allowance for credit losses was allocated as of December 31, 2011.
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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Table of Contents
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, | ||||||||
2012 | 2011 | |||||||
Balance at beginning of year |
$ | 10,769 | $ | 10,683 | ||||
Loans and leases charged-off: |
||||||||
Residential real estate |
73 | 100 | ||||||
Commercial loans |
1,465 | 1 | ||||||
Commercial real estate |
125 | | ||||||
Leases |
| 106 | ||||||
Indirect auto |
59 | 37 | ||||||
Consumer |
175 | 238 | ||||||
|
|
|
|
|||||
Total loans and leases charged off |
1,897 | 482 | ||||||
Recoveries of loans and leases previously charged off: |
||||||||
Residential real estate |
7 | 22 | ||||||
Commercial loans |
237 | 6 | ||||||
Commercial real estate |
1 | | ||||||
Leases |
61 | 55 | ||||||
Indirect auto |
59 | 38 | ||||||
Consumer |
121 | 156 | ||||||
|
|
|
|
|||||
Total recoveries |
486 | 277 | ||||||
|
|
|
|
|||||
Net loans and leases charged off |
1,411 | 205 | ||||||
Provision for credit losses |
| 200 | ||||||
|
|
|
|
|||||
Balance at end of year |
$ | 9,358 | $ | 10,678 | ||||
|
|
|
|
Net charge-offs were $1.4 million in the first quarter, compared with $205,000 in the year-ago quarter and $1.3 million in the fourth quarter of 2011. Net charge-offs, annualized, equaled 0.66% of average loans and leases in first quarter, compared with 0.09% in the year-ago quarter and 0.61% in the fourth quarter. Gross charge-offs were $1.9 million and recoveries were $486,000 in the first quarter of 2012. Our annualized net charge-off rate has averaged 0.30% over the past five quarters, of which all but 2 basis points is attributable to the losses recognized on the one commercial relationship previously discussed in this Form 10-Q.
There was no provision for credit losses recorded in the first quarter, compared to $200,000 in the year-ago quarter and $800,000 in the fourth quarter of 2011.
The provision for credit losses as a percentage of net charge-offs was 0% in the first quarter, compared with 98% in the year-ago quarter and 60% in the fourth quarter of 2011. Approximately $1.5 million or 81% of the gross charge-offs recognized in the first quarter of 2012 were on loans that were considered impaired in the fourth quarter of 2011 and for which impairment reserves were largely established due to the identification of possible loss events in the fourth quarter. Charge-offs on these impaired credits were recognized in the first quarter upon the occurrence of events confirming the existence of the losses, including further deterioration in the respective borrowers financial condition and negotiated settlements. A substantial portion of the allowance allocated to these impaired credits in 2011 came from the release of a portion of the general allowance for our lease portfolio. During 2011, approximately $1.2 million of the allowance that had been allocated to our lease portfolio prior to 2011 was released due to a substantial decline in charge-offs in our lease portfolio in 2011 compared with 2010 and 2009 (the years in which provisions for possible lease losses were charged to earnings) and to a $16.8 million decrease in the balance of that portfolio during 2011.
The allowance for credit losses was $9.4 million at March 31, 2012 and $10.8 million at December 31, 2011 and $10.7 million at March 31, 2011. The ratio of the allowance for credit losses to total loans and leases was 1.08% at March 31, 2012 compared with 1.24% at December 31, 2011 and 1.22% at March 31, 2011. The ratio of the allowance for credit losses to non-performing loans and leases was 105% at March 31, 2012, compared with 96% at December 31, 2011 and 133% at March 31, 2011.
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 (excluding the charge-offs
- 27 -
Table of Contents
related to $3.6 million commercial relationship previously discussed in this Form 10-Q), 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, 2012, $1.7 million or 18% of the allowance for credit losses was considered to be unallocated, compared to $991,000 or 9% at December 31, 2011. 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 2012 when the provision for credit losses equaled 0% of net charge-offs.
The following table presents certain asset quality ratios for the periods indicated:
For three months
ended March 31, |
||||||||
2012 | 2011 | |||||||
Net loans and leases charged-off to average loans and leases, annualized |
0.66 | % | 0.09 | % | ||||
Provision for credit losses to average loans and leases, annualized |
| 0.09 | % | |||||
Allowance for credit losses to period-end loans and leases |
1.08 | % | 1.22 | % | ||||
Allowance for credit losses to non-performing loans and leases |
105.0 | % | 132.5 | % | ||||
Non-performing loans and leases to period-end loans and leases |
1.03 | % | 0.92 | % | ||||
Non-performing assets to period-end assets |
0.65 | % | 0.59 | % |
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 | ||||||||||||||||
2012 | 2011 | $ | % | |||||||||||||
Investment management income |
$ | 1,855 | $ | 1,916 | $ | (61 | ) | (3.2 | )% | |||||||
Service charges on deposit accounts |
1,043 | 1,010 | 33 | 3.3 | % | |||||||||||
Card-related fees |
651 | 653 | (2 | ) | (0.3 | )% | ||||||||||
Bank-owned life insurance |
247 | 254 | (7 | ) | (2.8 | )% | ||||||||||
Gain on the sale of loans |
358 | 288 | 70 | 24.3 | % | |||||||||||
Other non-interest income |
322 | 465 | (143 | ) | (30.8 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Total non-interest income |
$ | 4,476 | $ | 4,586 | $ | (110 | ) | (2.4 | )% | |||||||
|
|
|
|
|
|
Non-interest income was $4.5 million in the first quarter of 2012, compared with $4.6 million in the year-ago quarter and $5.1 million in the fourth quarter of 2011. Gains on the sale of loans increased $70,000 compared with the first quarter of 2011, but were down $303,000 from the fourth quarter of 2011 due to fluctuations in the volumes of originations and sales of residential mortgages. A seasonal decrease in service charges on deposit accounts also contributed to the linked-quarter decline in non-interest income.
Non-interest income comprised 31.3% of total revenue in the first quarter of 2012 compared with 29.5% in the year-ago quarter and 33.6% in the fourth quarter of 2011.
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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 | ||||||||||||||||
2012 | 2011 | $ | % | |||||||||||||
Salaries and benefits |
$ | 5,691 | $ | 5,530 | $ | 161 | 2.9 | % | ||||||||
Occupancy and equipment |
1,901 | 1,830 | 71 | 3.9 | % | |||||||||||
Communication expense |
159 | 150 | 9 | 6.0 | % | |||||||||||
Office supplies and postage |
282 | 284 | (2 | ) | (0.7 | )% | ||||||||||
Marketing expense |
238 | 263 | (25 | ) | (9.5 | )% | ||||||||||
Amortization of intangible assets |
221 | 241 | (20 | ) | (8.3 | )% | ||||||||||
Professional fees |
777 | 824 | (47 | ) | (5.7 | )% | ||||||||||
FDIC insurance |
215 | 393 | (178 | ) | (45.3 | )% | ||||||||||
Other non-interest expenses |
1,404 | 1,464 | (60 | ) | (4.1 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Total non-interest expenses |
$ | 10,888 | $ | 10,979 | $ | (91 | ) | (0.8 | )% | |||||||
|
|
|
|
|
|
Non-interest expenses were $10.9 million in the quarter ended March 31, 2012, compared to $11.0 million in the first quarter of 2011 and $10.6 million in the fourth quarter of 2011. Alliances efficiency ratio was 76.1% in the first quarter of 2012 compared with 70.5% in the year-ago quarter and 70.6% in the fourth quarter of 2011.
Income Taxes
Our effective tax rate was 23.0% for the quarter ended March 31, 2012, compared with 24.7% in the year-ago period and 21.8% in the fourth quarter of 2011.
Comparison of Financial Condition at March 31, 2012 and December 31, 2011
General
Total assets were $1.4 billion at March 31, 2012 and December 31, 2011.
Securities available-for-sale decreased $27.9 million in the first quarter, which was offset by an increase in cash of $37.4 million. Total loans and leases, net of unearned income and deferred costs, decreased $2.8 million in the first quarter to $869.9 million.
Securities
Investment securities totaled $346.4 million at March 31, 2012, compared with $374.3 million at December 31, 2011. The decrease is attributable to our decision in the third quarter of 2011 to temporarily reduce the portfolio due to the very low yields available on the types of securities that we normally purchase. We have resumed purchases of such securities in the second quarter of 2012. Our portfolio is comprised entirely of investment grade securities, the majority of which are rated AAA by one or more of the nationally recognized rating agencies. The breakdown of the securities portfolio at March 31, 2012 was 75% government-sponsored entity guaranteed mortgage-backed securities, 23% municipal securities and 1% obligations of U.S. government-sponsored corporations. Mortgage-backed securities, which totaled $260.5 million at March 31, 2012, are comprised primarily of pass-through securities backed by conventional residential mortgages and guaranteed by Fannie-Mae, Freddie-Mac or Ginnie Mae, which in turn are backed by the U.S. government. Our municipal securities portfolio, which totaled $80.9 million at the end of the first quarter, is primarily comprised of highly rated general obligation bonds issued by local municipalities in New York State.
We had net unrealized gains of approximately $11.1 million in our securities portfolio at March 31, 2012, compared with net unrealized gains of $11.2 million at December 31, 2011.
Loans and Leases
Total loans and leases, net of unearned income and deferred costs, were $869.9 million at March 31, 2012, compared with $872.7 million at December 31, 2011.
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Residential mortgages totaled $313.8 million at the end of the first quarter, which was a decrease of $3.0 million from the end of 2011 as many of our first quarter originations were sold on the secondary market. We originated $30.0 million of residential mortgages in the first quarter, compared with $40.8 million in the fourth quarter of 2011 and $18.2 million in the first quarter of 2011. Our portfolio declined in 2011 and into the first quarter of 2012 as we sold a large portion of our originations on the secondary market in order to manage our overall interest rate risk position. Sales of residential mortgages totaled $59.6 million in 2011, and $17.0 million in the first quarter of 2012. In the first quarter of 2012 we changed our strategy as it relates to residential mortgages and will retain most fixed rate mortgages with terms of 15 years or less in portfolio for the foreseeable future. Fixed rate, monthly-payment mortgages with terms greater than 15 years will still be sold in the secondary market. Substantially all our residential mortgage originations are conventional mortgages originated in our market area. We do not originate sub-prime, Alt-A, negative amortizing or other higher risk residential mortgages.
Commercial loans and mortgages decreased $4.5 million in the first quarter and totaled $273.8 million at March 31, 2012. Originations of commercial loans and mortgages in the first quarter (excluding lines of credit) totaled $8.3 million, compared with $31.3 million in the fourth quarter of 2011 and $16.5 million in the year-ago quarter. The drop-off in the first quarters originations was largely the result of a reduced pipeline coming into the quarter following a higher than normal level of closings in the fourth quarter.
Leases (net of unearned income) decreased $7.3 million in the first quarter as a result of an increased level of prepayments and our previously announced decision to cease new lease originations.
Indirect auto loan balances were $171.8 million at the end of the first quarter, which was an increase of $13.0 million from the end of the fourth quarter of 2011. We originated $33.2 million of indirect auto loans in the first quarter, compared with $17.9 million in the fourth quarter of 2011 and $15.6 million in the year-ago quarter. The increase in originations is attributable to a change in our rate structure designed to increase our market share without lowering our underwriting standards. We originate new and used auto loans through a network of reputable, well established automobile dealers located in 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 its direct lending programs.
The following table sets forth the composition of our loan and lease portfolio at the dates indicated, with dollars in thousands:
March 31, 2012 | Percent | December 31, 2011 | Percent | |||||||||||||
Residential real estate |
$ | 313,803 | 36.2 | % | $ | 316,823 | 36.4 | % | ||||||||
Commercial loans |
147,334 | 17.0 | % | 151,420 | 17.4 | % | ||||||||||
Commercial real estate |
126,456 | 14.6 | % | 126,863 | 14.6 | % | ||||||||||
Leases (net of unearned income) |
18,339 | 2.1 | % | 25,636 | 3.0 | % | ||||||||||
Indirect auto |
171,822 | 19.9 | % | 158,813 | 18.3 | % | ||||||||||
Other consumer loans |
88,607 | 10.2 | % | 89,776 | 10.3 | % | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
866,361 | 100.0 | % | 869,331 | 100.0 | % | |||||||||||
|
|
|
|
|||||||||||||
Net deferred loan costs |
3,532 | 3,390 | ||||||||||||||
|
|
|
|
|||||||||||||
Total loans and leases |
869,893 | 872,721 | ||||||||||||||
Allowance for credit losses |
(9,358 | ) | (10,769 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Net loans and leases |
$ | 860,535 | $ | 861,952 | ||||||||||||
|
|
|
|
Deposits
Deposits increased $17.9 million in the first quarter, and were $1.1 billion at March 31, 2012. Transaction accounts (checking, savings, and money market) increased $64.3 million primarily due to a seasonal increase in municipal deposits. Low-cost transaction accounts comprised 75.7% of total deposits at the end of the first quarter, compared with 71.0% at December 31, 2011 and 70.6% at March 31, 2011. Time deposits decreased $46.5 million in the first quarter primarily due to maturities of brokered time accounts which we did not replace.
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The following table sets forth the composition of our deposits by business line at the dates indicated, dollars in thousands:
March 31, 2012 | ||||||||||||||||||||
Retail | Commercial | Municipal | Total | Percent | ||||||||||||||||
Non-interest checking |
$ | 52,081 | $ | 130,715 | $ | 7,770 | $ | 190,566 | 17.3 | % | ||||||||||
Interest checking |
111,530 | 16,582 | 20,738 | 148,850 | 13.5 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total checking |
163,611 | 147,297 | 28,508 | 339,416 | 30.8 | % | ||||||||||||||
Savings |
95,101 | 11,089 | 4,477 | 110,667 | 10.1 | % | ||||||||||||||
Money market |
89,632 | 133,448 | 160,087 | 383,167 | 34.8 | % | ||||||||||||||
Time deposits |
195,831 | 28,834 | 43,009 | 267,674 | 24.3 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total deposits |
$ | 544,175 | $ | 320,668 | $ | 236,081 | $ | 1,100,924 | 100.0 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
December 31, 2011 | ||||||||||||||||||||
Retail | Commercial | Municipal | Total | Percent | ||||||||||||||||
Non-interest checking |
$ | 46,580 | $ | 135,252 | $ | 3,904 | $ | 185,736 | 17.1 | % | ||||||||||
Interest checking |
110,886 | 16,831 | 18,168 | 145,885 | 13.5 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total checking |
157,466 | 152,083 | 22,072 | 331,621 | 30.6 | % | ||||||||||||||
Savings |
92,240 | 11,367 | 3,704 | 107,311 | 9.9 | % | ||||||||||||||
Money market |
88,056 | 122,195 | 119,749 | 330,000 | 30.5 | % | ||||||||||||||
Time deposits |
237,929 | 26,907 | 49,297 | 314,133 | 29.0 | % | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total deposits |
$ | 575,691 | $ | 312,552 | $ | 194,822 | $ | 1,083,065 | 100.0 | % | ||||||||||
|
|
|
|
|
|
|
|
|
|
Liquidity
Alliances liquidity primarily reflects the Banks ability to provide funds to meet loan and lease fundings, 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 (ALCO) is responsible for implementing the policies and guidelines for the maintenance of prudent levels of liquidity. As of March 31, 2012, 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, 2012, cash and cash equivalents increased by $37.4 million. Net cash provided by investing activities primarily resulted from $26.8 million in maturities, sales and principal repayments combined with a net decrease in loans of $1.4 million. Net cash provided by financing activities in the first quarter principally reflects a $17.9 million net increase in deposits, partly reduced by a net decrease in borrowings of $10.8 million and cash dividends of $1.5 million. Net cash from operating activities was primarily provided by net income in the amount of $2.6 million and proceeds from sale of loans and leases held-for-sale of $17.0 million, partly reduced by originations of loans held-for-sale of $16.0 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, 2012, our credit limit with the FHLB was $294.6 million. The total of our outstanding borrowings from the FHLB on that date was $100.0 million.
We had a $135.0 million line of credit at March 31, 2012 with the Federal Reserve Bank of New York through its Discount Window. Alliance has pledged indirect auto loans and investment securities totaling $160.7 million and $4.6 million, respectively, at March 31, 2012. At March 31, 2012, we also had available $62.5 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, 2012.
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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, 2012 | ||||
Total assets |
$ | 1,415,594 | ||
Less: Goodwill and intangible assets, net |
38,317 | |||
|
|
|||
Tangible assets (non-GAAP) |
$ | 1,377,277 | ||
Total Common Equity |
144,992 | |||
Less: Goodwill and intangible assets, net |
38,317 | |||
|
|
|||
Tangible Common Equity (non-GAAP) |
106,675 | |||
Total Equity/Total Assets |
10.24 | % | ||
Tangible Common Equity/Tangible Assets (non-GAAP) |
7.75 | % |
Shareholders equity was $145.0 million at March 31, 2012, compared with $144.0 million at December 31, 2011. Net income increased shareholders equity by $2.6 million during the quarter which was partially offset by dividends declared of $1.5 million. In February 2012, we announced that our Board of Directors declared a quarterly dividend of $0.31 per common share.
The Banks Tier 1 leverage ratio was 8.68% and its total risk-based capital ratio was 15.21% 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 7.75% at March 31, 2012.
Alliance and the Bank 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 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, 2011, 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, 2012, Alliance and the Bank met all capital adequacy requirements to which they were subject.
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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, 2012 |
||||||||||||||||||||||
Total risk-based capital |
||||||||||||||||||||||
Alliance |
$ | 137,225 | 16.10 | % | $ | 68,165 | ³ | 8.00 | % | N/A | N/A | |||||||||||
Bank |
128,700 | 15.21 | % | 67,695 | ³ | 8.00 | % | 84,618 | ³10.00% | |||||||||||||
Tier 1 capital |
||||||||||||||||||||||
Alliance |
127,820 | 15.00 | % | 34,083 | ³ | 4.00 | % | N/A | N/A | |||||||||||||
Bank |
119,295 | 14.10 | % | 33,848 | ³ | 4.00 | % | 50,771 | ³6.00% | |||||||||||||
Leverage |
||||||||||||||||||||||
Alliance |
127,820 | 9.26 | % | 55,184 | ³ | 4.00 | % | N/A | N/A | |||||||||||||
Bank |
119,295 | 8.68 | % | 54,949 | ³ | 4.00 | % | 68,686 | ³5.00% | |||||||||||||
As of December 31, 2011 |
||||||||||||||||||||||
Total risk-based capital |
||||||||||||||||||||||
Alliance |
$ | 137,273 | 15.97 | % | $ | 68,749 | ³ | 8.00 | % | N/A | N/A | |||||||||||
Bank |
128,479 | 15.05 | % | 68,277 | ³ | 8.00 | % | 85,347 | ³10.00% | |||||||||||||
Tier 1 capital |
||||||||||||||||||||||
Alliance |
126,481 | 14.72 | % | 34,374 | ³ | 4.00 | % | N/A | N/A | |||||||||||||
Bank |
117,759 | 13.80 | % | 34,139 | ³ | 4.00 | % | 51,208 | ³6.00% | |||||||||||||
Leverage |
||||||||||||||||||||||
Alliance |
126,481 | 9.09 | % | 55,680 | ³ | 4.00 | % | N/A | N/A | |||||||||||||
Bank |
117,759 | 8.50 | % | 55,442 | ³ | 4.00 | % | 69,303 | 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.
Our most significant accounting policies are presented in Note 1 to our consolidated financial statements included in the 2011 Annual Report on Form 10-K (the 2011 Consolidated Financial Statements). These policies, along with the 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 2011 Consolidated Financial Statements
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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 2011, we performed a qualitative goodwill impairment assessment to determine whether it is more likely than not that the fair value of our reporting unit was less than the carrying amount in accordance with new accounting guidance issued in the current year. In our qualitative assessment analysis we considered several factors including macroeconomic conditions, industry and market considerations, our financial performance and changes in the composition or carrying amount of our reporting unit. In prior years, we utilized significant estimates and assumptions in determining the fair value of our 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 rates 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 our 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 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, 2012 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, 2013 assuming that maturing assets or liabilities are replaced with new balances of the same type, in the same amount, and at current (March 31, 2012) rate levels and repricing balances are adjusted to current (March 31, 2012) rate levels. The rate change information (rate shocks) in the table shows estimates of net portfolio value at March 31, 2012 and net interest income for the twelve months ending March 31, 2013 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 March 31, 2012 | Net Interest
Income Twelve Months Ending March 31, 2013 | |||||||||||||||||||
Change from Base | Change from Base | |||||||||||||||||||
Amount | Dollar | Percent |
Amount | Dollar | Percent | |||||||||||||||
Rate Change Scenario |
(Dollars in thousands) | |||||||||||||||||||
+300 basis point rate shock |
$ | 301,366 | $ | (10,685 | ) | (3.4)% | $ | 29,992 | $ | (8,594 | ) | (22.3)% | ||||||||
+200 basis point rate shock |
303,243 | (8,808 | ) | (2.8)% | 32,969 | (5,617 | ) | (14.6)% | ||||||||||||
+100 basis point rate shock |
301,487 | (10,564 | ) | (3.4)% | 36,086 | (2,500 | ) | (6.5)% | ||||||||||||
Base case (no rate change) |
312,051 | | % | 38,586 | | % | ||||||||||||||
-100 basis point rate shock |
292,200 | (19,851 | ) | (6.4)% | 36,604 | (1,982 | ) | (5.1)% |
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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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None.
For a summary of risk factors relevant to our operations, see Part I, Item 1A, Risk Factors in our 2011 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. Mine Safety Disclosures
Not applicable.
None.
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 9, 2012 | /s/ Jack H. Webb | |||
Jack H. Webb | ||||
Chairman of the Board, President and Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
DATE: May 9, 2012 | /s/ J. Daniel Mohr | |||
J. Daniel Mohr | ||||
Executive Vice President and Chief Financial Officer | ||||
(Principal Financial and Accounting Officer) |
Table of Contents
Exhibit |
Exhibit | |
3.1 | Amended and Restated Certificate of Incorporation of Alliance (incorporated herein by reference to Exhibit 3.1 to Alliances Quarterly Report on Form 10-Q filed with the Securities and Exchange Commission (SEC) on August 9, 2011) | |
3.2 | Amended and Restated Bylaws of Alliance (incorporated herein by reference to Exhibit 3.2 to Alliances Quarterly Report on Form 10-Q filed with the SEC on August 9, 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 | |
101** | Financial statements from the quarterly report on Form 10-Q of Alliance Financial Corporation for the quarter ended March 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Shareholders Equity, (iv) the Consolidated Statements of Cash Flow and (v) Notes to Consolidated Financial Statements. |
* | Filed herewith |
** | Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections. |