XNAS:ALNC Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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

(Registrant’s 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 Registrant’s common stock, $1.00 par value, on May 3, 2012 was 4,784,698 shares.

 

 

 


Table of Contents
  TABLE OF CONTENTS   
     Page Number(s)  

Forward-Looking Statements

     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.

  Management’s 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 Ladd’s Agency, Inc. (“Ladd’s”), and the Bank’s subsidiaries, Alliance Preferred Funding Corp. and Alliance Leasing, Inc. Alliance is a New York corporation which was formed in November 1998 as a result of the merger of Cortland First Financial Corporation and Oneida Valley Bancshares, Inc.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain “forward-looking statements” (within the meaning of the Private Securities Litigation Reform Act of 1995) with respect to the financial conditions, results of operations and business of Alliance. The words “may,” “could,” “should,” “would,” “believe,” “anticipate,” “estimate,” “expect,” “intend,” “plan” and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following:

 

   

changes in the interest rate environment that reduce margins;

 

   

changes in the regulatory environment;

 

   

the highly competitive industry and market area in which we operate;

 

   

general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality;

 

   

changes in business conditions and inflation;

 

   

changes in credit market conditions;

 

   

changes in the securities markets which affect investment management revenues;

 

   

increases in 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

PART I. FINANCIAL INFORMATION

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.

 

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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.

 

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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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

     4,745,491      $ 5,068      $ 45,805      $ 94,263      $ 1,639      $ (8,656   $ (3,091   $ 135,028   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2012

     4,769,241      $ 5,092      $ 47,147      $ 99,879      $ 3,951      $ (8,656   $ (3,416   $ 143,997   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

     4,784,698      $ 5,107      $ 47,201      $ 101,035      $ 3,822      $ (8,656   $ (3,517   $ 144,992   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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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
  

 

 

   

 

 

 

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
  

 

 

   

 

 

 

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   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 90,199      $ 30,386   
  

 

 

   

 

 

 

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.

 

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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 Ladd’s Agency, Inc. (“Ladd’s”). 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 “Management’s 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 Management’s 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 Alliance’s 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   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock investments

     3,000         109         4         3,105   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available-for-sale

   $ 335,298       $ 11,213       $ 106       $ 346,405   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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):

 

XXXXX XXXXX
         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 Alliance’s 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 Alliance’s 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 borrower’s 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 management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s 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

 

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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 director’s fees, subject to increases based on the director’s 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 company’s 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).

 

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Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements        

 

Assets measured at fair value on a recurring basis are summarized below (in thousands):

 

XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
            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 borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s 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):

 

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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

 

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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.

Alliance’s 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.

 

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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.

 

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Table of Contents

Item 2. Management’s 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 Reserve’s 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 depositor’s 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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Table of Contents

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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Table of Contents

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 period’s rate. Rate changes are computed by multiplying the rate difference by the prior period’s 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).

 

0000000 0000000 0000000
     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