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| ALNC > SEC Filings for ALNC > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-2009
Quarterly Report
General
Throughout this discussion, the term "the Company" or "Alliance" refer to the consolidated entity of Alliance Financial Corporation, its wholly-owned subsidiaries Ladd's Agency, Inc. and Alliance Bank, N.A. (the "Bank"), and the Bank's subsidiaries, Alliance Preferred Funding Corp. and Alliance Leasing, Inc. The Company 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.
The following discussion presents material changes in the Company's results of operations and financial condition during the six months ended June 30, 2009, which are not otherwise apparent from the consolidated financial statements included in this report.
This discussion and analysis contains certain forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve certain risks and uncertainties. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, among others, the following possibilities:
• an increase in competitive pressures in the banking industry;
• changes in the interest rate environment that reduce margins;
• changes in the regulatory environment;
• general economic conditions, either nationally or regionally, resulting in, among other things, a deterioration in credit quality;
• changes in business conditions and inflation;
• changes in credit market conditions;
• changes in the securities markets which affect investment management revenues;
• increases in FDIC deposit insurance premiums and assessments could adversely affect our financial condition;
• changes in technology used in the banking business;
• our ability to maintain and increase market share and control expenses;
• the soundness of other financial services institutions may adversely affect our credit risk;
• certain of our intangible assets may become impaired in the future;
• the Company's controls and procedures may fail or be circumvented;
• new line of business or new products and services may subject the Company to additional risks;
• changes in key management personnel may adversely impact our operations;
• severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact the Company's business; and
• other factors detailed from time to time in the Company's Securities and Exchange Commission filings
Operating results for the three and six months ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.
Comparison of Operating Results for the Three and Six Months Ended June 30, 2009 and 2008
General
Net income available to common shareholders for the quarter ended June 30, 2009 was $1.3 million, or $0.28 per diluted share, compared to $2.9 million, or $0.62 per diluted share in the year-ago quarter. The Company's net income in the second quarter of 2009 was reduced by accrued dividends and discount accretion on preferred stock totaling $726,000 associated with its participation in and exit from the U.S. Treasury's Capital Purchase Program ("CPP"). There was no preferred stock outstanding in the second quarter of 2008. The return on average assets and return on average common shareholders' equity were 0.37% and 4.33%, respectively, for the quarter ended June 30, 2009 compared with 0.87% and 9.93%, respectively, for the second quarter of 2008.
Net income available to common shareholders for the six months ended June 30, 2009 was $3.9 million or $0.85 per diluted share, compared with $5.0 million or $1.06 per diluted share in the year-ago period. Preferred dividends and the accretion on the preferred stock discount was $1.1 million or $0.24 per diluted share for the six months ended June 30, 2009, respectively. There was no preferred stock outstanding for the six months ended June 30, 2008. The return on average assets and return on average common shareholders' equity were 0.56% and 6.47%, respectively, for the six months ended June 30, 2009 compared with 0.75% and 8.54%, respectively, for the same period in 2008.
The results for the second quarter and year-to-date reflect continued growth in net interest income, which offset higher credit costs and a decrease in investment management income compared to the year-ago periods. Excluding the impact of the Company's CPP participation and exit, second quarter and year-to-date earnings were impacted by a significant increase in the premiums assessed by the Federal Deposit Insurance Corporation ("FDIC") to all FDIC-insured banks. FDIC insurance premium expense for the three and six months increased $1.0 million and $1.3 million, respectively, compared with same periods in 2008. A large portion of the FDIC's insurance premium increase was in the form of a special assessment charged to all FDIC-insured banks in the second quarter which totaled $676,000 before tax or $0.09 per diluted common share after tax.
Net Interest Income
Net interest income totaled $10.6 million in the second quarter, representing an increase of $1.1 million or 11.7% compared with the second quarter of 2008. The increase in net interest income was driven by a higher net interest margin combined with earning asset growth. Average earning assets increased $91.0 million in the second quarter compared with the year-ago quarter, due in large part to increases in the average balance of residential mortgages and the securities portfolio. On a linked-quarter basis, net interest income increased $577,000 or 5.7% as a result of a higher net interest margin and a $40.2 million increase in average earning assets.
The Company's tax-equivalent net interest margin increased 11 basis points in the second quarter compared with the year-ago quarter, and was up 8 basis points compared to the first quarter of 2009. The net interest margin on a tax-equivalent basis was 3.50% in the second quarter of 2009, compared with 3.39% in the second quarter of 2008 and 3.42% in the first quarter of 2009. The increase in the net interest margin was the result of a decrease in the tax-equivalent earning asset yield of 76 basis points in the second quarter compared with the year-ago quarter, which was offset by a decrease in its cost of funds of 94 basis points over the same period. The Company's yield on earning assets decreased 17 basis points in the second quarter of 2009 compared with the first quarter of 2009, which was more than offset by a decrease in its cost of funds of 32 basis points during the same period.
The overall net interest margin growth since the first quarter of 2008 is primarily the result of the Company's ongoing active balance sheet management and deposit pricing strategies and the positive effects of those strategies in the interest rate environment of the past year. The rate of growth in the Company's net interest margin slowed in the second half of 2008 as interest rates on a substantial portion of the Company's interest-bearing liabilities have adjusted to the lower rates in effect during the period.
Since September 2007, the Federal Reserve has reduced its target fed funds rate from 5.25% to between zero and 0.25%. Over this same time period, a drop in equity markets, economic recession and federal government monetary and economic stimulus efforts have contributed to decline in the yields on U.S. Treasury securities. As a result of these factors, the yields on two-year, five-year and ten-year treasury securities dropped 304 basis points, 171 basis points and 103 basis points, respectively from August 31, 2007 to June 30, 2009. Yields on commercial loans and consumer loans were most affected by these conditions, with yields on these assets down 132 basis points and 200 basis points, respectively, in the second quarter of 2009 compared with the year-ago quarter. Other earning-asset classes have experienced declines in yields, though not to the same magnitude. The commercial and consumer loan portfolios are more sensitive than the Company's other interest-bearing assets to changes in market interest rates due to the variable rate characteristics of a segment of these portfolios and to the high levels of annual amortization in the portfolios as a result of their relatively shorter duration.
Average interest-earning assets increased $91.0 million or 7.6% in the second quarter compared with the year-ago period, due primarily to growth in investment securities and residential mortgage portfolio which offset declines in the commercial loan and lease portfolios. Loans and leases comprised 72% of average interest-earning assets in the second quarter, compared with 75% in the second quarter of 2008.
The Company's cost of funds declined on a quarter over quarter basis throughout 2008 and into the second quarter of 2009 in all interest-bearing liability categories except savings accounts. The average cost of money market and time deposits dropped 88 basis points and 137 basis points, respectively in the second quarter of 2009 compared
with the year-ago quarter as a result of the lower rate environment and the Company's actively managed deposit pricing strategies. Wholesale funding costs also dropped significantly over the same period, with the average cost of borrowings down 26 basis points. At the same time the Company was lowering its borrowing costs due to the lower market rates over the past eighteen months, it took the opportunity to lower the overall liability-sensitive position by extending the maturity on new or renewed borrowings. The weighted average maturity of the Company's borrowings was 2.29 years at June 30, 2009 compared with 1.1 years at December 31, 2007.
The average cost on the Company's junior subordinated obligations decreased 174 basis points in the second quarter of 2009 compared with the second quarter of 2008 due to the decline in the three-month Libor index to which these variable rate obligations are tied.
The Company's liability mix changed favorably during 2008 and into the first half of 2009 as the Company continued to focus on growing lower cost savings, demand and money market accounts (transaction accounts) and relied less on higher promotional rates to attract or retain retail time accounts. The aggregate average balance of transaction accounts was $670.8 million in the second quarter of 2009, which was an increase of $118.1 million or 21.4% from the aggregate average balances of $552.7 million in the second quarter of 2008. Average transaction account balances comprised 64% of total average deposits in the second quarter of 2009, compared with 58% in the year-ago period. Average time account balances in the second quarter of 2009 were 36% of total average deposits, compared with 42% in the year-ago period.
Net interest income for the six months ended June 30, 2009 totaled $20.7 million, an increase of $2.4 million or 13.1% compared with $18.3 million in the year-ago period. Average earning assets increased $74.9 million in the first half of 2009 compared with the year-ago period. The tax-equivalent net interest margin was 3.46% in the first half of 2009, compared with 3.27% in the first half of 2008. A decrease of 79 basis points in the Company's tax-equivalent earning assets yield in the first half of 2009 compared with the same period in 2008 was offset by a 104 basis point decrease in its cost of funds over the same period.
Changes in net interest income and net interest margin for the first half of 2009 compared with the same period in 2008 were driven largely by the same factors in the analysis of the second quarter of 2009 to the second quarter of 2008 discussed above.
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 June 30,
2009 2008
Interest Interest
Average Earned/ Yield Average Earned/ Yield
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Assets:
Interest earning assets:
Federal funds sold $ 18,903 $ 5 0.13 % $ 6,829 $ 43 2.52 %
Taxable investment securities 239,785 2,290 3.82 % 186,937 2,159 4.62 %
Nontaxable investment securities 87,747 1,387 6.32 % 88,663 1,371 6.19 %
FHLB and FRB stock 11,052 162 5.86 % 10,847 191 7.04 %
Real estate loans(1) 346,019 4,782 5.53 % 289,101 4,241 5.87 %
Commercial loans 206,085 2,814 5.46 % 211,766 3,590 6.78 %
Nontaxable commercial loans 9,573 145 6.08 % 8,327 138 6.62 %
Taxable leases (net of unearned
discount) (1) 68,991 1,079 6.26 % 106,864 1,678 6.28 %
Nontaxable leases (net of unearned
discount) 20,618 277 5.38 % 17,831 262 5.88 %
Indirect auto loans 185,765 2,562 5.52 % 177,112 2,482 5.61 %
Consumer loans 90,745 987 4.35 % 89,979 1,428 6.35 %
Total interest-earning assets $ 1,285,283 $ 16,490 5.13 % $ 1,194,256 $ 17,583 5.89 %
Non-interest earning assets:
Other assets 139,138 134,353
Less: Allowance for credit losses (9,866 ) (8,387 )
Net unrealized gains (losses) on
securities available-for-sale 6,048 3,444
Total assets $ 1,420,603 $ 1,323,666
Liabilities and shareholders'
equity:
Interest bearing liabilities:
Demand deposits $ 115,549 $ 134 0.46 % $ 106,487 $ 173 0.65 %
Savings deposits 91,859 117 0.51 % 86,449 123 0.57 %
MMDA deposits 308,279 844 1.10 % 228,124 1,130 1.98 %
Time deposits 383,166 2,467 2.58 % 394,558 3,896 3.95 %
Borrowings 190,901 1,478 3.10 % 217,255 1,825 3.36 %
Junior subordinated obligations
issued to unconsolidated trusts 25,774 213 3.32 % 25,774 326 5.06 %
Total interest-bearing liabilities $ 1,115,528 $ 5,253 1.88 % $ 1,058,647 $ 7,473 2.82 %
Non-interest bearing liabilities:
Demand deposits 155,156 131,689
Other liabilities 16,672 17,058
Shareholders' equity 133,247 116,272
Total liabilities and shareholders'
equity $ 1,420,603 $ 1,323,666
Net interest income (tax equivalent) $ 11,237 $ 10,110
Net interest rate spread 3.25 % 3.07 %
Net interest margin (tax equivalent) 3.50 % 3.39 %
Federal tax exemption on non-taxable
investment securities, loans and
leases included in interest income (615 ) (603 )
Net interest income $ 10,622 $ 9,507
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(1) Includes loans and leases held-for-sale
For the six months ended June 30,
2009 2008
Interest Interest
Average Earned/ Yield Average Earned/ Yield
Balance Paid Rate Balance Paid Rate
(Dollars in thousands)
Assets:
Interest earning assets:
Federal funds sold $ 25,907 $ 14 0.11 % $ 6,950 $ 89 2.59 %
Taxable investment securities 222,219 4,550 4.10 % 188,221 4,437 4.71 %
Nontaxable investment securities 88,335 2,724 6.17 % 87,841 2,700 6.15 %
FHLB and FRB stock 10,994 213 3.87 % 10,602 387 7.30 %
Real estate loans(1) 335,465 9,395 5.60 % 283,852 8,411 5.93 %
Commercial loans 204,642 5,749 5.62 % 210,989 7,404 7.02 %
Nontaxable commercial loans 9,679 292 6.04 % 8,277 279 6.74 %
Taxable leases (net of unearned
discount) (1) 73,225 2,325 6.35 % 109,316 3,488 6.38 %
Nontaxable leases (net of unearned
discount) 21,064 568 5.39 % 17,917 527 5.89 %
Indirect auto loans 183,436 5,070 5.53 % 175,567 4,976 5.67 %
Consumer loans 90,344 2,082 4.61 % 90,835 3,024 6.66 %
Total interest-earning assets $ 1,265,310 $ 32,982 5.21 % $ 1,190,367 $ 35,722 6.00 %
Non-interest earning assets:
Other assets 137,157 131,921
Less: Allowance for credit losses (9,678 ) (8,530 )
Net unrealized gains (losses) on
securities available-for-sale 6,051 3,512
Total assets $ 1,398,840 $ 1,317,270
Liabilities and shareholders'
equity:
Interest bearing liabilities:
Demand deposits $ 115,808 $ 284 0.49 % $ 106,723 $ 387 0.73 %
Savings deposits 89,954 234 0.52 % 84,462 237 0.56 %
MMDA deposits 287,298 1,807 1.26 % 219,480 2,516 2.29 %
Time deposits 369,961 5,176 2.80 % 404,176 8,550 4.23 %
Borrowings 201,073 3,128 3.11 % 213,434 3,826 3.59 %
Junior subordinated obligations
issued to unconsolidated trusts 25,774 468 3.63 % 25,774 741 5.75 %
Total interest-bearing liabilities $ 1,089,868 $ 11,097 2.04 % $ 1,054,049 $ 16,257 3.08 %
Non-interest bearing liabilities:
Demand deposits 151,991 128,971
Other liabilities 17,149 18,068
Shareholders' equity 139,832 116,182
Total liabilities and shareholders'
equity $ 1,398,840 $ 1,317,270
Net interest income (tax equivalent) $ 21,885 $ 19,465
Net interest rate spread 3.27 % 2.92 %
Net interest margin (tax equivalent) 3.46 % 3.27 %
Federal tax exemption on non-taxable
investment securities, loans and
leases included in interest income (1,218 ) (1,191 )
Net interest income $ 20,667 $ 18,274
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(1) Includes loans and leases held-for-sale
The following table sets forth the dollar volume of increase or (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.
For the three months ended For the six months ended
June 30, 2009 June 30, 2009
Compared to Compared to
June 30, 2008 June 30, 2008
Increase/(Decrease) Due To Increase/(Decrease) Due To
Net Net
Volume Rate Change Volume Rate Change
Federal funds sold $ 188 $ (226 ) $ (38 ) $ 200 $ (275 ) $ (75 )
Taxable investment securities 1,938 (1,807 ) 131 1,416 (1,303 ) 113
Non-taxable investment securities (72 ) 88 16 15 9 24
FHLB and FRB stock 23 (52 ) (29 ) 40 (214 ) (174 )
Real estate loans 1,936 (1,395 ) 541 2,174 (1,190 ) 984
Commercial loans (94 ) (682 ) (776 ) (217 ) (1,438 ) (1,655 )
Non-taxable commercial loans 63 (56 ) 7 80 (67 ) 13
Taxable leases (net of unearned
income) (592 ) (7 ) (599 ) (1,146 ) (17 ) (1,163 )
Non-taxable leases (net of unearned
income) 125 (110 ) 15 147 (106 ) 41
Indirect loans 298 (218 ) 80 378 (284 ) 94
Consumer loans 83 (524 ) (441 ) (16 ) (926 ) (942 )
Total interest-earning assets 3,896 (4,989 ) (1,093 ) 3,071 (5,811 ) (2,740 )
Interest-bearing demand deposits 82 (121 ) (39 ) 83 (186 ) (103 )
Savings deposits 37 (43 ) (6 ) 31 (34 ) (3 )
MMDA deposits 1,653 (1,939 ) (286 ) 1,558 (2,267 ) (709 )
Time deposits (109 ) (1,320 ) (1,429 ) (675 ) (2,699 ) (3,374 )
Borrowings (210 ) (137 ) (347 ) (212 ) (486 ) (698 )
Junior subordinated obligations
issued to unconsolidated subsidiary
trusts - (113 ) (113 ) - (273 ) (273 )
Total interest-bearing liabilities 1,453 (3,673 ) (2,220 ) 785 (5,945 ) (5,160 )
Net interest income tax equivalent $ 2,443 $ (1,316 ) $ 1,127 $ 2,286 $ 134 $ 2,420
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Asset Quality and the Allowance for Credit Losses
The following table represents a summary of delinquent loans and leases grouped
by the number of days delinquent at the dates indicated:
Delinquent loans and leases June 30, 2009 March 31, 2009 December 31, 2008
$ %(1) $ %(1) $ %(1)
(Dollars in thousands)
30 days past due $ 8,990 0.97 % $ 8,938 0.97 % $ 11,124 1.22 %
60 days past due 3,788 0.41 % 3,168 0.34 % 4,736 0.52 %
90 days past due and still accruing 23 - % 299 0.03 % 126 0.01 %
Non-accrual 7,588 0.81 % 5,620 0.61 % 4,352 0.48 %
Total $ 20,389 2.19 % $ 18,025 1.95 % $ 20,338 2.23 %
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(1) As a percentage of total loans and leases, excluding deferred costs
Continuing weakness in the local, state and national economies contributed to a modest increase in delinquencies and nonperforming loans and leases in the second quarter. Loans and leases past due 30 days or more totaled $20.4 million or 2.2% of total loans and leases at June 30, 2009, compared with $18.0 million or 2.0% at March 31, 2009 and $20.3 million or 2.2% of total loans and leases at . . .
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