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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

¨	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):

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 November 2, 2012 was 4,782,185 shares.

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	5-22

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23-39

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	40

	Item 4.	Controls and Procedures	41

Part II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	42

	Item 1A.	Risk Factors	42-44

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44

	Item 3.	Defaults Upon Senior Securities	44

	Item 4.	Mine Safety Disclosures	44

	Item 5.	Other Information	44

	Item 6.	Exhibits	44

	Signatures

	Exhibits

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;

•

risks related to the merger with NBT Bancorp Inc. as described in Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q; 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.

PART I. FINANCIAL INFORMATION

Alliance Financial Corporation and Subsidiaries

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)


	September 30, 2012			December 31, 2011
Assets
Cash and due from banks	$	88,703		$	52,802

Securities available-for-sale		343,211			374,306
Federal Home Loan Bank of New York (“FLHB”) and Federal Reserve Bank (“FRB”) stock		7,983			8,478
Loans and leases held-for-sale		359			1,217
Loans and leases, net of unearned income and deferred costs		906,383			872,721
Allowance for credit losses		(8,483	)		(10,769	)

Net loans and leases		897,900			861,952

Premises and equipment, net		16,879			17,541
Accrued interest receivable		4,134			3,960
Bank-owned life insurance		30,172			29,430
Goodwill		30,844			30,844
Intangible assets, net		7,029			7,694
Other assets		18,826			20,866

Total assets	$	1,446,040		$	1,409,090


Liabilities and shareholders’ equity
Liabilities
Deposits:
Non-interest-bearing deposits	$	212,437		$	185,736
Interest-bearing deposits		913,966			897,329

Total deposits		1,126,403			1,083,065
Borrowings		127,134			136,310
Accrued interest payable		723			1,578
Other liabilities		17,628			18,366
Junior subordinated obligations issued to unconsolidated subsidiary trusts		25,774			25,774

Total liabilities		1,297,662			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, 5,104,497 and 5,091,553 shares issued; and 4,782,185 and 4,769,241 shares outstanding, respectively		5,104			5,092
Surplus		47,651			47,147
Undivided profits		103,225			99,879
Accumulated other comprehensive income		4,808			3,951
Directors’ stock-based deferred compensation plan (144,926 and 134,260 shares, respectively)		(3,754	)		(3,416	)
Treasury stock, at cost: 322,312 shares		(8,656	)		(8,656	)

Total shareholders’ equity		148,378			143,997


Total liabilities & shareholders’ equity	$	1,446,040		$	1,409,090

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

Alliance Financial Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands, except per share data)


	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012			2011
Interest income:
Interest and fees on loans and leases	$	9,727	$	10,448	$	29,270		$	31,731
Federal funds sold and interest bearing deposits		28		—		103			5
Interest and dividends on taxable securities		1,596		2,880		5,275			8,849
Interest and dividends on nontaxable securities		628		733		2,011			2,232

Total interest income		11,979		14,061		36,659			42,817

Interest expense:
Deposits:
Savings accounts		30		54		85			166
Money market accounts		249		377		779			1,271
Time accounts		812		1,404		2,843			4,337
NOW accounts		30		49		96			179

Total deposits		1,121		1,884		3,803			5,953
Borrowings:
Repurchase agreements		210		206		622			619
FHLB advances		524		816		1,920			2,486
Junior subordinated obligations issued to unconsolidated subsidiary trusts		170		158		514			473

Total interest expense		2,025		3,064		6,859			9,531

Net interest income		9,954		10,997		29,800			33,286
Provision for credit losses		—		750		(300	)		1,110

Net interest income after provision for credit losses		9,954		10,247		30,100			32,176

Non-interest income:
Investment management income		1,831		1,948		5,636			5,850
Service charges on deposit accounts		1,074		1,194		3,167			3,299
Card-related fees		688		687		2,059			2,039
Income from bank-owned life insurance		250		258		742			768
Gain on the sale of loans		508		245		1,214			621
Gain on sale of securities available-for-sale		—		1,325		—			1,325
Other non-interest income		233		262		767			1,038

Total non-interest income		4,584		5,919		13,585			14,940

Non-interest expense:
Salaries and employee benefits		5,761		5,573		17,103			16,407
Occupancy and equipment expense		1,770		1,833		5,365			5,479
Communication expense		153		124		469			448
Office supplies and postage expense		298		283		905			868
Marketing expense		152		193		651			673
Amortization of intangible assets		222		241		665			722
Professional fees		1,615		736		3,220			2,420
FDIC insurance premium		216		49		642			844
Other non-interest expense		1,526		2,107		4,598			5,080

Total non-interest expense		11,713		11,139		33,618			32,941

Income before income tax expense		2,825		5,027		10,067			14,175
Income tax expense		540		1,360		2,224			3,723

Net income	$	2,285	$	3,667	$	7,843		$	10,452

Net income per share:
Basic earnings per share	$	0.48	$	0.77	$	1.64		$	2.20
Diluted earnings per share	$	0.48	$	0.77	$	1.64		$	2.20
Cash dividends declared per share	$	0.32	$	0.31	$	0.94		$	0.91

Comprehensive income	$	2,997	$	4,286	$	8,700		$	13,916

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

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		—			—			—			10,452			—		—			—			10,452
Change in unrealized appreciation in available-for-sale securities (net of tax)		—			—			—			—			3,371		—			—			3,371
Change in accumulated unrealized losses and prior service costs for retirement plans (net of tax)		—			—			—			—			93		—			—			93
Retirement of common stock		(3,447	)		(3	)		(100	)		—			—		—			—			(103	)
Issuance of restricted stock		17,839			18			(18	)		—			—		—			—			—
Forfeiture of restricted stock		(200	)		—			(1	)		—			—		—			—			(1	)
Amortization of restricted stock		—			—			367			—			—		—			—			367
Stock options exercised		4,385			4			98			—			—		—			—			102
Tax benefit of stock-based compensation		—			—			43			—			—		—			—			43
Cash dividend $0.91 per common share		—			—			—			(4,318	)		—		—			—			(4,318	)
Directors’ deferred stock plan purchase		—			—			350			—			—		—			(350	)		—
Directors’ deferred stock plan distribution		—			—			(23	)		—			—		—			23			—

Balance at September 30, 2011		4,747,612		$	5,070		$	46,336		$	98,514		$	5,177	$	(8,656	)	$	(3,304	)	$	143,137


Balance at January 1, 2012		4,769,241		$	5,092		$	47,147		$	99,879		$	3,951	$	(8,656	)	$	(3,416	)	$	143,997

Net income		—			—			—			7,843			—		—			—			7,843
Change in unrealized appreciation in available-for-sale securities (net of tax)		—			—			—			—			694		—			—			694
Change in accumulated unrealized losses and prior service costs for retirement plans (net of tax)		—			—			—			—			163		—			—			163
Retirement of common stock		(4,971	)		(5	)		(160	)		—			—		—			—			(165	)
Issuance of restricted stock		18,465			18			(18	)		—			—		—			—			—
Forfeiture of restricted stock		(550	)		(1	)		—			—			—		—			—			(1	)
Amortization of restricted stock		—			—			382			—			—		—			—			382
Tax benefit of stock-based compensation		—			—			(38	)		—			—		—			—			(38	)
Cash dividend $0.94 per common share		—			—			—			(4,497	)		—		—			—			(4,497	)
Directors’ deferred stock plan purchase		—			—			362			—			—		—			(362	)		—
Directors’ deferred stock plan distribution		—			—			(24	)		—			—		—			24			—

Balance at September 30, 2012		4,782,185		$	5,104		$	47,651		$	103,225		$	4,808	$	(8,656	)	$	(3,754	)	$	148,378

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

Alliance Financial Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flow (Unaudited)

(In thousands)


	Nine months ended September 30,
	2012			2011
Operating Activities:
Net Income	$	7,843		$	10,452

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		(300	)		1,110
Depreciation expense		1,478			1,632
Increase in surrender value of life insurance		(742	)		(768	)
Provision (benefit) for deferred income taxes		963			(1,560	)
Amortization of investment security discounts and premiums, net		2,812			2,381
Net gain on sale of securities available-for-sale		—			(1,325	)
Net gain on sale of premises and equipment		—			2
Proceeds from the sale of loans held-for-sale		46,811			30,369
Origination of loans held-for-sale		(45,073	)		(28,593	)
Gain on sale of loans held-for-sale		(1,214	)		(621	)
Gain on foreclosed real estate		(50	)		(61	)
Amortization of capitalized servicing rights		361			278
Amortization of intangible assets		665			722
Restricted stock expense, net		381			366
Amortization of prepaid FDIC insurance premium		557			764
Impairment loss on fixed asset		—			570
Change in other assets and liabilities		(748	)		(292	)

Net cash provided by operating activities		13,744			15,426

Investing Activities:
Proceeds from maturities, redemptions, calls and principal repayments of investment securities available-for-sale		84,979			73,299
Proceeds from sales of investment securities available-for-sale		—			57,824
Purchase of investment securities available-for-sale		(55,547	)		(121,427	)
Purchase of FHLB and FRB stock		(63	)		(13,093	)
Redemption of FHLB stock		558			13,298
Net (increase) decrease in loans and leases		(36,684	)		24,213
Purchases of premises and equipment		(863	)		(1,022	)
Proceeds from the sale of premises and equipment		47			—
Proceeds from disposition of foreclosed assets		579			703

Net cash provided by (used in) investing activities		(6,994	)		33,795

Financing Activities:
Net increase (decrease) in checking, savings and money market accounts		99,037			(10,981	)
Net decrease in time accounts		(55,699	)		(15,556	)
Net (decrease) increase in short-term borrowings		824			(2,611	)
Payments on long-term borrowings		(10,000	)		(15,000	)
Proceeds from long-term borrowings		—			10,000
Proceeds from the exercise of stock options		—			102
Retirement of common stock		(165	)		(103	)
Tax (provision) benefit for stock-based compensation		(38	)		43
Purchase of shares for directors’ deferred stock-based plan		(362	)		(350	)
Cash dividends paid to common shareholders		(4,446	)		(4,265	)

Net cash provided by (used in) financing activities		29,151			(38,721	)

Net increase in cash and cash equivalents		35,901			10,500
Cash and cash equivalents at beginning of period		52,802			32,501

Cash and cash equivalents at end of period	$	88,703		$	43,001


Supplemental Disclosures of Cash Flow Information:
Interest received during the period	$	36,485		$	42,521
Interest paid during the period		7,714			9,779
Income taxes		213			5,048
Non-cash investing and financing activities:
Change in unrealized gain on available-for-sale securities		1,149			5,497
Transfer of loans to other real estate		1,036			659
Common dividend declared and unpaid		1,530			1,472

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

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 company-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 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, consisting of only normal recurring items, 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 nine months ended September 30, 2012 and 2011. The results of operations for the nine months ended September 30, 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):


	September 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Debt Securities:
Obligations of U.S. government-sponsored corporations	$	1,489	$	10	$	—	$	1,499
Obligations of states and political subdivisions		68,900		5,059		—		73,959
Mortgage-backed securities – residential		257,435		7,293		145		264,583

Total debt securities		327,824		12,362		145		340,041
Stock Investments:
Mutual funds		3,000		170		—		3,170

Total available-for-sale	$	330,824	$	12,532	$	145	$	343,211

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 available-for-sale	$	363,068	$	11,411	$	173	$	374,306

As of September 30, 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 U.S. government.

At September 30, 2012 and December 31, 2011, securities with a carrying value of $296.2 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 nine months of 2012. Alliance recognized gross gains on sales of securities of $1.3 million with a related tax provision of $513,000 for the three and nine months ended September 30, 2011.

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.


	September 30, 2012
	Amortized Cost		Estimated Fair Value
Due in one year or less	$	88,378	$	90,769
Due after one year through five years		162,627		167,900
Due after five years through ten years		59,854		63,645
Due after ten years		16,965		17,727

Total debt securities	$	327,824	$	340,041

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):


	September 30, 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
Mortgage-backed securities – residential	$	16,240	$	76	$	1,047	$	69	$	17,287	$	145

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 September 30, 2012 represents an other-than-temporary impairment. A total of 12 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 and FHLMC. 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):


	September 30,			December 31,
	2012			2011
Residential real estate	$	327,454		$	316,823
Commercial loans		147,677			151,420
Commercial real estate		126,783			126,863
Leases		13,726			28,842
Consumer other
Indirect auto		199,419			158,813
Home equity		78,572			78,624
Other consumer		10,167			11,152

Loans and leases		903,798			872,537
Less: Unearned income		(1,915	)		(3,206	)
Net deferred loan costs		4,500			3,390

Total loans and leases		906,383			872,721
Allowance for credit losses		(8,483	)		(10,769	)

Net loans and leases	$	897,900		$	861,952

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Non-accrual and Past Due Loans and Leases

Non-accrual loans and leases and loans greater than 90 days past due and 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 that are greater than 90 days past due and still accruing and non-performing at the dates indicated (in thousands):


	September 30, 2012
	Non-accrual		Greater than 90 Days Past Due and Still Accruing		Non-performing Loans and Leases
Commercial loans	$	579	$	—	$	579
Commercial real estate		505		—		505
Leases, net of unearned income		52		—		52
Residential real estate		2,302		—		2,302
Consumer other:
Indirect		220		—		220
Home equity		361		—		361
Other		85		—		85

Total	$	4,104	$	—	$	4,104


	December 31, 2011
	Non-accrual		Greater than 90 Days Past Due and Still Accruing		Non-performing Loans and Leases
Commercial loans	$	3,401	$	—	$	3,401
Commercial real estate		4,051		—		4,051
Leases, net of unearned income		107		—		107
Residential real estate		3,062		—		3,062
Consumer other:
Indirect		293		—		293
Home equity		270		—		270
Other		103		—		103

Total	$	11,287	$	—	$	11,287

The following tables present the aging of past due loans and leases, including non-performing loans and leases, at the dates indicated (in thousands):


	September 30, 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 loans	$	378	$	34	$	564	$	976	$	146,701	$	147,677
Commercial real estate		713		57		333		1,103		125,680		126,783
Leases, net		14		18		15		47		11,764		11,811
Residential real estate		2,667		1,659		2,244		6,570		320,884		327,454
Consumer other:
Indirect		398		62		94		554		198,865		199,419
Home equity		124		36		53		213		78,359		78,572
Other		131		19		2		152		10,015		10,167

Total	$	4,425	$	1,885	$	3,305	$	9,615	$	892,268	$	901,883

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 loans	$	390	$	173	$	1,327	$	1,890	$	149,530	$	151,420
Commercial real estate		262		—		1,873		2,135		124,728		126,863
Leases, net		39		—		18		57		25,579		25,636
Residential real estate		3,743		377		3,062		7,182		309,641		316,823
Consumer other:
Indirect		728		76		67		871		157,942		158,813
Home equity		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):


	Three months ended September 30, 2012
	Commercial & Commercial Real Estate			Leases, net		Residential Real Estate			Consumer Indirect			Consumer Other			Unallocated			Total
Allowance for credit losses:
Beginning balance	$	4,974		$	167	$	855		$	937		$	701		$	1,258		$	8,892
Charge-offs		(367	)		—		(12	)		(16	)		(226	)					(621	)
Recoveries		14			45		3			25			125						212

Net charge-offs		(353	)		45		(9	)		9			(101	)					(409	)
Provision		180			79		111			108			82			(560	)		—

Ending Balance	$	4,801		$	291	$	957		$	1,054		$	682		$	698		$	8,483


	Three months ended September 30, 2011
	Commercial & Commercial Real Estate			Leases, net			Residential Real Estate			Consumer Indirect			Consumer Other			Unallocated		Total
Allowance for credit losses:
Beginning balance	$	6,338		$	853		$	767		$	779		$	751		$	1,195	$	10,683
Charge-offs		(81	)		(1	)		—			(105	)		(310	)				(511	)
Recoveries		14			178			3			73			104					372

Net charge-offs		(67	)		163			3			(32	)		(206	)				(139	)
Provision		824			(381	)		(8	)		68			220			27		750

Ending Balance	$	7,095		$	635		$	762		$	815		$	765		$	1,222	$	11,294


	Nine months ended September 30, 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		(2,134	)		—			(102	)		(126	)		(616	)					(2,978	)
Recoveries		276			257			13			99			347						992

Net charge-offs		(1,858	)		257			(89	)		(27	)		(269	)					(1,986	)
Provision		(335	)		(469	)		296			297			204			(293	)		(300	)

Ending Balance	$	4,801		$	291		$	957		$	1,054		$	682		$	698		$	8,483

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements


	Nine months ended September 30, 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		(136	)		(331	)		(150	)		(243	)		(704	)				(1,564	)
Recoveries		130			365			42			150			378					1,065

Net charge-offs		(6	)		34			(108	)		(93	)		(326	)				(499	)
Provision		1,533			(982	)		(76	)		(25	)		312			348		1,110

Ending Balance	$	7,095		$	635		$	762		$	815		$	765		$	1,222	$	11,294

Impaired Loans and Leases

The following table presents information related to impaired loans and leases by type as of the dates indicated (in thousands):


	September 30, 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 and commercial real estate	$	1,157	$	817			$	1,962	$	1,143
Leases, net		116		54				191		83
Residential real estate		1,264		1,559				1,533		1,457
Consumer other		34		34				41		41

		2,571		2,464				3,727		2,724
With an allowance recorded:
Commercial and commercial real estate		566		485	$	19		7,150		5,932	$	2,077
Leases, net		—		—		—		40		24		10
Residential real estate		998		601		38		405		405		11

		1,564		1,086		57		7,595		6,361		2,098
Total:
Commercial and commercial real estate		1,723		1,302		19		9,112		7,075		2,077
Leases, net		116		54		—		231		107		10
Residential real estate		2,262		2,160		38		1,938		1,862		11
Consumer other		34		34		—		41		41		—

	$	4,135	$	3,550	$	57	$	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.

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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, net		Residential Real Estate		Consumer Indirect		Consumer Other		Total
September 30, 2012
Individually evaluated for impairment	$	19	$	—	$	38	$	—	$	—	$	57
Collectively evaluated for impairment		4,782		291		919		1,054		682		7,728

Allocated	$	4,801	$	291	$	957	$	1,054	$	682		7,785

Unallocated												698

Total											$	8,483

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, net		Residential Real Estate		Consumer Indirect		Consumer Other		Total
September 30, 2012
Individually evaluated for impairment	$	1,302	$	54	$	2,160	$	—	$	34	$	3,550
Collectively evaluated for impairment		273,158		11,757		325,294		199,419		88,705		898,333

Total	$	274,460	$	11,811	$	327,454	$	199,419	$	88,739	$	901,883

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

The following table presents the average recorded investment in impaired loans and leases for the periods indicated (in thousands):


	For the three months ended September 30,				For the nine months ended September 30,
	2012		2011		2012		2011
Commercial and commercial real estate	$	2,132	$	5,612	$	4,145	$	3,893
Leases, net		61		188		78		304
Residential real estate		2,177		1,127		2,054		1,212
Consumer other		35		—		38		—

Total	$	4,405	$	6,927	$	6,315	$	5,409

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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 September 30, 2012		For the three months ended September 30, 2011		For the nine months ended September 30, 2012		For the nine months ended September 30, 2011
Commercial and commercial real estate	$	69	$	1	$	75	$	2
Residential real estate		26		15		73		48
Consumer other		1		—		2		—

Total	$	96	$	16	$	150	$	50

Troubled Debt Restructurings

The following table presents the recorded investment in troubled debt restructured loans and leases as of September 30, 2012 and December 31, 2011 based on payment performance status (in thousands):


	September 30, 2012
	Commercial & Commercial Real Estate		Leases, net		Residential Real Estate		Consumer Other		Total
Performing	$	681	$	—	$	1,989	$	34	$	2,704
Non-performing		210		6		191		—		407

Total	$	891	$	6	$	2,180	$	34	$	3,111


	December 31, 2011
	Commercial & Commercial Real Estate		Leases, net		Residential Real Estate		Consumer Other		Total
Performing	$	211	$	—	$	1,401	$	41	$	1,653
Non-performing		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 September 30, 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 and nine month periods ending September 30, 2012 and September 30, 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.

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 September 30, 2012
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and commercial real estate		1	$	206	$	206

		1	$	206	$	206

	For the three months ending September 30, 2011
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and commercial real estate		1	$	3,000	$	3,000

		1	$	3,000	$	3,000

	For the nine months ending September 30, 2012
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and commercial real estate		3	$	577	$	577
Residential real estate		3		306		351

		6	$	883	$	928

	For the nine months ending September 30, 2011
	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial and commercial real estate		4	$	3,318	$	3,330
Leases, net		2		121		121
Residential real estate		5		385		436

		11	$	3,824	$	3,887

The troubled debt restructurings described above required a net allocation of the allowance for credit losses of $49,000 and $1.3 million at September 30, 2012 and September 30, 2011, respectively. Charge-offs of $1.5 million and $42,000 were recorded during the nine month periods ending September 30, 2012 and September 30, 2011.

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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 September 30, 2012				For the three months ending September 30, 2011
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Commercial and commercial real estate		1	$	—		2	$	3,062
Residential real estate		2		191		2		236

		3	$	191		4	$	3,298

	For the nine months ending September 30, 2012				For the nine months ending September 30, 2011
	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Commercial and commercial real estate		2	$	—		2	$	3,062
Residential real estate		2		191		2		236

		4	$	191		4	$	3,298

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 $0 and $1.7 million at September 30, 2012 and September 30, 2011, respectively. Charge-offs of $210,000 and $1.5 million for the three and nine months ended September 30, 2012, respectively, were recorded on these defaulted troubled debt restructurings. There were no charge-offs recorded on defaulted troubled debt restructurings during the three and nine months ended September 30, 2011.

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:

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.

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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 or further segregated into smaller homogeneous pools based on similar risk and loss characteristics. 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.

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):


	September 30, 2012				December 31, 2011
	Commercial & Commercial Real Estate		Commercial Leases, net		Commercial & Commercial Real Estate		Commercial Leases, net
Credit risk profile by internally assigned grade:
Pass	$	229,162	$	3,629	$	220,226	$	13,759
Special mention		6,063		—		13,421		259
Substandard		8,771		1,676		10,074		371
Substandard individually evaluated for impairment		1,103		54		7,075		107
Not rated		29,361		6,452		27,487		11,140

	$	274,460	$	11,811	$	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.

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):


	September 30, 2012
	Residential Real Estate		Consumer Indirect		Consumer Home Equity		Consumer Other
Performing	$	325,152	$	199,199	$	78,211	$	10,082
Non-performing		2,302		220		361		85

Total	$	327,454	$	199,419	$	78,572	$	10,167


	December 31, 2011
	Residential Real Estate		Consumer Indirect		Consumer Home Equity		Consumer Other
Performing	$	313,761	$	158,520	$	78,354	$	11,049
Non-performing		3,062		293		270		103

Total	$	316,823	$	158,813	$	78,624	$	11,152

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

4.	Deposits

Deposits consisted of the following at the periods indicated (in thousands):


	September 30, 2012		December 31, 2011
Non-interest-bearing checking	$	212,437	$	185,736
Interest-bearing checking		159,680		145,885
Savings accounts		115,229		107,311
Money market accounts		380,623		330,000
Time accounts		258,434		314,133

Total deposits	$	1,126,403	$	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.

Basic and diluted net income per common share calculations are as follows (in thousands, except per share data):


	For the three months ended September 30,						For the nine months ended September 30,
	2012			2011			2012			2011
Basic:
Net income	$	2,285		$	3,667		$	7,843		$	10,452
Less: dividends and undistributed earnings allocated to unvested restricted shares		(37	)		(61	)		(132	)		(175	)

Net earnings allocated to common shareholders	$	2,248		$	3,606		$	7,711		$	10,277

Weighted average common shares outstanding, including shares considered participating securities		4,783,546			4,747,870			4,780,826			4,743,021
Less: average participating securities		(81,252	)		(80,515	)		(80,202	)		(78,951	)

Weighted average shares		4,702,294			4,667,355			4,700,624			4,664,070

Net income per common share – basic	$	0.48		$	0.77		$	1.64		$	2.20

Diluted:
Net earnings allocated to common shareholders	$	2,248		$	3,606		$	7,711		$	10,277

Weighted average common shares outstanding for basic earnings per common share		4,702,294			4,667,355			4,700,624			4,664,070
Incremental shares from assumed conversion of stock options and warrants		—			6,553			—			7,618

Average common shares outstanding – diluted		4,702,294			4,673,908			4,700,624			4,671,688
Net income per common share – diluted	$	0.48		$	0.77		$	1.64		$	2.20

Dividends of $24,000 and $23,000 were paid on unvested shares with non-forfeitable dividend rights for the quarters ending September 30, 2012 and 2011, respectively. Dividends of $76,000 and $72,000 for the nine months ended September 30, 2012 and 2011, respectively, were paid on unvested shares with non-forfeitable dividend rights. There were no options outstanding at September 30, 2012. There were no anti-dilutive stock options for the three months and nine months ended September 30, 2011.

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

6.	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 (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”). 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 September 30, 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			44			56			43		48		12		14
Expected return on assets		(87	)		(97	)		—			—			—		—		—		—
Amortization of unrecognized actuarial loss		55			31			5			5			17		1		7		7
Amortization of unrecognized prior service cost		—			—			(11	)		(11	)		6		6		12		12

Net periodic plan cost	$	35		$	6		$	38		$	50		$	88	$	77	$	49	$	56

The components of all of the plans’ net periodic costs for the nine months ended September 30, 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	$	—		$	—		$	—		$	—		$	66	$	67	$	53	$	68
Interest cost		201			216			133			168			128		143		36		42
Expected return on assets		(261	)		(290	)		—			—			—		—		—		—
Amortization of unrecognized actuarial loss		165			92			13			14			51		3		21		22
Amortization of unrecognized prior service cost		—			—			(33	)		(33	)		17		17		36		36

Net periodic plan cost	$	105		$	18		$	113		$	149		$	262	$	230	$	146	$	168

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

7.	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). There were no transfers between fair value measurement levels during the most recent quarter.

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


			Fair Value Measurements at September 30, 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	$	1,499	$	—	$	1,499
Obligations of states and political subdivisions		73,959		—		73,959
Mortgage-backed securities – residential		264,583		—		264,583

Total debt securities		340,041		—		340,041
Stock Investments:
Mutual Funds		3,170		3,170		—

Total available-for-sale	$	343,211	$	3,170	$	340,041


			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 available-for-sale	$	374,306	$	3,111	$	371,195

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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):


	At September 30, 2012				At December 31, 2011
	Fair Value		Significant unobservable inputs (Level 3)		Fair Value		Significant unobservable inputs (Level 3)
Impaired loans and leases:
Commercial and commercial real estate	$	190	$	190	$	3,855	$	3,855
Leases, net		—		—		14		14

	$	190	$	190	$	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 $196,000 with a valuation allowance of $6,000 at September 30, 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 $347,000 and $1.8 million for the nine months ended September 30, 2012 and 2011, respectively.

The fair value of one impaired commercial real estate loan at September 30, 2012 was measured based upon a real estate appraisal. Unobservable inputs included adjustments by the appraiser for differences between the comparable sales averaging 10%. In addition, the appraised real estate value was discounted 20% by management due to the appraisal being greater than 2 years old. For a commercial impaired loan, the fair value of the equipment and inventory collateral was based upon customer prepared interim financial statements that management discounted 40% and 70% for the equipment and inventory, respectively.

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

The carrying amounts and estimated fair value of financial instruments at September 30, 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	$	88,703	$	—	$	—	$	88,703
FHLB and FRB stock		N/A		N/A		N/A		7,983
Loans held for sale		—		359		—		359
Net loans and leases⁽¹⁾		—		—		936,356		897,900
Accrued interest receivable		—		1,628		2,506		4,134
Financial Liabilities:
Deposits		867,969		259,734		—		1,126,403
Borrowings		—		131,986		—		127,134
Junior subordinated obligations		—		—		9,830		25,774
Accrued interest payable		3		642		78		723

(1)	includes impaired loans and leases

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.

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

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.

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.

Alliance Financial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

8.	Subsequent Event

On October 8, NBT Bancorp Inc. (“NBT”) and Alliance announced that they entered into a definitive agreement under which Alliance will merge with and into NBT. The merger is valued at approximately $233.4 million and is expected to close in early 2013 subject to customary closing conditions, including receipt of regulatory approvals and approvals by NBT and Alliance stockholders. Under the terms of the merger agreement, each outstanding share of Alliance common stock will be converted into the right to receive 2.1779 shares of NBT common stock upon completion of the merger. The transaction is valued at $48.00 per Alliance share based on NBT’s average closing stock price of $22.04 for the five-day trading period ending on October 5, 2012.

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 and nine months ended September 30, 2012:

•

Total assets were $1.4 billion and total deposits were $1.1 billion at September 30, 2012, compared with $1.4 billion and $1.1 billion at December 31, 2011, respectively.

•

Net income was $2.3 million for the three months ended September 30, 2012, compared with $3.7 million for the same period in 2011. For the nine months ended September 30, 2012, net income was $7.8 million compared with $10.5 million for the first nine months of 2011. Pre-tax merger related expenses were $991,000 in the three and nine months ended September 30, 2012.

•

Net income per diluted share was $0.48 and $0.77 for the three months ending September 30, 2012 and 2011, respectively. Net income per diluted share was $1.64 for the nine months ending September 30, 2012 compared with $2.20 per share for the same period in 2011.

•

The tax-equivalent net interest margin was 3.23% in the third quarter of 2012 compared with 3.48% in the third quarter of 2011.

•

Provision for credit losses of $0 in the quarter and a negative provision for credit losses of $300,000 for the nine months ended September 30, 2012, compared with provision expense of $750,000 and $1.1 million in the year ago periods, respectively.

•

Total non-performing assets were $5.1 million or 0.35% of total assets at September 30, 2012 compared with $12.9 million, or 0.90% at September 30, 2011 and $11.7 million or 0.83% at December 31, 2011.

•

Non-interest income was 31.3% of total revenue in the first nine months of 2012 compared with 29.0% in the year ago period.

•

Our efficiency ratio was 77.5% in the nine months ended September 30, 2012 compared with 70.2% for the same period in 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.

Pending Merger

On October 8, we announced that we entered into a definitive agreement with NBT under which we will merge with and into NBT. The merger is valued at approximately $233.4 million and is expected to close in early 2013 subject to customary closing conditions, including receipt of regulatory approvals and approvals by NBT and Alliance stockholders. Under the terms of the merger agreement, each outstanding share of our common stock will be converted into the right to receive 2.1779 shares of NBT common stock upon completion of the merger. The transaction is valued at $48.00 per Alliance share based on NBT’s average closing stock price of $22.04 for the five-day trading period ending on October 5, 2012.

Recent Legislative Updates

In June 2012, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation issued three proposals that would amend the existing regulatory risk-based capital adequacy requirements of banks and bank holding companies. The proposed rules implement the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act. The Basel III proposal would increase the minimum levels of required capital, narrow the definition of capital, and places much greater emphasis on common equity. The comment period for the proposed rules ended October 22, 2012.

The proposed rules include new risk-based capital and leverage ratios, which would be phased in from 2013 to 2019, and would refine the definition of what constitutes “capital” for purposes of calculating those ratios. The proposed new minimum capital level requirements applicable to us and the Bank under the proposals would be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4% for all institutions. The proposed rules would also establish a "capital conservation buffer" of 2.5% above the new regulatory minimum capital requirements, which must consist entirely of common equity Tier 1 capital and would result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase by that amount each year until fully implemented in January 2019. An institution would be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations would establish a maximum percentage of eligible retained income that could be utilized for such actions.

The proposed rules also implement revisions and clarifications consistent with Basel III regarding the various components of Tier 1 capital, including common equity, unrealized gains and losses, as well as certain instruments that will no longer qualify as Tier 1 capital, such as trust preferred securities, which would be phased out over time. Although the Dodd-Frank Act only required the phase out of such instruments for institutions with total consolidated assets of $15 billion or more, the proposed rules would require almost all institutions to phase out instruments that will no longer qualify as Tier 1 capital, albeit on a longer time frame than for institutions with total consolidated assets of $15 billion or more.

The federal bank regulatory agencies also proposed revisions to the prompt corrective action framework, which is designed to place restrictions on insured depository institutions, including the Bank, if their capital levels begin to show signs of weakness. These revisions would take effect January 1, 2015. We are still in the process of assessing the impacts of these complex proposals.

Comparison of Operating Results for the Three and Nine Months Ended September 30, 2012 and 2011

General

Net income for the quarter ended September 30, 2012 was $2.3 million or $0.48 per diluted share compared with $3.7 million or $0.77 per diluted share in the year-ago quarter. The return on average assets and return on average shareholders’ equity were 0.64% and 6.32%, respectively, for the third quarter of 2012, compared with 1.01% and 10.69%, respectively, for the third quarter of 2011. Securities gains in the third quarter of 2011, when netted against a fixed asset write-down, totaled $472,000 after tax or $0.10 per share. Third quarter results for 2012 included costs associated with the recently announced acquisition of Alliance by NBT of $598,000 after tax or $0.13 per share.

Net income for the nine months ended September 30, 2012 was $7.8 million or $1.64 per diluted share compared with $10.5 million or $2.20 per diluted share in the year ago period. The return on average assets and return on average shareholders’ equity were 0.74% and 7.34%, respectively, for the first nine months of 2012, compared with 0.95% and $10.47%, respectively, for the first nine months of 2011.

Net interest income decreased $1.0 million and $3.5 million in the three and nine month periods ended September 30, 2012, respectively, compared with the year-ago periods due to the continuing pressure on our net interest margin caused by the exceptionally low interest rate environment, which was partially mitigated by higher loan balances.

Net Interest Income

Net interest income totaled $10.0 million in the three months ended September 30, 2012, compared with $11.0 million in the year-ago quarter, and $10.0 million in the second quarter of 2012. The tax-equivalent net interest margin decreased 25 basis points in the third quarter compared with the year-ago quarter due to the effect of persistently low interest rates on our interest-earning assets. The net interest margin decreased 3 basis points from the second to the third quarter of 2012 with most of the decrease attributable to the net effect of interest income recognition on non-accrual loans which were returned to performing status in each of the second and third quarters of 2012.

The net interest margin on a tax-equivalent basis was 3.23% in the third quarter of 2012, compared with 3.48% in the year-ago quarter and 3.26% in the second quarter of 2012. The decrease in the net interest margin compared with the third quarter of 2011 was the result of a decrease in the tax-equivalent earning asset yield of 55 basis points in the third quarter compared with

the year-ago quarter, which was partially offset by a decrease in the cost of interest-bearing liabilities of 33 basis points over the same period. On a linked-quarter basis, the decline in our earning-assets yield was 9 basis points in the third quarter, which was partially offset by a 6 basis-point drop in the cost of our interest-bearing liabilities.

Average interest-earning assets were $1.3 billion in the third quarter, which was a decrease of 2.6% from the year-ago quarter but was unchanged from the second quarter of 2012. Most of the decline from the year-ago quarter occurred in our securities portfolio, with the average balance down 24% due to our decision to temporarily shrink the portfolio in the second half of 2011 due to the very low yields available on the types of securities in which we invest. Average loans and leases increased $25.2 million or 2.9% in the third quarter compared with the year-ago quarter as growth in our average commercial loan and consumer loan portfolios offset lower average lease balances. Total average loans and leases were 69.8% of total interest-earning assets in the third quarter of 2012, compared with 66.1% in the year-ago quarter and 68.4% in the second quarter of 2012.

Net interest income for the nine months ended September 30, 2012 totaled $29.8 million, which was down $3.5 million or 10.5% compared with the year-ago period. The tax equivalent net interest margin was 3.24% for the nine months ended September 30, 2012, compared to 3.49% for the first nine months of 2011. The tax-equivalent earning asset yield decreased 49 basis points in the first nine months of 2012 compared with the year-ago period, which was partially offset by a decrease of 26 basis points in the cost of interest-bearing liabilities over the same period.

Average interest-earning assets were $1.3 billion in the first nine months of 2012, which was a decrease of 3.5% from the first nine months of 2011. The changes in the average balances of securities and loans for the first nine months of 2012 compared with the year-ago period were similar to that as discussed above for the third quarter. Total average loans and leases were 68.4% of total interest-earning assets in the first nine months of 2012, compared with 65.8% in the year-ago period.

Since December 2008 the Federal Reserve has maintained its target fed funds rate between zero and 0.25%, and has carried out a number of policy actions designed to lower long-term interest rates. These monetary policy actions, along with volatility in equity markets, weak economic conditions 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. As a result the tax-equivalent yield on our securities portfolio decreased 61 basis points in the third quarter of 2012 compared to the year-ago quarter. The yield on our commercial loans, residential loans and consumer (including indirect) loans decreased 6 basis points, 35 basis points and 86 basis points, respectively, in the third quarter of 2012 compared to the third quarter of 2011.

The cost of our interest-bearing liabilities decreased in the third 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. However we have not been able to reduce our cost of our interest-bearing liabilities sufficient to offset our declining asset yields in recent quarters due to the absolute low levels of our deposit rates. The average cost of money market and time deposits dropped 16 basis points and 46 basis points, respectively in the third quarter compared to the year-ago quarter. Average interest-bearing transaction accounts comprised 70.6% of total average interest-bearing deposits in the third quarter, compared to 64.2% in the year-ago period. We also reduced our cost of borrowings by 23 basis points in the third quarter compared to the third quarter of 2011 primarily through a restructuring of FHLB advances totaling $50.0 million in June 2012. The restructurings resulted in prepayment penalties of $2.1 million which will be amortized as an adjustment to interest expense over the remaining term of the restructured debt in accordance with U.S. generally accepted accounting principles. The restructuring had the effect of extending the maturities of the restructured borrowings by 3.3 years and lowering the annual average effective cost by 148 basis points.

Our liability mix remained favorably weighted towards transaction accounts (including non-interest bearing demand deposits) in the third quarter as retail and municipal depositors continue to refrain from investing funds in time accounts at 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 was $845.6 million or 76.2% of total deposits in the third quarter, compared with $778.7 million or 70.1% in the year-ago quarter. Average time account balances in the third quarter were $263.6 million or 23.8% of total average deposits, compared with $332.1 million or 29.9% in the year-ago quarter. 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 and risk aversion among retail investors have also played a role in the growth in our transaction accounts.

Our tax-equivalent net interest margin declined in recent quarters 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. The pressure on our net interest margin along with weak economic conditions, uneven loan demand and competition may result in further declines in net interest income in coming quarters.

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 September 30,
	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 and interest bearing deposits	$	50,376		$	28			0.22	%	$	3,310		$	—			0.06	%
Taxable investment securities		261,090			1,501			2.30	%		354,363			2,775			3.13	%
Nontaxable investment securities		69,035			951			5.50	%		80,086			1,111			5.55	%
FHLB and FRB stock		7,977			95			4.75	%		9,759			104			4.25	%
Residential real estate loans⁽¹⁾		325,720			3,952			4.85	%		331,977			4,314			5.20	%
Commercial loans		134,037			1,427			4.26	%		125,697			1,377			4.38	%
Nontaxable commercial loans		12,171			173			5.67	%		8,811			121			5.48	%
Commercial real estate		128,719			1,707			5.30	%		120,059			1,600			5.33	%
Taxable leases (net of unearned discount)		4,272			76			7.15	%		19,770			294			5.95	%
Nontaxable leases (net of unearned discount)		8,119			133			6.54	%		11,220			182			6.47	%
Indirect auto loans		194,717			1,541			3.17	%		162,439			1,757			4.33	%
Consumer loans		88,522			821			3.72	%		91,087			906			3.98	%

Total interest-earning assets	$	1,284,755		$	12,405			3.86	%	$	1,318,578		$	14,541			4.41	%

Non-interest earning assets:
Other assets		135,043									131,530
Less: Allowance for credit losses		(8,866	)								(10,711	)
Net unrealized gains on securities available-for-sale		11,999									11,263

Total assets	$	1,422,931								$	1,450,660

Liabilities and shareholders’ equity:
Interest bearing liabilities:
Demand deposits	$	155,062		$	30			0.08	%	$	139,035		$	49			0.14	%
Savings deposits		117,732			30			0.10	%		108,969			54			0.20	%
MMDA deposits		358,951			249			0.28	%		346,779			377			0.44	%
Time deposits		263,632			812			1.23	%		332,054			1,404			1.69	%
Borrowings		127,210			734			2.31	%		160,943			1,022			2.54	%
Junior subordinated obligations issued to unconsolidated trusts		25,774			170			2.64	%		25,774			158			2.45	%

Total interest-bearing liabilities	$	1,048,361		$	2,025			0.77	%	$	1,113,554		$	3,064			1.10	%

Non-interest bearing liabilities:
Demand deposits		213,883									183,920
Other liabilities		16,083									15,957
Shareholders’ equity		144,604									137,229

Total liabilities and shareholders’ equity	$	1,422,931								$	1,450,660

Net interest income				$	10,380								$	11,477

Net interest rate spread								3.09	%								3.31	%
Net interest margin								3.23	%								3.48	%
Federal tax exemption on non-taxable investment securities, loans and leases included in interest income					(426	)								(480	)

Net interest income				$	9,954								$	10,997

(1)	Includes loans held-for-sale


	For the nine months ended September 30,
	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 and interest bearing deposits	$	58,175		$	103		0.24	%	$	8,124		$	5		0.09	%
Taxable investment securities		265,167			4,970		2.50	%		358,394			8,521		3.17	%
Nontaxable investment securities		73,740			3,046		5.51	%		80,110			3,381		5.63	%
FHLB and FRB stock		8,093			305		5.03	%		8,963			328		4.88	%
Residential real estate loans⁽¹⁾		319,769			11,876		4.95	%		331,727			12,980		5.22	%
Commercial loans		133,983			4,244		4.22	%		121,437			3,966		4.35	%
Nontaxable commercial loans		12,010			515		5.71	%		9,104			359		5.25	%
Commercial real estate		127,336			5,009		5.25	%		118,615			4,862		5.47	%
Taxable leases (net of unearned discount)		7,586			342		6.01	%		23,293			1,031		5.90	%
Nontaxable leases (net of unearned discount)		9,268			448		6.45	%		11,961			577		6.43	%
Indirect auto loans		179,188			4,663		3.47	%		167,649			5,569		4.43	%
Consumer loans		88,608			2,501		3.76	%		90,596			2,706		3.98	%

Total interest-earning assets	$	1,282,923		$	38,022		3.95	%	$	1,329,973		$	44,285		4.44	%

Non-interest earning assets:
Other assets		134,757								132,458
Less: Allowance for credit losses		(9,652	)							(10,815	)
Net unrealized gains on securities available-for-sale		11,765								8,184

Total assets	$	1,419,793							$	1,459,800

Liabilities and shareholders’ equity:
Interest bearing liabilities:
Demand deposits	$	152,660		$	96		0.08	%	$	148,445		$	179		0.16	%
Savings deposits		113,275			85		0.10	%		106,527			166		0.21	%
MMDA deposits		363,154			779		0.29	%		368,670			1,271		0.46	%
Time deposits		276,668			2,843		1.37	%		337,480			4,337		1.71	%
Borrowings		128,820			2,542		2.63	%		145,895			3,105		2.84	%
Junior subordinated obligations issued to unconsolidated trusts		25,774			514		2.66	%		25,774			473

Large Accelerated Filer

Accelerated Filer

Non-accelerated filer

Smaller Reporting Company

ALLIANCE FINANCIAL CORP /NY/ 10-Q